JBA's Proposal for Housing Loan Market Reform

The "Plan for Streamlining Governmental Corporations" was finalized at the Cabinet meeting in December 2001. According to the Plan, the Housing Loan Corporation is to be abolished and supplanted by a newly established independent administrative organization within five years, and HLC will launch a business to support securitization of housing loans while phasing out its role in the loan business. On the other hand, the Council on Economy and Fiscal Policy advocated in its report, "Reforming Policy Finance," that policy finance be restricted to areas where public benefits and difficulty of assessing credit risks exist.Based on the understanding that governmental institutions need not be big players in lending markets actively served by private financial institutions, JBA drafted the "Reforming the Housing Loan Market" report in the Working Committee on Housing Loan System Reforms, and released it on February 18.The JBA report analyzes the share of the HLC in the housing loan market, which was 45% at its peak and is 35% presently, and attributes the large share to three factors; (1) Long-term, fixed and low interest rate lending, (2) Low level commissions paid to banks and (3) Frequently raised loan limits.The report cites disruption of market mechanism and burden on taxpayers as problems posed by HLC, and stresses the necessity for a detailed review of HLC's operations, based on the rule of thumb for administrative reform, that is, let private sectors do what private sectors can do.Specifically, the report requests that HLC reduce new loans gradually toward its abolition four years later, by focusing on loans that private financial institutions cannot extend, and the subsequent independent organization refrain from lending businesses. It calls for the drafting, releasing and executing of an action plan for phased reduction in loan business of HLC, total ban on lending by the independent administrative organization, and introducing market mechanism in HLC's lending rates and commissions paid to banks.As for HLC supporting securitization, the report, while recognizing its usefulness, regards the projected scheme insufficient. It calls for the review of the HLC's loan business to help spread housing loans intended for securitization and confining this supportive business only to rudimentary stages of the market and leave the business to the market after it matures.The report's last section refers to the future housing loan market in saying that minimizing the involvement of the government in the housing loan market is essential to make HLC reforms successful. The report sketches a desirable, user-friendly housing loan market without a public finance scheme after HLC is abolished. It posits that this could be realized with continuous efforts of private financial institutions, the development of securitization markets, and tax/budgetary support by public sector of truly needed areas.