Potential Flat 35 loan fraud — another low blow for Japan’s real estate industry

Earlier this month, the The Ministry of Land, Infrastructure, Transport and Tourism (MLIT) of Japan announced an investigation into the potential fraudulent use of Flat 35 loans. A Flat 35 loan, which is securitized by the Japan Housing Finance Agency (JHF), a government affiliate, is a widely distributed mortgage type to help more people afford homes by offering a low-interest fixed rate over a 35-year term. The loan’s conditions are favourable over the commercial loans available on the market and its only purpose is for acquiring properties as a home. Keiichi Ishii, Minister of Land, Infrastructure, Transport and Tourism, announced at a May 7, 2019 press conference that borrowers who are found to have abused Flat 35 loans would be required to repay the loan in a lump sum. He further urged the JHF to investigate with its partner banks and come up with preventative measures.

In a May 15 update on the situation, The Nikkei newspaper reported that investigations so far resulted in uncovering about 100 fraudulent transactions. They have all been found to be issued by Aruhi Corporation, the market leader in Flat 35 loans. The company released a statement after a May 7 press conference expressing that it is has not engaged in any illegal activity regarding Flat 35. However, Aruhi also added that it is supporting the JHF in its investigation to confirm whether they might have unintentionally approved loans for borrowers that intended to use them for investment purposes — which led to a significant drop of their stocks listed on The Nikkei, by about a quarter of its value. The company further announced it will tighten the screening process to prevent future fraud.

After the result of the investigation, Aruhi released another statement saying that the amount of illegal loans so far makes up only 0.1% of their total turnover of tens of thousands of transactions — thereby likely trying to reject accusations that the loans were knowingly given out . While the investigation will continue, so far more than 680,000 Flat 35 loans were issued, making it a difficult task to check on every property to ensure it is owner-occupied.

This is not the first loans-centred real estate scandal in recent years either. The real estate market in Tokyo has been heating up since the early 2010s and only recently leveled off. However, interest from both domestic and international investors in unwavering. In 2018, the Suruga Bank scandal involved overvaluing properties — and consequently loans issued. Shortly after, similar cases at other financial institutions came to light.