Wayne Swan (Lilley, Australian Labor Party, Shadow Treasurer) Share this | Hansard source

The Housing Loans Insurance Corporation (Transfer of Pre-transfer Contracts) Bill 2006 and the Housing Loans Insurance Corporation (Transfer of Assets and Abolition) Repeal Bill 2006 seek to finalise arrangements in relation to the winding up of the Commonwealth Housing Loans Insurance Corporation in 1997. The Housing Loans Insurance Corporation was established by the Menzies government in 1965 to address structural deficiencies in the highly regulated financial system. Its primary purpose was to assist low-income earners with small deposits to obtain housing finance. It did this by insuring lenders against the cost of mortgage defaults.

At the time its purpose was articulated by the then Minister for Housing, Mr Bury, as follows:

The scheme aims to assist people to borrow, by means of a single loan secured by a first mortgage, the difference between available personal savings and the cost of a home suited to their requirements. The amount of the loan would, of course, be related to the ability of the borrower to repay it over a reasonable period. It is our hope and intention that this scheme will progressively remove the present need for many creditworthy borrowers to obtain a second mortgage loan, frequently on oppressive terms and conditions.

Since the introduction of the scheme and financial deregulation during the 1980s, the market for mortgage insurance matured considerably, progressively making a Commonwealth funded scheme redundant. The HLIC was at that time the largest mortgage insurer in Australia, having insured more than 1.3 million loans.

In the early 1990s, the former Labor government proposed to transfer the corporation to the private sector. However, the transfer process itself became untenable due to the lack of competitive neutrality in the regulations under which the corporation operated. Its liabilities were guaranteed by the Commonwealth and its exemption from supervision by the industry regulator meant it did not have to comply with the capital adequacy arrangements applying to its competitors. As a consequence, the former Labor government proposed restructuring the Housing Loans Insurance Corporation as a company incorporated under the companies law and subject to the regulations of its competitors, as well as those of the states and territories. It was proposed that the corporation cease writing business on the day before the new company came into existence. The then existing insurance policies—the so-called old book—would then be directly taken over by the Commonwealth. Finally, the Commonwealth would then contract with the new company to administer the old book insurance obligations, with the Commonwealth making any payments arising from this old business

A bill was presented to and passed by the House in October 1995 to achieve this but lapsed in the Senate. Upon coming to office, the current government reintroduced the bill in 1996. Upon the bill passing, the new entity, HLIC Ltd, was sold to the private sector in 1997. However, pre-transfer contracts remained under Commonwealth ownership. These contracts are currently managed on behalf of the Commonwealth under a management agreement that is due to expire on 31 December this year. The principal amount covered by the Commonwealth’s guarantee was estimated in 2005 to be $5.087 million, considerably less than the outstanding amount of $19 million in 2003.

The government has stated that it no longer has a desire to continue to be involved in the business of mortgage insurance through its ownership of the pre-transfer contracts. Labor is of the view that this is a reasonable position and is an evolution of policy advocated by successive governments. The bills we are debating today do not commit the Commonwealth to transfer its ownership of the residual contracts but would enable the transfer to occur if required.

Labor notes that in divesting itself of the pre-transfer contracts it is likely the Commonwealth will need to compensate the new owner of the contracts for risk involved. These bills propose that a standing appropriation be used for this purpose, as it is not possible to estimate what the risk is valued at by a new owner. However, given that the total balances outstanding on the pre-transfer contracts are now worth less than $5.4 million, it is unlikely that any compensation for risk will be significant.

It is worthwhile noting, however, that the risk associated with mortgage defaults has increased in recent times. A sharp increase in repossession action against borrowers has occurred, following the seven back-to-back interest rate hikes since 2002. Figures from the Supreme Court of Victoria show that in the first half of this year there were 1,474 repossessions, or more than 2½ times the 563 in the first half of 2003. In New South Wales the figures are also striking. The data from the Supreme Court of New South Wales clearly show a rapid and concerning acceleration of mortgage repossessions in New South Wales since 2002—precisely when interest rates started rising. The figures show mortgage repossessions in New South Wales have more than doubled since 2002 and are now 50 per cent above levels recorded in 1991. In the ACT, similar figures are available which show a marked pick-up in repossession actions since 2002.

This is a deeply concerning trend and serves to highlight the impact on families of the government’s seven back-to-back interest rate hikes. It is nothing new to the Prime Minister. Figures on foreclosures show that there was an almost fourfold increase in mortgage repossessions when he was Treasurer, from 246 in 1978 to 952 in 1981. Those opposite might find it uncomfortable, but the fact is that there was a fourfold increase in repossessions under Treasurer Howard. We can add that to his record interest rate of 22 per cent on 8 April 1982.

There is a complacency evident in this government’s recent stewardship of interest rates. Families have taken on a lot more debt relative to their incomes and, as a consequence, prevailing interest rates today can no longer be considered low. This government arrogantly suggests that it can hit the snooze button until interest rates hit double digits. I do not believe that it can afford to do any such thing. Households are becoming increasingly stretched.

Official RBA figures show a record proportion of household disposable income is now consumed by mortgage interest repayments. In fact, the share of income consumed by mortgage interest today is 50 per cent higher than it was under Mr Keating. The Reserve Bank, in their most recent Financial Stability Review, talked at some length about this surge in the debt servicing ratio and the factors behind it. They highlighted the increased prevalence of owner occupied and investor housing as well as an easing in credit standards that has resulted in an increase in overall levels of debt. However, the conclusion they reached is important:

Nonetheless, the increase in the aggregate servicing ratio does mean that the financial position of the household sector is more sensitive to changes in the economic and financial climate than was the case a decade ago.

In this environment the government should be doing everything it can to put downward pressure on inflation and downward pressure on interest rates. Sadly, there is little evidence of that occurring. On that note, I wish to conclude my remarks. As I said earlier, Labor will be supporting these bills. They will lessen the contingent liabilities of the Commonwealth into the future and there is every chance the private sector mortgage market will readily accommodate the pre-transfer contracts that are currently guaranteed by the Commonwealth.

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