HSBC 2006 Annual Report Download - page 191

189
Areas of special interest
Mortgage lending products
(Unaudited)
HSBC underwrites first lien residential mortgages,
as well as loans secured by second lien mortgages
which are reported within ‘Other personal lending’
in the market sector analysis. In addition to capital or
principal repayment mortgages that may be subject
to either fixed or variable interest rates, HSBC
responds to customer needs by periodically testing
and underwriting an increasing range of mortgage
products designed to meet the growing demand for
flexible house purchase loans.
Interest-only mortgages, including endowment
mortgages which are most prevalent in the UK,
allow customers to pay only the interest that accrues
on the loan, with the principal sum repaid at a later
stage. In many cases, customers contribute to an
endowment or other investment policy that should,
on maturity, provide sufficient capital to repay the
principal amount. Alternatively, customers may
repay the principal of their loan from the proceeds of
the sale of the property on which the loan is secured
or from other repayment sources
‘Affordability’ mortgages include all products
where the customer’s monthly payments are
maintained at a low or fixed level in early periods
using discounted or fixed interest rates, or an
interest-only introductory period, before resetting to
a higher variable rate or a capital repayment profile
in later years.
The US has, in recent years seen a significant
change in the structure of borrowing products in
the sub-prime mortgage market. In particular,
affordability mortgages have grown faster than more
traditional fixed rate mortgages. These have included
interest-only, stated income (low documentation),
adjustable rate with alternative payment options
(known as option ARMs), negatively amortising and
layered risk loans, the latter of which includes
secondary loans. The growth of affordability
mortgages has occurred simultaneously with
gradually rising loan-to-value ratios.
Stated income loans have a lesser income
documentation requirement during the underwriting
process and, accordingly, carry a higher risk.
Interest-only loans allow customers to pay only
accruing interest for a period of time, and provide
customers with repayment flexibility. Adjustable-rate
mortgages are loans where the interest rate is
periodically adjusted based on an index. Secondary
loans which are, for example, drawn down to finance
the costs of relocation and property acquisition, are
also increasingly common.
As a consequence of US consumer demand for
affordability mortgages, this segment of the US loan
portfolio experienced rapid growth in 2005,
continuing into 2006. HSBC does not offer, and does
not anticipate offering, option ARMs or other
negative amortisation products.
As with all lending, HSBC underwrites in
accordance with criteria that consider the particular
terms of the loan and prices affordability products in
a manner designed to compensate for the higher risk
that exists in these products, notably the increase in
payments required at the end of the introductory
interest-only period or following the rate reset date.
The following table shows the level of mortgage
products in the various portfolios of HSBC Finance
and the rest of the HSBC Group.
At 31 December 2006 At 31 December 2005
HSBC
Finance1 Other Total
HSBC
Finance1 Other Total
US$m US$m US$m US$m US$m US$m
Total mortgage lending2 ...................................... 95,915 192,583 288,498 81,131 176,022 257,153
Interest-only (including endowment) mortgages – 33,190 33,190 – 27,418 27,418
Affordability mortgages, including ARMs ......... 29,536 60,739 90,275 23,971 57,669 81,640
Other ................................................................... – 295 295 – 388 388
Total interest only and affordability lending ...... 29,536 94,224 123,760 23,971 85,475 109,446
As a percentage of total mortgage lending ......... 30.8% 48.9% 42.9% 29.5% 48.6% 42.6%
Second lien mortgages ........................................ 19,265 5,093 24,358 14,975 4,889 19,864
As a percentage of total mortgage lending ......... 20.1% 2.6% 8.4% 18.5% 2.8% 7.7%
Negative equity2 ................................................. 12,343 2,454 14,797 14,160 2,336 16,496
Other loan to value ratios greater than 90 per cent3
.........................................................................
44,450 20,870 65,320 33,302 22,680 55,982
56,793 23,324 80,117 47,462 25,016 72,478
As a percentage of total mortgage lending ......... 59.2% 12.1% 27.8% 58.5% 14.2% 28.2%