Bills Digest no. 29 2006–07
Housing Loans Insurance Corporation (Transfer of
Pre-transfer Contracts) Bill 2006
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
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Housing Loans Insurance Corporation
(Transfer of Pre-transfer Contracts) Bill 2006
Date introduced: 13 September 2006
House: House of
Commencement: The day after Royal Assent
To enable the Commonwealth to transfer its ownership to another
person of the residual mortgage insurance contracts that were
written by the Housing Loans Insurance Corporation prior to its
restructure and abolition in 1997.
The Housing Loans Insurance Corporation (HLIC) was established
by the government of Sir Robert Menzies in 1965 to provide a
government-backed housing loan insurance scheme. The main purpose
of this scheme was to assist prospective home purchasers to obtain
a loan at a reasonable rate of interest by providing mortgage
insurance. Mortgage insurance policies cover the losses suffered by
lenders when a borrower defaults on a loan secured by mortgage.
Although the HLIC principally insured housing loans, it also
insured lenders for loans relating to non-residential buildings. In
the mid-1990s, HLIC was the largest mortgage insurer in Australia,
having insured more than 1,300,000 loans.(1)
In 1996 Parliament passed the Housing Loans Insurance
Corporation (Transfer of Assets and Abolition) Act 1996 which
restructured HLIC into a new government-owned company.
Subsequently, HLIC Ltd was sold to the private sector in
1997.(2) Insurance contracts written by the HLIC prior
to its restructure, known as pre-transfer contracts , remain under
the Commonwealth s ownership. The size of the principal amount
covered by the Commonwealth s guarantee and the balances
outstanding was estimated in 2005 to be $5.397 million. This figure
is a small increase on the balance outstanding in 2004 which was
$5.087 million, but much less than the $19.036 million balance
outstanding in 2003.(3) There are no figures available
for earlier years.(4)
According to the second reading speech, claims against these
contracts are managed on behalf of the Commonwealth under a
management agreement. No figures are available for the extent of
the Government outlays associated with the management of the
pre-transfer insurance policies. In 1996, when it took over the
pre-transfer contracts, the Government estimated its expected
budget allocations to cover anticipated home loan defaults in the
three years following the restructure of HLIC would be:
Recent press reports have indicated a rise in the number of
cases lodged in state and territory Supreme Courts to take legal
action against borrowers who default on mortgages that are secured
by property.(6) For example, the Age reported
that in Victoria there had been a 58 per cent increase in mortgage
repossessions between 2004 05 and 2005 06.(7) In New
South Wales, the Australian Financial Review reported that
there was a 60 per cent jump, up from 3061 in 2005 to 4873 in
2006,(8) while in the ACT, the Canberra Times
quoted a report by the Consumer Law Centre saying that
repossessions in the Territory increased by 39 per cent between
2004 and 2005.(9) However, in Western Australia, the
trend is in the opposite direction. According to the West
Australian, after a rise in the number of home repossessions
in 2004 05 to 577, the number of applications dropped to 531 in the
past financial year .(10) It is not known what risk the
rise in mortgage defaults poses to the Commonwealth through its
ownership of the pre-transfer contracts of the HLIC.
The second reading speech explains that the Government has no
desire to continue to be involved in the business of mortgage
insurance through its continued ownership of the residual
pre-transfer contracts.(11) The Parliamentary Secretary
stated that the Commonwealth s involvement is no longer financially
viable and will only become increasingly burdensome to administer
over time.(12) The purpose of this Bill is to provide a
framework that would allow the Commonwealth to divest its ownership
of the remaining mortgage insurance contracts, if it can find
someone to take on the residual risk. Depending on the nature of
the risk, it is possible that the acquirer may seek consideration
for assuming this risk from the Commonwealth. The explanatory
memorandum says that this Bill has no financial
implications.(13) However, this may be because, at this
stage, it is not known if the Minister will succeed in transferring
the risk to somebody else or not. Transferring the remaining
mortgage insurance contracts to somebody may or may not involve
some future compensation. As it is not possible to estimate the
amount of such compensation, the Bill provides for any such payment
to be made as a special appropriation from the Consolidated Revenue
Fund and reported in the Treasury Portfolio Budget Statements and
the Treasury Department Annual Report.
This Bill is time sensitive because the current management
agreement under which the pre-transfer insurance contracts are
managed expires on 31 December 2006. Moreover, according to the
second reading speech:
the Australian Government Actuary has advised that
present market conditions and the current profile of the portfolio
provide the Commonwealth with the best opportunity it has had to
complete its exit from the lenders mortgage insurance business. Any
delay in amending the current legislation may diminish the
government s negotiating position in the interests of the
Australian public. (14)
Proposed section 3 contains definitions of
words and terms used in the Bill. One significant definition is
vesting day which is the day fixed by the Minister by notice
published in the Gazette. The vesting refers to the
transfer of assets and liabilities owned by the Commonwealth in the
form of mortgage insurance contracts to an acquirer . The mortgage
insurance contracts had been written by HLIC prior to its
restructure and abolition in 1997. These pre-transfer contracts
have continued to be owned and guaranteed by the Commonwealth.
Proposed section 6 is a key provision in the
Bill and enables the Commonwealth to wholly divest its interests in
the pre-transfer contracts to the acquirer. On the vesting day, the
acquirer becomes the successor in law to the pre-transfer
contracts, associated documents, rights and liabilities. This is a
broad provision, intended to cover any circumstances which might
not be covered by the specific vesting provisions in the proposed
section. Any rights and liabilities of the Commonwealth under a
pre-transfer contract or an associated document become rights and
liabilities of the acquirer.
Proposed section 7 preserves the effect of any
pre-transfer contracts and relevant legislative instruments that
were in force immediately before the transfer day in 1997 when the
HLIC was restructured into a company and the Commonwealth took over
ownership of the pre-transfer contracts. Under the current law,
references to the Corporation in a pre-transfer contract or a
relevant legislative instrument refer to the Commonwealth. The
effect of the saving provisions in proposed section
7 is that, after the vesting day, references to the
Corporation in a pre-transfer contract or a relevant legislative
instrument will refer to the acquirer. Each pre-transfer contract
and each relevant legislative instrument will continue to have
effect, according to its terms, after the vesting day.
Proposed section 8 provides an exemption from
stamp duty and other state and territory taxes in relation to the
transfer of the pre-transfer contracts to the acquirer pursuant to
proposed section 6. The purpose of this proposed
section is to provide certainty to the acquirer.
The Bill provides a framework that enables the Government to
commence formal discussions with persons interested in acquiring
the pre-transfer contacts. No other Parliamentary approval will be
necessary to bring about the transfer of ownership of the
pre-transfer contracts to another person. Should the acquirer seek
compensation from the Commonwealth for taking on the risk that
might exist in the remaining mortgage insurance contracts, then
provision is made by proposed section 9 to pay the
acquirer out of the Consolidated Revenue Fund. It is not possible,
at this stage, to know if compensation will be required, and if so,
how much will be sought. An annual appropriation through the
Appropriation Bill would not be practical for this purpose as it
requires an accurate estimation of the amount to be paid. The use
of a standing appropriation will ensure that public money can be
used to support the transfer, if needed. According to the
explanatory memorandum, accountability to Parliament will be met
through the Treasury Portfolio Budget Statements and the Treasury
Department Annual Report.(15)
Proposed section 10 enables the Minister to
delegate his or her powers and functions in declaring the vesting
day and acquirer under proposed section 5, and
certifying matters that are exempt from stamp duty and other state
and territory taxes under proposed section 8. The
delegate is to be either the Secretary of the Department (currently
Treasury) or a Senior Executive Service employee in the Department.
The delegate is to comply with directions of the Minister.
Proposed section 11 provides that the
Governor-General may make regulations prescribing matters that are
required or necessary for carrying out the operation of this Act.
This includes matters of a transitional nature, including
prescribing any saving or application provisions relating to the
enactment of this Act and the repeal of the Housing Loans
Insurance Corporation (Transfer of Assets and Abolition) Act
This Bill does not commit the Commonwealth to transfer its
ownership of the residual mortgage insurance contracts to another
person, but would enable any transfer to occur, if desired. In
2005, the principal amount covered by the Commonwealth s guarantee
and the balance outstanding was estimated to be $5.397 million. If
the Government can find somebody willing to assume ownership of
this risk, then it is possible the acquirer will seek some
consideration for assuming this risk from the Commonwealth. This
Bill provides that funds may be drawn from the Consolidated Revenue
Fund for this purpose. The Government has received advice from the
Australian Government Actuary that the present market conditions
and the current profile of the portfolio provide the Commonwealth
with the best opportunity it has had to complete its exit from the
lenders mortgage insurance business.
- Hon. John Fahey, Sale completed of Housing Loan Insurance
Corporation , Media Release, 22 December 1997. In the
debate on the Housing Loans Insurance Corporation (Transfer of
Assets and Abolition) Bill 1995, it was stated that HLIC had
insured 94,700 loans in 1994 and a further 84,000 loans in 1995.
(Senator C Kernot, Senate, Hansard, 31 May 1996, p.
- Hon. John Fahey (Minister for Finance and Administration), Sale
of Housing Loans Insurance Corporation , Media Release, 31
October 1997; Hon. John Fahey, Sale completed of Housing Loan
Insurance Corporation , Media Release, 22 December 1997.
HLIC Limited was sold to GE Capital Australia.
- Treasury, Annual reports, 2004-05 p. 196; 2003-04 p.
229; 2002-03 p. 214.
- For the years 1997-2002, the Treasury reported that the
principal amount covered by the guarantee and the balances
outstanding are unable to be reliably measured , see for example,
Treasury, Annual report 1997-98, p. 182.
- Explanatory memorandum to the Housing Loans Insurance
Corporation (Transfer of Assets and Abolition) Bill 1995, p.
- Figures of the number of repossession actions are kept by state
and territory Supreme Courts.
- Ben Doherty and Nassim Khadem, Hundreds lose homes as rates
rise , The Age, 2 August 2006, p. 1; Ben Doherty, Howard s
dream-believers living on hand-outs , The Age, 3 August
2006, p. 8. Also, Karen Collier, Living on the edge: Victorians
risk losing homes , Herald Sun, 17 July 2006, p.
- Fiona Tyndall, Housing risk warning , Australian Financial
Review, 3 February 2006, p. 46. Also, Lenders repossessing
houses of overextended borrowers , Canberra Times, 19
January 2006, p. 6.
- Paul Malone, Rise in home repossessions sparks call to regulate
brokers , Canberra Times, 14 September 2006, p. 2.
- Amanda Banks, Home owners battle to hold on , West
Australian, 4 August 2006, p. 4.
- Hon. C Pearce (Parliamentary Secretary to the Treasurer),
Second reading speech, Housing Loans Insurance Corporation
(Transfer of Pre-transfer Contracts) Bill 2006, House of
Representatives, Debates, 13 September 2003, p. 3.
- Explanatory memorandum, Housing Loans Insurance
Corporation (Transfer of Pre-transfer contracts) Bill 2006, p. 3
- ibid, p. 1.
- ibid, p. 11.
6 October 2006
Bills Digest Service
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