Audit finds HUG approved W382b in PF guarantees for projects that should have been rejected

The Board of Audit and Inspection found that the Korea Housing and Urban Guarantee Corporation approved hundreds of billions of won in project financing guarantees for developments that should have been rejected, following a review of the corporation's PF guarantee screening process.

According to the results of a regular audit of the Korea Housing and Urban Guarantee Corporation, or HUG, released Thursday, HUG failed to adequately verify cash flow data submitted by project developers during PF guarantee screening, accepting the figures as presented and conducting reviews in a deficient manner.

HUG is a public institution that protects homebuyers and tenants through pre-sale guarantees, rental guarantees and jeonse deposit guarantees. It also provides PF guarantees to project developers. A PF guarantee is a system under which a public institution or construction company assumes responsibility for repaying principal and interest on loans extended on the basis of a project's expected performance or future cash flows in real estate development. Because such guarantees are backed by a developer's projected pre-sale revenue, accurately assessing a project's cash flow and debt-repayment capacity is essential.

HUG calculates screening scores by factoring in a project's cumulative debt service coverage ratio, or DSCR, and initial pre-sale rate, and its rules require that guarantees be denied when a project falls below a certain threshold.

The audit found, however, that HUG accepted without meaningful verification data in which developers had arbitrarily adjusted construction payment schedules to push the cumulative DSCR above 1.

As a result, HUG approved a total of 382 billion won ($263 million) in PF guarantees for three projects that should have been denied under a proper review.

The audit also found that HUG miscalculated screening ratings for two other projects, resulting in 1.64 billion won in guarantee fees going uncollected.

The Board of Audit and Inspection notified HUG's president to devise a plan to collect the underpaid guarantee fees and called for stricter PF guarantee screening to prevent developers' arbitrarily adjusted payment schedules from being accepted without scrutiny. It also issued a Caution to the staff involved.

The audit identified a total of 20 irregularities at HUG, including undercollected guarantee fees and inadequate bond recovery management.

HUG swung to a loss in 2022 as guarantee incidents surged, centered on rental and jeonse deposit guarantees, following a wave of jeonse fraud cases that year, and its financial health has deteriorated rapidly since. The corporation's operating loss widened from 242.9 billion won in 2022 to 2.19 trillion won in 2024.

The Board of Audit and Inspection said it incorporated HUG into its audit plan at the end of last year and carried out the review accordingly.