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Thursday, 25 March 1965

Senator PALTRIDGE (Western Australia) (Minister for Defence) . - I move -

That the Bill be now read a second time.

Mr. Deputy President,the purpose of this Bill is to establish a Housing Loans Insurance Corporation to insure lenders against losses arising out of the making of loans for housing. The Bill, which will authorize the Corporation to put into effect the Government's promised housing loans insurance scheme, will empower the Corporation to insure loans made for the erection of homes, the purchase of existing homes, additions to homes, the repair and improvement of homes, and the discharge and refinancing of existing mortgages on homes. The main purpose of this scheme is to assist people to obtain, as a single loan and at a reasonable rate of interest, the money they need, and can afford to borrow, to buy or build a home. As the amount borrowed may, at times, be a high proportion of the value of a house and land, there is the risk that a lender may lose some of his capital or may not receive all the interest due to him. The offer by the Corporation to insure against the risk of loss due to failure to recover the amount outstanding of a loan, together with accrued interest, will enable lenders to protect themselves against such losses.

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 credit-worthy borrowers to obtain a second mortgage loan, frequently on oppressive terms and conditions.

Sir, thescheme aims to assist people to obtain low-deposit loans to acquire homes by the offer to insure the repayment of loans made up to a high proportion of the valuation of a home. Insured loans may be 80 to 90 per cent, of valuation, or even 95 per cent, in cases where a borrower's capacity to repay appears to be unusually high. However, to be insurable, loans must be made at reasonable rates of interest. A loan up to these percentages of valuation has in it far greater risks of loss than a conventional loan, of, say, 70 per cent, of value. Quite justifiably, up to the present, the major lenders, who are responsible for the safe investment of the moneys entrusted to them, have rarely been willing to lend where they see a possible risk of loss. Now that the risks will be removed when the loans are insured, we hope that the major institutions that lend for housing will be willing to make loans up to a high proportion of the value of a dwelling. ^

There are now close to three and a quarter million dwelling units in Australia. Over the past 30 years the number has doubled, and it is expected that it will double again within the next 25 to 30 years. The natural increase in our population must be adequately housed. In addition, dwelling accommodation must be found for the increasing number of newcomers to our shores, whose skills are essential to enable us to maintain our high rate of growth. If we are to continue to grow at about the samehigh rate as in the recent past, and I have no doubt we shall, we must encourage an increased rate of flow of the nation's savings, especially private savings, into our home building industry. We expect the home savings grant scheme to assist in stimulating additional saving for this purpose. As time goes on increasing funds must be available to those who lend for housing purposes.

The provision of more funds for housing would be greatly assisted by the establishment in Australia of a market for housing mortgages. We hope that our offer to insure the repayment in full of housing loans will stimulate private enterprise to establish such a market. Moreover, in offering to insure these loans, we hope to attract additional overseas capital into the Australian home building industry. Our offer to insure the repayment of housing loans, together with accrued interest, will, we trust, go a long way towards achieving these important aims. The time will doubtless come when some lending institutions will be in a position to say that all their loans are insured by the Corporation, which is guaranteed by the Commonwealth Government. What safer investment could anyone wish for?

Before this Bill was introduced into another place, we made a close examination of other housing loans insurance schemes, the manner of their operation and the lessons to be learned from experience in administering them. We have also had the benefit of the valuable advice of an Assistant Director of the Central Mortgage and Housing Corporation of Canada, which has been operating a nation-wide housing loans insurance scheme for more than ten years.

As honorable senators would expect, we have also sought and obtained the views of the major lenders for housing on the elements of our proposed scheme. We have had the benefit of discussions with, amongst others, the Australian Bankers Association, the Life Offices Association, the Australian Association of Permanent Building Societies and the Australian Council of Co-operative Housing Societies. We are indeed grateful to them for the views they have expressed. We have also explored the difficulties being experienced by many home seekers in arranging to borrow the money they need for their homes. We have spoken to builders and housing project developers who will, we hope, be encouraged to expand their private enterprise activities with the assistance of insured loans. I believe we have evolved a workable scheme which will operate within the authority of the Bill now before the Senate.

This Bill has been drafted to give the Corporation the widest permissible powers to insure loans made for purposes in connection with housing. It is designed to empower the Corporation to insure all manner of loans that may be made to add to, or improve, the stock of dwelling accommodation in Australia. The Bill has also been broadly drafted because housing loans insurance is a field in which the Commonwealth has not had any experience to provide a guide, and in which problems that have not been foreseen may well arise. In essence, the Bill provides for the establishment of a Housing Loans Insurance Corporation, authorises it to carry on the business of insuring housing loans, sets out the general field in which the Corporation is to operate and indicates the nature of the limitations to which it is to be subject.

Loans acceptable for insurance will include those made, or being advanced, to the owner or lessee of land on which a dwelling: is being, or has been, erected. These loans will not be confined to those made in respect of a single dwelling unit. The Bill defines a dwelling-house to include not only a single dwelling and a home unit, but also a building comprising multiple dwelling units. Clause 4 defines insurable loans to include -

(a)   loans made for the purpose of acquiring land and constructing, or completing the construction of, a dwelling on the land. However, clause 22 makes it quite clear that the Corporation may not insure a loan made solely for the acquisition of land - we do not wish to encourage the land speculator;

(b)   loans made to construct a dwelling or complete the construction of a dwelling on land owned or leased by the borrower;

(c)   loans made to purchase an existing dwelling;

(d)   loans made to alter, improve or extend a dwelling. These would include loans for, amongst other things, the permanent provision of water supply, electricity and sewerage, and the conversion of an existing dwelling into two or more dwelling units;

(e)   loans made to meet expenses on roads, kerbing or footpaths, in connection with land which the borrower owns; and

(f)   loans made for the discharge of an existing mortgage over land on which a dwelling has been, or is being, erected and which is owned or leased by the borrower.

The legislation provides that the Corporation shall charge a premium for insuring a loan, and that the premium rates shall be determined by the Corporation. In fixing these rates, the Corporation will be required to aim over the long term neither to make a profit nor to incur a loss. It is expected that the premium to be charged will be in the form of a once-and-for-all payment for insuring a loan up to its maturity date. It is proposed that the premium be collected from the lender and that in practice the lender would recover the amount from the borrower. In return for the payment of a relatively small premium, the borrower will receive the benefit of a larger loan at a reasonable rate of interest and for a reasonable period. We expect it to be the normal procedure for the lender to agree to lend the amount of the premium to the borrower. When the lender does this, the amount of the premium may be added to the loan and the Corporation will insure repayment of the whole. It is not proposed that the Corporation be permitted to insure housing loans made by the Commonwealth or a State, or by an authority of the Commonwealth or a State, other than a bank. It is the usual practice of governments themselves to carry their own risks of loss.

May I draw the attention of honorable senators to clause 23 of the Bill. We believe this clause will be of very great significance in the future. It will authorise the Corporation to refuse to insure a loan if it is not satisfied that a dwellinghouse will be, or has been, built according to sound standards of construction. We all wish to see improve ments in the standard of housing in Australia, and the maximum feasible adoption of uniform standards that will increase the efficiency of the industry and reduce its costs. The Corporation should be in a position to assist acceptance of minimum building standards by having the power to refuse to insure loans for dwellings that fall short of reasonable standards of construction.

Loans will be insurable only if the repayment of the loan is secured by an approved security over the interest of the borrower in the land. The Bill defines an approved security as meaning a first legal mortgage, but it will also permit an approved security to be a second mortgage or, indeed, any form of security over the borrower's interest in the landthat is declared by the regulations to be an approved security for a class of insurable loans.

It is the Government's intention that a loan made for the purpose of buying or building a dwelling will be insurable only if it is secured by a first legal mortgage. This is in line with the objective of encouraging the major lenders to make high ratio insured loans, so that the need of many home seekers to obtain second mortgage loans may be removed. To insure a second mortgage made to acquire a home would be to insure lenders who lend mostly at interest rates higher than those at which first mortgage loans are customarily made, and for far shorter periods. Neitherthe American scheme, nor the Canadian scheme, authorises insurance of other than a first mortgage loan for the acquisition of a home. We also intend that an insurable loan for the discharge of an existing second mortgage must be a single loan, being either a renegotiated first mortgage or a loan to discharge the existing first and second mortgages, and that it would be secured by a first legal mortgage. We do not intend to authorise the Corporation to insure a renegotiated second mortgage loan secured by a new second mortgage.

The Corporation may insure a loan secured by a first mortgage made to a farmer for the erection of any type of dwelling on his property. As the Corporation will not be empowered to insure the repayment of a loan made to acquire land for farming and commercial purposes, the amount of an insurable loan made for farm housing will be determined in relation to the appraised value of the dwelling or dwellings proposed to be erected.

A loan to buy or build a dwelling to which is attached, for example, a shop or surgery, may be insured up to a percentage of the appraised value of that portion of the building comprising the dwelling. To be insurable, such a loan would have to be secured by a first mortgage. There are many people who wish to borrow to extend or improve their homes, but have already given a first mortgage over their properties. In these cases, it is not proposed to rule out the insurance of a home extension or a home improvement loan secured by a second mortgage, or some other type of security over the borrower's interest in the land, but a first mortgage, including a renegotiated first mortgage, will be preferred.

The Bill defines the borrower's interest in the land as an estate in fee simple, an interest as lessee under a lease in perpetuity from the Crown, or an interest under any other form of lease for a term of years. The Corporation would, however, have to be satisfied that the lease will give reasonable security of tenure to the lessee for at least the period over which the loan is due to be repaid. The Bill also authorises the Corporation to accept any other interest in land that may be prescribed by the regulations.

The Bill will establish a Corporation to carry on the business of insuring housing loans. The Corporation will consist of a Chairman, a Deputy Chairman and three other members. The Bill will also provide that the Chairman and Deputy Chairman be full-time members, and that the Chairman will also be Managing Director. The Managing Director will be the Corporation's chief executive officer. This arrangement should provide for the efficient conduct of the Corporation's business.

Clauses 17 and 18 of the Bill will give the Corporation power to carry on the business of insuring an approved lender who makes an insurable loan, against the whole, or against any part, of any loss in respect of the loan.

The loss that the Corporation may insure includes -

(a)   loss of moneys constituting the loan, which may include the amount of the insurance premium:

(b)   loss of interest and other charges on or in relation to the loan; and

(c)   any other loss arising from any default in relation to the loan.

The reference to other charges associated with interest is to the management fees payable by some borrowers at regular intervals and assessed on the amount of a loan. These fees, which are charged separately under many building society mortgages, are similar to the charges for administration incorporated by most other lenders in the interest charge. Such a management fee will be treated as part of the interest charge.

The expression: "Any other loss arising from any default in relation to the loan ", is intended to cover losses due to realisation expenses, including legal costs in acquiring vacant possession of the property, costs of essential repairs to the property up to an amount previously approved by the Corporation, costs of the sale, including advertising costs up to a limit approved by the Corporation, and any payments by the lender of municipal rates and fire insurance premiums outstanding on the property. Our thinking is that the internal costs ordinarily met by a lender in administering an insured loan in default should continue to be met by the lender out of the charge for administration included in the interest payment or out of the management fee. There must obviously be a limit on the period during which interest may accrue on a loan in default and be admitted in the amount of a claim. This will be a matter for determination by the Corporation. When a loan is in default, interest might accrue at the mortgage interest rate on the outstanding balance for up to twelve months. Thereafter it might continue to accrue for a further period at a rate that might well be below the mortgage rate.

The legislation will provide that an insurable loan must be made by an approved lender. The classes of lenders eligible for approval will be specified by the Minister, but the Corporation will approve particular lenders. The Corporation will also have the power to withdraw its approval of a lender. Classes of approved lenders will include banks, life insurance companies and building societies. As time goes on other classes of lenders will almost certainly be approved. Approved lenders will, as far as possible, be responsible for the administration of insured loans. As is the practice of lenders at the present time, they will examine the title to the relevant property, appraise its value and assess the capacity of the borrower to repay a given loan. In the event of the default of a borrower, any action to renegotiate a loan or to obtain vacant possession and sell the property will, in almost every case, be undertaken by the approved lender. Under the default procedure, we have in mind that the lender will advise the Corporation of the action he proposes to take. It is expected that the Corporation will, in most cases, endorse the action proposed by the lender. If the Corporation does not agree with the proposed action, it will endeavour to persuade the lender to adopt the course the Corporation thinks desirable under the circumstances. The general practice will be that a lender shall exercise his rights under a mortgage to sell the property before he may submit a claim.

There may be cases where a borrower defaults under an insured loan and the mortgagee wishes to exercise his rights under the mortgage to sell the property and submit a claim, but the Corporation believes that a sale at the time would unduly increase the loss in respect of the loan. In cases such as these the Corporation will be permitted to determine the amount of loss in respect of the loan and to pay this amount, notwithstanding that the lender has not exercised any of the rights he has against the borrower. The approved security and any collateral to that security would, of course, be assigned to the Corporation. To deal with cases such as these, the Corporation will have a limited power to acquire, hold and dispose of the securities for loans insured under the scheme. It is a power the Corporation will, on occasions, need to exercise, but it may only be exercised when an insured loan is in default.

Clause 24 will authorize the Corporation to pay a claim where the lender has exercised his right to sell the mortgaged property, but has not pursued any personal or other remedies he may be entitled to exercise against the borrower. It is rare for the major lenders to exercise the rights they have under a personal covenant where the property has been sold. This is also the usual practice of overseas authorities who make and insure housing loans. It will, however, be for the Corporation to decide whether or not to accept and pay a claim if a lender has not exercised all the remedies he may pursue. Clause 19 of the Bill will authorize the Corporation, where a security is transferred to it in consequence of its paying a claim, to dispose of its rights under the security by a further assignment of the mortgage or, if it is satisfied that in all the circumstances it is desirable to do so, to renegotiate the security and, if it thinks fit, subsequently to sell it.

If a market in insured mortgage loans is to be developed in Australia, the insurance contracts must be assignable. Clause 42 of the Bill provides that when an insured loan is sold or otherwise assigned, the contract of insurance may also be assigned to the person to whom the mortgage is transferred. However, it will be essentia] to the smooth working of the scheme that an insured loan should continue to be administered by an approved lender. Such a lender will be familiar with the conditions attaching to the contract of insurance, the reporting to the Corporation of a loan in default, what may come to be regarded by the Corporation as reasonable action in the event of a default, the extent to which costs may be included in a claim and other administrative matters. The Bill therefore provides that a contract of insurance may be cancelled if an insured loan ceases to be administered by an approved lender. Before the insurance cover may be assigned to a non-approved lender, he must have arranged for an approved lender to administer the loan under an agency contract. Such a contract, which must be in a form approved by the Corporation, would list the things to be done by the approved lender. An agency contract will not, of course, interfere with the right of the holder to sell or otherwise transfer his interest in any mortgage to which such a contract refers. However, if a loan is to continue to be insured, it must be administered by an approved lender.

The Bill provides that a number of specified matters of policy may be determined from time to time by the Minister, by the Corporation with the concurrence of the Minister, or by regulation in accordance with a recommendation made to the Minister by the Corporation. The more important of these matters are referred to in clause 20 and sub-clause (2) of clause 47. I shall have something to say about them shortly. Clause 25 provides that, subject to the provisions of this Bill, the Corporation may adopt its own policies, but will be obliged to keep the Minister informed of any significant policy decision it may make. A matter of policy not otherwise provided for in the Bill may be declared by regulation to be a matter of policy in respect of which the Minister may issue a direction. The Bill, however, expressly forbids the Minister to instruct the Corporation to write, or not to write, a particular contract of insurance.

Sub-clause (1) of clause 20 of the Bill provides that classes of insurable loans may be prescribed by regulation. Sub-clause (2) of clause 47 provides, however, that after the Corporation has commenced to carry on its business, regulations prescribing classes of insurable loans, or an amendment of any existing regulations in respect of classes of insurable loans, may not be made unless the regulations are in accordance with a recommendation made to the Minister by the Corporation. Sub-clause (2) of clause 20 gives the Minister power to direct the Corporation not to insure particular classes of loans until he otherwise directs. This provision is included to give the Government a power to determine, if it so wishes, the scope of the business that the Corporation may insure from time to time. The Government may use this power in accordance with its assessment of the need to stimulate, or not, the levels of activity in sectors of the home building industry or to attempt to divert portion of the demand for homes towards a fuller utilization of existing houses. In times such as the present when the physical resources in the home building industry are close to being fully employed and building costs are tending to edge up, we would not wish the activities of the Corporation to create any undesirable pressures. However, honorable senators may be assured that the Corporation will be permitted to insure all classes of housing loans as soon as adequate finance and physical resources may be available for these purposes.

There will also be a limit on the amount of a loan that may be insured in respect of each class of insurable loan. These limits, which will be determined by the Corporation with the concurrence of the Minister, may be varied from time to time. The

Corporation will also fix limits on the percentage, or percentages, of the appraised value of the land and dwelling that may be lent and insured.

In announcing the scheme we said we would introduce legislation to permit the Corporation to insure housing loans up to a high percentage of valuation, ranging up to 95 per cent, in appropriate cases. We also referred to those who want a house which is, in size or quality, better than the average. At present the average value of a newly erected house and land is in the vicinity of £5,000. We do not intend to overlook those credit-worthy borrowers who wish to borrow a high proportion of the valuation of a house and land costing more than the average. There are, however, sound commercial reasons why those who wish to acquire such homes should have a reasonable equity in the property.

The Corporation will determine the maximum amount, and the maximum percentage of the value of a house and land, that may be borrowed if the loan is to be insured. No lender will be under any compulsion to make an insurable loan to any particular borrower, or to make a loan up to the maximum amount or the maximum percentage of valuation that may be insured. At present many institutional lenders have not the finance freely available to permit them to make many larger loans. Although we do expect all these lenders to make some larger high-ratio loans, and to insure them, the needs of many borrowers will continue to be satisfied with loans up to conventional percentages of valuation which will not

Even if there were a large increase in the funds immediately available for housing, it is doubtful whether there would be an increase in the rate of home construction, as almost all the labour available for home building is now fully employed. In the first nine months of 1964 there was a most gratifying increase of 7,600 in the number of persons engaged in new dwelling construction. Whilst the Government is doing all it can to expand this labour supply, a further rapid increase must not be expected. It takes time to train craftsmen. Although a record number of building workers is migrating to Australia this year, there is a limit to the number we may attract. We will not, of course, relax our efforts to this end.

We must not expect the major lending institutions to change quickly the home lending rules they have been working to for many years. Experience elsewhere has been that, when an offer to insure high-ratio lowdeposit loans is first made, lenders hesitate to make larger loans. It takes time to change lending habits. A borrower seeking a highratio insured loan will be expected to demonstrate his need for it and his ability to repay it. Insurable loans made during the early operation of the scheme might be between 80 and 90 per cent, of valuation. This should help many who would otherwise seek both first and second mortgage loans. In the relatively few cases where a borrower's capacity to repay appears unusually high, loans up to 95 per cent, of valuation may be made and insured.

Clause 20 of the Bill provides that a loan shall not be insurable if the interest rate payable exceeds the maximum permissible interest rate to be determined from time to time by the Corporation with the concurrence of the Minister. This rate will be notified in the " Gazette ". It will be announced shortly before the Corporation commences to carry on its business, and should permit institutional lenders who make housing loans to insure some of their housing loans.

It is the practice of some lenders to take power under the mortgage to vary the rate of interest charged after a loan has been in existence for a specified number of years, or at certain set intervals. We believe it is highly desirable that the rate of interest payable on an insured housing loan should be constant for the full duration of the loan, especially if a market in insured mortgage loans is to be developed. It is not proposed that the Corporation should, in its initial operations, be required to refuse to insure mortgage loans where the interest rate may be varied. However, it is intended that the terms and conditions of contracts of insurance will include a provision that they may be cancelled if a lender were to vary the rate of interest on an insured loan without the consent of the Corporation or if the interest rate on an insured loan were to be raised above the maximum permissible interest rate prevailing at that time.

The Bill provides for the Corporation to determine the maximum duration of the loans it will insure. The maximum duration of an insurable 'loan on an existing dwelling may be for a shorter period than for a loan for a newly erected dwelling. Home extension and home improvement loans will be for relatively short periods. When we announced this scheme, we said we would assist the obtaining of low deposit loans related to the income and reasonable creditworthiness of the borrower. The capacity of a borrower to repay a loan is a matter of importance. The Corporation may refuse to insure a loan if it thinks that the amount of principal and interest payable on the loan, and rates and any other payments in respect of the property, would exceed a certain, proportion of the borrower's established income. Assuming this proportion were 25 per cent, of income, a loan repayable by regular instalments at intervals not longer than twelve months over a period of 25 years at an interest rate of, say, 6 per cent, per annum, would be about three times the borrower's established annual income.

Honorable senators will note that the Bill contains the customary provisions in Commonwealth statutory authority legislation to authorise the Corporation to appoint staff. The Treasurer will make an initial advance of £100,000 and will be authorised to advance further sums to the Corporation on such terms and conditions as he determines. The Corporation will also have a general borrowing power to meet its possible future need for funds, but this power may only be exercised with the Treasurer's approval. The Corporation's avenues of investment will be limited to fixed deposits with an approved bank, Commonwealth securities and the official short-term money market.

The Bill will exempt the Corporation from taxation under a law of a State or a Territory and also from the payment of income tax. The Corporation will, however, be empowered to pay for municipal services in respect of properties it may hold. Assuming that adequate funds are forthcoming the passage of this Bill and the establishment of the Corporation should eventually confer widespread benefits on many people. The scheme is designed to assist many of those wishing to borrow, to buy or build their own homes, to obtain high ratio insured loans at reasonable rates of interest. Those who wish to borrow to add to their homes may benefit from insured loans. Those who lend for housing purposes also stand to benefit greatly. The risks of loss of capital and interest will be removed when their loans are insured.

Benefits should also flow to those who have the enterprise to borrow to build multiple dwelling units, or to sub-divide land and erect a number of individual homes. Indeed, the scheme should benefit all who obtain their livelihood from the home building industry. In the past those who build our homes have suffered from fluctuations in the demand for their services. In their interest and in the national interest, it is most desirable that these fluctuations be reduced to the minimum. Although home building is a field in which the Commonwealth has only limited powers of determination, our policy is to do all we can to influence the determining factors, sothat Australia will continue to have a high and rising rate of new home construction. The housing loans insurance scheme, to operate under the authority of this Bill, should help us to achieve this most important aim.

I commend the Bill to honorable senators.

Debate (on motion by Senator Bishop) adjourned.

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