Home Purchase Assistance Authority Bill
HOME PURCHASE ASSISTANCE AUTHORITY BILL
Bill introduced and read a first time.
Declaration of urgency agreed to.
Second Reading
The Hon. R. J. WEBSTER (Minister for Planning, and Minister for Housing) [6.2]: I move:
That this bill be now read a second time.
The purpose of this bill is to establish the Home Purchase Assistance Authority as a statutory corporation. This bill is one of several measures that the Government is taking to improve the administration of HomeFund and assistance to home purchasers in general. To understand the need for this bill it is necessary, first of all, to explain some of the fundamental principles of HomeFund lending and why recent difficulties have arisen. We cannot tackle present problems without understanding their sources. HomeFund schemes were developed in the mid-1980s to tackle a basic dilemma of housing policy. The dilemma is that people with the lowest incomes tend to live in rented accommodation, yet, in the long run, renting seems to be more expensive than buying. Buying offers greater security of tenure, tax-free capital gains and security in retirement. Moreover, in the conditions of inflation in the 1970s and 1980s, the real costs of buying houses went down year by year whereas real renting costs either stayed the same or increased.
The problem was, and is, that the initial costs of buying - for deposits and repayment in early years - are much higher than renting. This prevents people on low incomes from getting a start in home ownership. HomeFund programs offer such people loans which do not cover interest in the early years, so initial repayments are low - often close to the level of rents. These loans have escalating repayments. At first repayments were set to rise at 6 per cent per annum; more recently, 4 per cent per annum has been the escalation rate. Eventually, for each borrower, total repayments cover total costs except for the built-in subsidies of the various schemes. The escalation in repayments is an inevitable consequence because HomeFund lending offers larger amounts relative to incomes and property values than can be offered under usual mortgage loans with monthly repayments that are fixed as long as interest rates do not change.
One of the major difficulties faced today is that the 1990s are proving very different from the 1970s and 1980s. Incomes are not rising as rapidly as they did before. Some HomeFund borrowers now find it difficult to meet their escalating repayment obligations. HomeFund programs depend upon housing co-operatives to originate mortgages. Their responsibility is to ensure that loans are made to borrowers who are eligible and that they are made for suitable dwellings. The rapid growth of HomeFund programs placed strains on the ability of the housing co-operatives to do this well. As there are several HomeFund schemes, the housing co-operatives face a difficult task.
Problems have arisen concerning the two main schemes - low start loans and affordable loans. The latter was for people on lower incomes than those eligible for the former scheme. They offer higher subsidies, particularly because they protect borrowers from income loss by setting repayments at no more than 30 per cent of their incomes over the life of the loan. When repayments reach 30 per cent of income, borrowers with affordable loans can request a review of repayments and a rescheduling of them to 27 per cent of household income. As this scheme is expensive, it was not feasible to offer this degree of protection to borrowers with higher incomes. A major innovation in HomeFund was the method of raising finance for the mortgages. FANMAC was established to issue bonds at fixed interest rates for this purpose. Mortgage rates are fixed because borrowers with low incomes and high loan-to-value
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ratios have little capacity to absorb interest rate increases, either by paying more or by extending their loans.
Fixed mortgage rates are, in turn, funded by fixed rate bonds. However, many HomeFund borrowers have been able to take advantage of recent falls in interest rates by refinancing their loans without penalty. This is an unusual benefit for a fixed rate mortgage. Investors in the FANMAC bonds take the risk that the bonds will be prepaid before their maturity by refinancing, but bondholders are guaranteed payments of interest by the Government on all outstanding bonds. The Government takes the risk when HomeFund borrowers are unable to make their scheduled repayments or there is a shortfall on sale of the property and discharge of the loan. Then any shortfall in interest or principal due to the bondholders is met from government funds.
I have spent some time describing HomeFund because it is a complex program that offers different benefits to different participants. HomeFund grew very rapidly because these benefits were appreciated at that time. Borrowers wanted early access to housing. They wanted to be able to live in their own homes as soon as possible. Investors appreciated the opportunity to buy long-term bonds with a good yield and a government guarantee. It is important to remember that it suited everyone to expand the scheme before the recession. What we now understand in retrospect was not known then. When I became Minister for Housing last year I realised that severe problems were emerging and I asked John McMurtrie to review the whole program. He reported to me in December 1992.
Mr McMurtrie's report recognised, first, the scale and importance of HomeFund. By September 1992, 55,000 loans had been made. The vast majority were to assist borrowers who wanted home ownership but could not afford it on the terms then offered by banks and building societies. Mr McMurtrie reported, second, that a major cause of recent difficulties had been the unforeseen length and depth of the current recession and its effects on incomes, house prices, interest rates and, especially, unemployment. Falling interest rates have made HomeFund loans seem expensive. This is despite the fact that HomeFund loans generally had lower interest rates when they were originated than bank home loans. It is also despite their low start structures. Over the years, escalation has raised levels of repayments faster than many incomes.
As market interest rates have fallen, 20,000 HomeFund borrowers have taken the opportunity to refinance their loans without any extra costs. They have benefited by being able to move into a house early and yet they have not paid high interest rates for very long. Unfortunately, many other borrowers cannot meet banks' refinancing criteria and are now finding repayment difficult. Because of the recession many have lost jobs or overtime, and this makes their difficulties worse. Third, Mr McMurtrie advised that the complexity of the program and the many different participants worsen the difficulties that are due to the recession. An example of confusion was that because the arrangements for financing were complex, there was a 10-day gap between a borrower making a repayment and that repayment being entered into his or her account. Mr McMurtrie confirmed that this practise was legal but borrowers remained highly critical of these arrangements.
Since receiving the McMurtrie report, I have introduced a number of measures to further assist HomeFund borrowers. I have arranged to close the gap between repayment dates and the date at which amounts received are credited to borrowers' accounts. I have extended the levels of mortgage assistance available. I have organised the provision of advice and counselling on refinancing and other means of meeting HomeFund difficulties. This package still stands and will continue to stand, except that the $5,000 grants announced for the refinancing have been suspended temporarily. There remain, however, the problems of HomeFund's organisation. These are being tackled in three different ways by the new legislation introduced into Parliament this week and by discontinuing new lending through the HomeFund programs.
First, the establishment of the Home Purchase Assistance Authority will simplify the management of HomeFund and improve accountability by creating a single authority dedicated to its administration. Second, the HomeFund Commissioner Bill, also to be introduced into Parliament this week, will establish the position of HomeFund Commissioner. He will receive complaints from individual HomeFund borrowers and determine solutions. The Home Purchase Assistance Authority will provide guidelines for the HomeFund Commissioner. Together, the two bills provide the means to solving past problems. Those that have arisen on a case-by-case basis will get individual attention. Changes of administration that the McMurtrie report identified will be implemented to improve the general management of the HomeFund portfolio.
Third, new loan financing by HomeFund has been discontinued. Methods of assisting home purchasers in ways more appropriate to today's economic environment will be developed by the Home Purchase Assistance Authority. The authority will also manage the existing HomeFund loans, which, of course, have many years to mature. The Home Purchase Assistance Authority will be a small statutory corporation, reporting directly to me in my capacity as Minister. I shall be able to appoint a chief executive officer who can concentrate on the administration of HomeFund and new programs to assist home purchase.
The Home Purchase Assistance Authority will have an independent board chaired by a person other than the chief executive officer. The board, made up of part-time members and the chief executive officer, will determine the policies and long-term strategic plans of the authority. It will oversee the management of the authority and advise me on matters
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relating to its functions and activities. The board will be chosen from persons with experience in public sector policy, consumer affairs, finance, housing, commerce, law and economics. I will therefore be able to draw together more varied management skills than previously to develop effective home purchase policies.
The functions of the Home Purchase Assistance Authority will enable it to manage efficiently the Government's existing programs for home purchasers and allow it to develop effective new programs. The Home Purchase Assistance Authority will develop guidelines for eligibility for assistance. The authority will determine terms and conditions of loans; it will provide information; it will be responsible for managing loans and investments. I will approve the budgets of the authority. I will use funds available from the Home Purchase Assistance Fund, presently managed by the Department of Housing, and grants from funds provided by the Commonwealth and New South Wales governments under the terms of the Commonwealth-State housing agreement.
Financial and performance reporting and external audits will ensure the accountability of the Home Purchase Assistance Authority. There will be many benefits from the establishment of the Home Purchase Assistance Authority. The authority will avoid duplication of effort and resources - for instance, between Treasury and the Department of Housing; encourage professionalism in the development and management of policies to assist home purchasers; and sharpen the process of fixing objectives for home purchase programs as the authority will have to justify its recommendations and have them approved by me.
Above all, the establishment of this authority will centralise responsibility for home purchase assistance. As we look to the different economic environment of the 1990s it is clear that a new approach to home-ownership policies will be required. In the past, these policies have been developed without adequate accountability. Complex structures have obscured responsibility and hidden the risks being taken by borrowers, investors and the Government. I recommend that a new, single purpose, statutory corporation, the Home Purchase Assistance Authority, be established to manage the existing HomeFund loans and develop a new, more accountable method of assisting people with home purchase. I commend the bill.
Debate adjourned on motion by the Hon. R. D. Dyer.