Background

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: ⁽⁵⁾

Mortgage default

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.