O Kobayashi was stunned last year when he found that his mortgage applications had been rejected by two banks.

The 35-year-old had quit a Japanese bank where he had worked for 10 years, obtained an MBA from an Ivy League business school and started working at the financial unit of Connecticut-based General Electric Co. before returning to Japan.

Despite his solid career and no record of debts, the two Japanese banks turned him down because he had changed jobs during the year before he applied for the loans.

“It was a big shock,” said Kobayashi, who is now director of GE Consumer Finance Co.’s New Business Group. “I’d never dreamed that my credit had deteriorated despite the fact that I’d furthered my career in the U.S.”

For financial institutions, Japan’s housing loan market, worth about 183.6 trillion yen as of the end of March 2004, is a stable source of revenue and a market with potential.

Most major banks here have placed strict criteria in extending mortgages out of a desire to hedge risk, and the products they offer are often similar, industry observers say.

But since December 2001, when the Bank of Tokyo-Mitsubishi launched a product that charged 1 percent interest for the first three years and floating rates for the remaining term of the loan, major banks have been trying to outdo each other in cutting interest rates to attract borrowers.

Some entities, such as Softbank group firm Good Mortgage Corp., slashed interest rates on 35-year mortgage loans to below 2.3 percent by using a new scheme offered by the Government Housing Loan Corp. Under the system, the public corporation purchases the private sector’s loans, securitizes them and then sells them to investors.

In recent years, however, new entrants such as Kobayashi’s firm are cultivating new demand in their quest for a bigger slice of the market, particularly before the Government Housing Loan Corp. effectively shuts down in fiscal 2006.

The public corporation has long been the biggest player in the mortgage market, largely due to the fact that thanks to government backing it can offer long-term, fixed rate loans. It had about 29.5 percent share of the overall mortgage loan market as of the end of March 2004.

On April 1, GE Consumer Finance launched in Japan a new mortgage product proposed by Kobayashi that targets people who may be rejected by major lenders even if they have sufficient income.

Since such banks’ top priority in judging borrowers’ creditworthiness is stable income, loan applicants are required to have worked for the same firm for at least one year, and in many cases three years. For the same reason, self-employed people are not their favorite customers.

According to a survey by marketing consultant Booz Allen Hamilton in May 2004, 16.8 percent of housing loan borrowers experienced trouble when they first applied for mortgage loans. The three top reasons for rejection were: less than three years’ career experience at one company, business ownership, and a lack of ample deposits.

GE Consumer Finance uses the knowhow accumulated by its consumer finance services arm, which operates under the brand name Honobono Lake, to set different interest rates depending on borrowers’ credit risks.

Kobayashi said the market for borrowers who would be shunned under conventional criteria is worth some 4 trillion yen, adding that it is expected to grow in the short term amid accelerating liquidity in the labor market and more incentives for people to start up their own businesses.

The new product also targets contract employees and working women, who in many cases are snubbed by major financial institutions when applying for home loans.

Other financial firms are also aggressively expanding their housing loan business through products with unique features.

In February 2002, Shinsei Bank launched its “PowerSmart Housing Loan,” which allows borrowers to partially return loans earlier than scheduled as many times as they like without any commission.

At many domestic banks, borrowers must pay about 10,000 yen in fees each time they make such payments of less than 1 million yen. The fee is about 50,000 yen when they return 10 million yen or more, and about 30,000 yen for amounts in between.

Interest is also kept low for the first five years — 1 percent or 1.9 percent depending on whether 10-year Japanese government bond yields hit 3 percent during that time. After five years, borrowers can choose from floating rates or fixed rates.

Some 10,000 people had applied for the loan by the end of December, with the outstanding amount of loans extended coming to 230 billion yen, according to the bank.

Meanwhile, Tokyo Star Bank started selling the “Star One Mortgage” in 2003. The main attraction of this product is that interest is charged only on the amount of the housing loan that exceeds the outstanding amount of money a borrower has deposited with the bank.

In that way, borrowers can reduce the overall amount of money they have to pay back while also retaining the security of knowing that they can also withdraw money from their bank deposit in emergencies.

Tokyo Star declined to disclose specific figures regarding the product’s popularity, but spokeswoman Mami Fujita said the number of applicants rose 64 percent during the past year, while the amount of outstanding loans grew 2.5 times.

“Many Japanese people get a bit nervous if they feel they don’t have enough money deposited at the bank, but this product can dispel such concerns,” she said.

Despite their eagerness to develop new products, however, some analysts said the newcomers face an uphill battle.

They point to a structural problem in the market — most home buyers automatically apply for mortgages provided by domestic banks that have partnerships with real estate brokers.

“In Japan, 80 percent to 90 percent of borrowers apply for banks’ mortgages through real estate brokers,” said Noriaki Maruyama, president at mortgage broker Homeloan Consulting Co., a unit of the Softbank group. This structure has partly damped banks’ incentives to develop new housing loan products, he added.

Unlike the U.S., where there are about 30,000 mortgage brokers that provide advice of various housing loan products, Homeloan, which has tied up mainly with new market players including GE Consumer Finance and Tokyo Star, has been the only broker in Japan so far, he said.

“Borrowers don’t get the chance to compare different loan products and make the best choice due to these fixed channels,” Maruyama said.

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