HomeStart Finance is a statutory corporation established pursuant to the Housing and Urban Development (Administrative Arrangements) Act 1995. The Act provides for the Governor to establish, by regulation, statutory corporations to undertake specified functions. It has a Board of Management appointed by the Minister for Human Services and is subject to the control and direction of the Minister.
The functions of HomeStart Finance as prescribed by regulation include the:
lending of monies or provision of other financial assistance to facilitate home ownership by persons of low to moderate income;
provision, marketing and management of home finance products;
provision, management or facilitation of finance for housing schemes or housing associations and of mortgage relief schemes.
In meeting these functional responsibilities, HomeStart Finance’s activities includes the following:
the management of existing loans and advance of new loans which form part of the ongoing HomeStart program;
the management of concessional home loans advanced under the Home Ownership Made Easy Scheme which was closed to new borrowers in 1989;
management of loans advanced by the South Australian Housing Trust to enable tenants to purchase their Trust homes;
the Mortgage Relief Scheme which provides assistance to home owners who are experiencing temporary difficulty in meeting mortgage commitments.
HomeStart Finance is required by regulation to conduct its business in accordance with established principles of financial management. It is also required to coordinate its activities with those of other public sector agencies and to ensure its activities are consistent with the planning of a desirable physical and social environment and with the enhancement of the Government’s physical and social development objectives.
HomeStart Finance uses the services of a number of financial institutions and other intermediaries to provide essential services including loan origination, loan management and arrears management. Debt funding for HomeStart Finance lending has been provided by the South Australian Government Financing Authority (SAFA).
The level of outstanding home loans fell by $45.6 million (rose by $9.7 million in 2000-01) to $761.8 million ($807.4 million) as at 30 June 2002.
The Net Profit from Ordinary Activities after Related Income Tax Expense was $6.7 million ($4.8 million), an increase of $1.9 million compared to the previous year. An income tax equivalent expense of $2.9 million ($2.5 million) was incurred.
HomeStart paid guarantee fees to the Treasurer of $5.0 million ($5.1 million) and a dividend of $2.2 million ($1.65 million) to the Department of Human Services. A repayment of capital was made during the year of $2.8 million ($3.35 million)
Bad and doubtful debts expense was $120 000, a decrease of $1.8 million from the previous year ($1.9 million).
Section 28 of the Housing and Urban Development (Administrative Arrangements) Act 1995 requires statutory corporations established pursuant to the Act to keep proper accounting records in relation to their financial affairs and to prepare annual statements of accounts for each financial year. That section also empowers the Auditor-General to audit the accounts of HomeStart Finance and the annual statement of accounts.
The audit program covered all major financial systems and was directed primarily towards obtaining sufficient evidence to enable an audit opinion to be formed with respect to the financial statements and internal control.
During 2001-02 specific areas of audit attention included:
lending activities including loan approvals, monitoring of arrears and loss write-off procedures
raisings and receipting of loan repayments
loan loss provisioning
completeness and accuracy of the Loan Management System including general IT controls
funding including treasury risk management and accruals
other expenditure.
HomeStart Finance has an Internal Audit function which uses an external contractor to undertake the internal audit program. External Audit has considered the work undertaken by Internal Audit to supplement other procedures performed in evaluating HomeStart’s internal control.
No significant matters arose from the external audit of HomeStart Finance.
HomeStart has an Audit Committee with three members, including two non-executive Board members. The Committee’s responsibilities include ensuring effective management of business and financial risk, reliable financial reporting and compliance with laws and regulations. The Audit Committee met on six occasions during 2001-02.
As required by subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987, the audit of HomeStart Finance included an assessment of the controls exercised in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities. The assessment also considered whether those controls were consistent with the prescribed elements of the Financial Management Framework as required by Treasurer’s Instruction 2 ‘Financial Management Policies’.
Audit formed the opinion that the controls exercised by HomeStart Finance in relation to the receipt, expenditure and investment of money; the acquisition and disposal of property; and the incurring of liabilities, were sufficient to provide reasonable assurance that the financial transactions of the organisation were conducted properly and in accordance with law.
Profit after income tax increased to $6.7 million from $4.8 million in 2000-01 due to a number of factors, including:
a reduction in net interest revenue of $0.9 million
an increase in income from investments of $1.3 million
a decrease in the bad and doubtful debt expense of $1.8 million
Net interest revenue decreased by $0.9 million to $22.2 million, notwithstanding the ‘write-back’ to income of $1.2 million of interest income on non-accrual loans during the year. The decrease was a result of lower levels of lending, offset by an improved interest rate margin between loans and cost of funds as demonstrated in the following chart.
Net Interest Revenue and Interest Margin
Over the past two years HomeStart have undertaken investments as part of a strategy for meeting loan shortfalls. Income from these investments increased by $1.3 million during the year to $1.4 million. This included $227 000 ($nil) of unrealised gains on investments.
The bad and doubtful debts expense for the year decreased by $1.8 million to $120 000 ($1.9 million), notwithstanding that HomeStart has continued to maintain or raise their overall provisioning in recent years. The relatively low expense reflects the level of actual write-offs that have had to be made over the last few years in an environment of decreasing interest rates and rising property values (that provide the loan security to HomeStart).
The decrease in actual write-offs can be seen in the following chart.
As mentioned, lower net interest revenue has principally been a result of a decrease in the levels of lending. One of the reasons for the decrease over recent years has been the ability of borrowers to obtain finance from other lenders in a low interest rate environment. The extent of the decrease in lending is demonstrated in the following chart, together with the impact that it has had on the net interest revenue.
Loans and Advances and Net Interest Revenue
The market conditions have also influenced HomeStart’s provision for doubtful debts but in two different ways. The total provision is comprised of two components being the specific and general provision.
The specific provision (the estimate of potential loss exposure on identified problem loans) has decreased a further $620 000 in 2001-02 ($2.3 million decrease in 2000-01) to $1.9 million ($2.5 million) due to continued property value growth, improved principal repayments due to low interest rates and a reduction in loans in arrears.
The general provision (provision for presently unidentifiable losses that may arise in the portfolio) has increased to $13.8 million ($13.2 million) due to HomeStart’s concern about the possibility of a correction in property values in the event of reductions to the First Home Owners Grant (FHOG) and the outlook for rising interest rates. HomeStart’s projections in this regard reflect experience in past markets in similar circumstances and stress testing carried out on its loan portfolio.
As a result of the movements in the specific and general provisions, the total provision for doubtful debts has remained relatively stable at $15.6 million, notwithstanding that total loans have decreased. The following chart shows the level of the total doubtful debts provision over the past seven years, and demonstrates that total provisions as a proportion of loans and advances is at a peak for that period.
Doubtful Debts Provision
Non-accrual loans reflect balances where management have assessed that loan recovery is doubtful.
Interest and charges are not taken to profit for such loans and they are written down to estimated realisable values through the specific provision referred to above.
The proportion of net non-accrual loans (that is after specific provisions and interest foregone) to total receivables (net of interest foregone) is the lowest for five years as shown in the following graph. Again, this reflects the market conditions and is consistent with the specific provision for the year.
HomeStart has been required to maintain its distributions to the Government (Department of Human Services) and in 2001-02 made a dividend payment of $2.21 million ($1.65 million) and a capital repatriation of $2.79 million ($3.35 million). The payment of dividends and the capital repatriation reduces the level of interest free capital available to HomeStart. It is, however, noted that the level of retained surplus at 30 June 2002 was $132.4 million ($130.7 million).
The following chart shows net profit after tax and distributions made for the past seven years.
Distributions to Government
In addition to these distributions, HomeStart pays a guarantee fee of 0.75 percent to the Government based on the outstanding funding balance at the end of each quarter of the financial year. The amount paid in 2001-02 was $5.0 million ($5.1 million).
HomeStart is also subject to an income tax equivalent regime. The income tax expense in 2001-02 was $2.9 million ($2.5 million).