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 SA 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 retailing, loan management and arrears management. Debt funding for HomeStart Finance lending has been provided by the South Australian Government Financing Authority (SAFA).
The Government initiated a review of the future of HomeStart Finance in May 1997 which was completed by the Department of Human Services in July 1999. As a result of that review Cabinet approved the continuation of HomeStart’s business subject to it operating under targeted lending criteria established in 1998-99 and within lending limits to be determined each year in consultation with the Department of Treasury and Finance.
The level of outstanding home loans fell by $133.1 million ($158.6 million) to $797.7 million ($930.8 million) as at 30 June 2000.
The Operating Surplus after Income Tax was $5.2 million ($4.5 million), an increase of $0.7 million compared to the previous year. An income tax equivalent of $2.9 million was paid to the Treasurer.
HomeStart paid guarantee fees to the Treasurer of $5.5 million ($6.5 million) and a dividend of $5 million ($5 million) to the Department of Human Services. No repayment of capital was made during the year ($25 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 Auditor-General has audited the accounts of HomeStart Finance. The accounts of Bank SA in relation to the administration of the HOME program are audited by external auditors appointed by the Bank. This did not occur for the 1999-2000 year. Instead, the Auditor-General performed sufficient work with respect to the HOME program so as to form an opinion as to HomeStart’s financial statements.
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 1999-2000 specific areas of audit attention included:
Lending activities
Raisings and receipting (including interest income)
Loan loss provisioning
Completeness and accuracy of the Loan Management Systems
Funding through the South Australian Government Financing Authority (including interest expense)
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 matters arose from the external audit of HomeStart Finance.
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 the law.
HomeStart achieved a slight increase in the Operating Surplus after Income Tax of $0.7 million to $5.2 million. Although Net Interest Income decreased by $3.1 million, this was offset by the write back of bad and doubtful debts expense by $1.8 million, a $3.1 million improvement from the previous year. The reduction in Net Interest Income is principally due to the reduction in the balance of Housing Loans and Advances by $133.1 million from $930.8 million over the period.
The following graph shows the relationship between Net Interest Income and Operating Surplus after Income Tax over the last five years.
The reduction in the balance of Housing Loans and Advances is principally due to two factors, namely compliance with government policy and market conditions. The limit placed by government on the level of new lending that can be advanced in each year was first imposed for the 1998-99 financial year. In order to comply and maintain its profitability, HomeStart tightened its lending criteria. The tightened lending criteria, which continued to be applied during 1999-2000, coupled with market conditions, resulted in the level of new lending by HomeStart being less than the limit imposed.
As highlighted above, a reduced level of new lending and the resultant reduction in Housing Loans and Advances corresponds with a reduction in Net Interest Income. In the absence of write backs of bad and doubtful debt expense, as occurred in 1997 and 2000, this results in a decrease in the profitability of HomeStart. This trend can be expected to continue were HomeStart's balance sheet to be further decreased.
Notwithstanding the reduction in profitability over past years, HomeStart has been required to maintain its dividend payments (and, in 1998-99 repatriate capital). 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 was $130.9 million ($130.8 million).
The value of Housing Loans and Advances has continued to fall in the current year. The following graph highlights this decline.
A credit to the bad and doubtful debt expense of $1.8 million resulted in a reduction of $3.1 million compared to the previous year. The following graph documents the reduction in bad and doubtful debt expense over the past five years and the percentage of the Housing Loans and Advances covered by the established Specific and General Provisions. The main reason for the decrease of both items is the general increase in the value of properties securing the loans granted by HomeStart.
