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Breez Forms

Housing Cooperatives

1 - Introduction

Since 1936 Cooperative Housing Societies have been the forefront of  Australia’s most pressing affordable housing issues and over the years have had a tremendous impact on the revitalisation of Australian cities and neighborhoods.   These entities have made an important contribution to the financing of housing construction in Australia and have helped to give Australia one of the highest home ownership rates in the world.  

Cooperative Housing Societies are compassionate and ethical lending institutions and are firmly entrenched in the belief that people come before profit.  They predominantly lend to families that fall outside of the mainstream banks requirements, and are deep rooted in country and regional Australia. 

Breez Finance Corporation is a Management Company, employed to provide daily loan management and support to the Cooperative Societies.   We wholeheartedly support the cooperative doctrine that the home is the thread of the family.  Our fundamental charter is to assist people to obtain home-ownership and survive the financial hardships that can afflict families from time to time,  through education and personal service.   This filters through to the way that we deal with members. 

Housing cooperatives exist for their members' mutual benefit. They share with other cooperatives the values of individual responsibility, mutual help, democracy, equity, and solidarity.

2 - History of Cooperative Housing Societies

Cooperative housing societies, or terminating building societies as they were originally known, have existed in Australia since the 1836.   Terminating building societies originated in England in the 1780s and consisted of a membership who contributed a regular sum to a common pool with each member eventually obtaining a housing loan, by ballot or other method. 

Cooperative Housing Societies have made an important contribution to the financing of housing construction in Australia and have helped to give Australia one of the highest home ownership rates in the world.  The heyday of these institutions was in the 1950s when cooperative housing societies financed as much as 35 per cent of housing construction in Victoria, New South Wales and Queensland, but since 1961 these institutions have gone into relative decline and today finance less than one per cent of housing construction. The rapid growth of these institutions in the 1950s and their relative decline in the 1960s is a remarkable story and one that, unfortunately, has attracted little attention. During the 1980s they experienced a mild recovery when banks became inclined to channel funds into them. 

Victoria was the first state to initiate housing cooperatives.  The move on the part of the Victorian Government to assist the housing societies only occurred after a decade of public agitation over housing conditions in Victoria. During the 1930s there was a great deal of concern expressed in Victoria about the lack of affordable housing for people on low incomes.   Victorian politicians advocated that the government involve itself in housing finance for middle and lower income earners by encouraging the setting up of cooperative housing societies. 

The main justification for the establishment of cooperative housing societies during the 1930s was the reluctance on the part of the major banks to involve themselves in the financing of housing for middle and lower income earners and a tendency for the permanent building societies to cater mainly for investors in rental housing.  This made it difficult for many to find finance for owner-occupied housing.    Further pressure came from the Real Estate and Stock Institute of Victoria.

In 1944 the Victorian Parliament passed the Cooperative Housing Societies Act.  Under the Cooperatives Housing Act the Victorian Government agreed to supervise the activities of these societies and guarantee the repayment of the loans they borrowed. The Government also undertook, in certain circumstances, to indemnify societies against the loss directly attributable to them when their loans exceeded 80 per cent of a property’s valuation (but could not exceed 90 per cent). The Act when it came into force on the 5 September 1945 authorised that housing societies could be formed to raise loans and make advances to members for the purchase of land and the erection of homes (but not for the purchase of standing houses), backed by a guarantee to the creditors by the government. Most of the loan funds used by the cooperatives were expected to come from private banks, friendly societies and insurance companies, although later it was the government itself that became the main provider of funds.  

The normal procedure for setting up a cooperative housing society was for a group of persons with some community of interest (e.g. residential, ethnic, occupational, recreational or religious) to meet and elect a tentative board of directors to negotiate with a lending institution for finance. The housing societies established during the 1950s mostly had some sort of regional attachment; either suburban or in country towns.   Typically directors and managers were local accountants, solicitors or real estate agents.   After the financing had been arranged the society would be registered and a government guarantee extended to the lending institution. 

The societies had a fixed life, usually between twenty-six and thirty-one years, and a limited membership - usually between thirty and one hundred. Most members would join at the beginning of the society’s life, however provision was made for late entry. Members when joining a cooperative applied for a number of shares, each share entitling the member for a loan. Monthly subscriptions were paid on each share at a rate determined by the nominal life of the society and notional interest rate on which it is based. After taking the loan the member paid an additional sum each month which represented interest. As subscriptions were received the indebtedness of the society was reduced and when the loans were completely repaid the society was wound up.

3 - Cooperatives Funds

Cooperative housing societies relied on funds obtained from banks and other institutions and so the extent of their activity was determined by the amounts that they could borrow. Although it was originally intended that the housing societies would rely upon the finance of private banks, friendly societies and insurance companies it was only in the first three years of their operations that they received most of their funds from this source.  

In the immediate post-war years housing construction was slow to expand due to the shortages of materials. Banks at this time were reluctant to lend directly to borrowers and found that lending to the cooperatives a good alternative. Most of the private banks and the government banks lent little for the purpose of housing construction during the war and found it difficult to take up this form of lending very quickly after the war was over.   Lending to the cooperatives seemed an easy way to get back into housing finance without any risks, because of the government guarantee.  The State Savings Bank of Victoria in particular began lending on overdraft to the cooperative housing societies in May 1946 and by June 1954 some 51 societies had received overdraft facilities from the State Savings Bank amounting to £15.7 million.  

The strong growth of the housing societies during the late 1940s and 1950s seems to have been a product of the strong support of the Commonwealth Bank and the State Savings Bank of Victoria. During 1951/2 the State Savings Bank increased its funding during a period of reduced private funding due to tight credit conditions. Up until the mid 1950s the Commonwealth Bank pursued a policy of trying to expand its operations into Victoria from its strong base in New South Wales.   It lent to cooperative housing societies who lent the funds on to the final borrowers. During the 1950s and 1960s the government banks gradually lost interest and concentrated on expanding their own home lending facilities.  

During the 1960s most of the funds made available to the cooperatives (approximately 63 per cent) came from the Home Builders Account of the Victorian Government which channeled Commonwealth Government funding into housing. Without this large scale support in would seem unlikely that the cooperatives would have survived as large scale financiers of housing.  The cooperative housing societies were assisted by the Commonwealth/State Housing Agreement after 1956 whereby the State Governments were allowed to allocate a sizeable portion of its share of funds to these societies. Under this agreement 20 per cent in the first two years, and 30 per cent subsequently of the money granted by the Commonwealth to the State Governments was to be used to finance private construction of housing through the Home Builder’s Account. 

From 1959 onwards the direct funding of the federal and state governments became the most important source of funding for the housing societies and so they effectively became a major arm of the Victorian Government in providing home purchase assistance. This status was later recognised by the Victorian Government when it brought the Registrar under the jurisdiction of the new Ministry of Housing in 1973. Previously the Registrar had been seen as being a regulatory body, responsible for the registration and inspection of cooperative housing societies. The Ministry of Housing on the other hand saw it as a way of channeling Commonwealth/State funds into housing for low income earners.  

In effect the housing societies became a means by which institutional and government funds were channeled into housing and their success depended upon the support they were able to attract. Although originally designed to attract funding from private banks and insurance companies it was the initial support of the government banks and later the Commonwealth and Victorian governments that ensured that the societies had sufficient funds to meet the needs of home buyers. Gradually even this level of government support began to flag and after 1975 government funding of the cooperatives, both in real and nominal terms, began to decline. 

Gradually it became apparent that more important factors were encouraging a longer term decline of the societies. Initially the tight monetary policy of the Reserve Bank meant that banks were less likely to lend to the societies and the deteriorating economic conditions reduced demand for loans as consumers became worried about their employment prospect 

The cooperative societies continued to contract in number and size of assets even after the Australian economy recovered in 1992 because of the difficulty in obtaining further funding from banks and the government. Revised capital adequacy guidelines set by the Reserve Bank resulted in housing lending being more aggressively pursued by the banks themselves who discontinued to lend funds to the cooperatives.    Finally the cooperatives found it difficult to retain borrowers in the face of keen price competition from banks and other financial institutions.

4 - Legislative Framework

Poinciana Cooperative Housing Society Limited (the Society) is an unlisted not-for-profit corporation described as a Registrable Australian Body under Corporations Act 2001 Sub-section 601CU(1).  It is incorporated under the Financial Intermediaries Act 1996 by the Registrar of Cooperative Housing Societies. 

 

(a) Financial Intermediaries Act 1996

The Financial Intermediaries Act 1996 (The Act) is a Queensland Act that regulates the activities of Cooperative Housing Societies.  Section 19 of the Act gives the State powers to appoint a Registrar to supervise the activities of Registered Societies.  This is a role of the Queensland Treasury Corporation. 

 

(b) The Regulator

The Registrar has power to do all things necessary in connection with the performance of the registrar’s functions under The Act and its prudential and advisory functions are to:

 1. Institute, develop, and ensure the effective and efficient implementation of a system of prudential and other standards for, and for the supervision of, societies;

2. Advise and make recommendations to the Treasury about changes to The Act or new laws, and changes to other existing laws, about or affecting societies;

3. Register, supervise and regulate societies;

4. Protect the interests of members of the societies

 

(c) Prudential Standards

The Registrar has adopted a set of Prudential Standards which is used to standardise the supervisory framework of Societies.  The Society must conduct its affairs within the framework of these Prudential Standards.

5 - Housing Cooperatives Today

In 1996, the Queensland Government passed the Financial Intermediaries Act which transformed their ability to lend in the home loan market. Cooperative Housing Societies are primarily residential mortgage lenders.  They are unique financial institutions offering unique products and services to clients, but are non-deposit taking institutions. 

A Housing Cooperative is a legal association formed for the purpose of providing housing finance to its members. It is owned and controlled by its members.  A cooperative is distinguished from other housing associations by its ownership structure and its commitment to cooperative principles.   The primary object of a housing cooperative is to help low-moderate income earners into home ownership and to provide the necessary ongoing support, education and personal assistance throughout the term of their loans.

Historically, they specialised in sympathetic lending for those marginal income households that could not gain access to housing through normal home lending channels.  There is a continuing relevant role for societies and their associated entities as they continue to focus upon their traditional market niche of marginal income households, which makes up more than 30% of all Australian households. 

Housing cooperatives lend under the jurisdiction of the Uniform Consumer Credit Code, Financial Intermediaries Act, Model Rules, Prudential Standards, and Society Procedures set by the board.  Supervision is carried out by the Queensland Treasury Corporation and an external auditor oversees the organisation's annual activities, and reports on risk management.  Separate State registration must be attained before a Society can commence lending outside the State that it is formed in. 

Societies are under the control of a board, which appoints a management company to take responsibility for the day to day operations. In practice, individual societies are pooled into "groups" for administrative efficiency.

Cooperative Housing Societies lend money for residential purposes only. They do not hold deposit accounts, as do banks. In Queensland they are supervised by the Queensland Treasury Corporation and regulated under the Financial Intermediaries Act. 

Cooperative Housing Societies receive tranches of money from banks and other institutions, which are held on the Society’s balance sheet, duly making the Society responsible for any accrued losses. A board of Directors oversees each Society on behalf of all of its members.   The Housing Cooperative becomes custodian of all Members’ mortgages and titles until their loans are paid out.

6 - Prudential Regulation and Reporting

Cooperative housing societies have empowered state supervisory authorities to regulate and supervise the industry.   In Queensland, this body is the Queensland Treasury Corporation (QTC), which is charged with the supervision of societies and the enforcement of the legislation. Societies operate under a system of prudential supervision introduced by the Financial Intermediaries Bill 1996 ('the Act").  The Act makes provision for the governance and regulation of societies, and for the making of mandatory Standards, which are binding on the Societies. 

The Registrar’s (QTC) approach to supervision combines setting Prudential Standards, data collection, off-site analysis, on-site inspection, and review of the work of external auditors of the societies.    The Registrar requires each society to have appropriate documented policies and procedures in place to manage risks, and ensures that these policies and procedures are fully implemented. 

The Prudential Standard addressing risk management identifies requirements for each of the major types of risks associated with cooperative housing society activity.  Accounting disclosure and audit standards to be applied to each society include reporting to membership, more general public reporting, and reporting to the registrar. 

Cooperative housing societies must address financial risks typical of other financial intermediaries such as banks or building societies.  However, unlike a bank, a society does not borrow money from its members or the general public to finance loans it makes to its members.  Instead it borrows “wholesale” form a source lender.   Like other financial intermediaries, a society has to recognise the nature of the risk involved and the commensurate procedures required to effectively identify, monitor and mitigate or manage these risks. 

 

Reporting to Wholesale Funders

In essence wholesale funders provide the society with a “line of credit” which is drawn down as each property title is certified by the society’s solicitors and settlement occurs.  The society provides a reconciliation report to funders on a quarterly basis, reconciling the members loan ledger to the bank loan account, a members loan portfolio summary, and statistical information as to the geographical spread of the loans.  Additionally, each month, the society provides an arrears report in the specified format.

 

Reporting to The Registrar

There are several reporting requirements by the Registrar, including monthly loan arrears reporting, annual returns,  annual accounts and audit, management contracts, distribution of reserves, provision of doubtful debts, and changes to Society Rules.

 

Audit

The  nature of cooperative housing societies means that auditors can readily review and report on the risks involved in the operations of societies.   Each society must be audited in accordance with Australian Accounting Standards.

7 - Differentiation

Whilst the banking and finance world is becoming more internationalised, Cooperative Housing Societies remain very much 'grass roots’ organisations, strategically focused at the community level and upon Australians trying to fund basic shelter.  

The Cooperative Housing Society program is about lending to people who want or need personal service and flexibility.   These people can be AAA candidates or sub-prime candidates.   The type of customer that enjoys being in a housing cooperative is one who wants old fashioned personal service.   Some distinguishing features are:

 

  • Cooperative housing societies are mutual financial institutions.  They are run by members for the benefit of members.  Members vote directors in.  Each member has one share and one vote.

  • They lend exclusively for housing.

  • Market focus is upon one very specific subject - "affordable housing" for ordinary Australians, including marginal income households.  Terms and conditions of lending are set by the funder and the Board of Directors of the Societies as part of their lending agenda.

  • Cooperative housing societies and their associated companies have traditionally and primarily provided accommodation to the low - moderate income earners.  They have been a conduit for government housing policy firstly, and economic policy secondly. Whilst, in recent years this role has been curtailed, it is interesting to note that the NSW Government  re-established their role and limited government guarantees are in place.

  • Cooperative housing societies are not deposit taking institutions.  Their funding is solely wholesale on commercial terms and conditions.  They have no saving/investing members.  As they do not accept retail deposits, they are not exposed to liquidity risks of deposit withdrawals from any loss of public confidence.

  • Historically, they have specialised in servicing disadvantaged borrowers and minorities such as women, singles, single parents, migrants and owner-builders. 

  • They provide counsel to prospective and established borrowers.

  • They specialise in loan repayment management where a borrower runs into financial difficulty.