HSBC 2007 Annual Report Download - page 221

219
HSBC Finance mortgage lending1
(Unaudited)
Year ended 31 December 2007 Year ended 31 December 20062 Year ended 31 December 2005
Mortgage
services
Consumer
lending
Other
mortgage
lending3
Mortgage
services
Consumer
lending
Other
mortgage
lending3
Mortgage
services
Consumer
lending
Other
mortgage
lending3
US$m US$m US$m US$m US$m US$m US$m US$m US$m
Fixed-rate ............... 20,146 47,254 2,597 22,358 42,378 2,210 20,088 36,187 1,642
Adjustable-rate and
introductory rate . 16,070 2,970 1,750 27,114 3,528 1,562 24,211 1,796 1,738
Total ....................... 36,216 50,224 4,347 49,472 45,906 3,772 44,299 37,983 3,380
First lien ................. 29,475 43,366 1,126 39,404 39,406 920 36,278 33,242 804
Second lien ............ 6,741 6,858 3,221 10,068 6,500 2,852 8,021 4,741 2,576
Total ....................... 36,216 50,224 4,347 49,472 45,906 3,772 44,299 37,983 3,380
Adjustable-rate ....... 12,361 2,970 1,748 21,344 3,528 1,562 19,037 1,796 1,733
Introductory
interest-only ....... 3,709 – 2 5,770 – – 5,174 – 5
Total ....................... 16,070 2,970 1,750 27,114 3,528 1,562 24,211 1,796 1,738
1 Management basis.
2 Restated to show HSBC Finance management basis, consistent with the current year.
3 Includes balances in the UK and Canada.
US personal lending credit quality
(Unaudited)
In 2007, a cycle of declining house prices, reduced
availability of mortgage finance and growing
customer delinquency and default caused a
deterioration in credit quality of increasing intensity.
Housing markets in a large part of the US have
been affected by a broad-based slowdown in the rate
of appreciation in property values, with actual
declines in many markets, including California,
Florida and Arizona, where earlier price increases
had been significant. The S&P/Case-Shiller 10-City
Composite Index showed a record decline in house
prices of 8.4 per cent in the year to November 2007.
There was a high degree of correlation between
the increase in delinquency throughout 2007 and
declining house prices. Two months or more
delinquencies rose most rapidly in those states
which, prior to 2007, demonstrated superior credit
performance, the greatest rate of appreciation and the
highest home values.
The rising level of delinquencies led investors to
question the reliability of credit ratings, not only for
residential mortgage-backed securities but for a wide
range of structured credit products. Investors became
increasingly unwilling to purchase securitised credit,
leading to a sharp contraction in flows of credit
through the affected channels. The exit of a number
of participants in the sub-prime mortgage industry,
together with a tightening of underwriting criteria by
remaining providers, led to fewer refinancing
options for customers. This created particular
problems for borrowers with affordability mortgages
who faced a considerable increase in their monthly
repayments at the end of their discounted
introductory periods.
Within HSBC’s portfolio, the rise in
delinquencies, first reported in 2006 in the sub-prime
second lien mortgages within the mortgage services
business, spread initially to other parts of mortgage
services, then to the branch-based consumer lending
business and, in the closing months of the year, to
the credit card business as the US economy
weakened and credit availability contracted.
Loans originated in 2005, 2006 and early 2007
experienced worse credit performance than earlier
vintages. The highest delinquency rates were in
second lien loans whose borrowers also had first lien
loans that were ARMs.
In addition, a significant number of second lien
customers had underlying ARMs that faced repricing
in the near term. As the interest rate adjustments
occurred in an environment of lower house prices
and tightening credit, the probability of default was
greater than generally experienced prior to 2007.
Second lien loans have a heightened risk profile,
for the reasons noted above. These loans often have
higher loan-to-value ratios because, in many cases,
the second lien loan was necessary to complete the