HSBC 2008 Annual Report Download - page 216

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Credit risk > Areas of special interest > US personal lending / Loan delinquency in US
214
Second lien loans have a risk profile
characterised by higher loan-to-value ratios because,
in many cases, the second lien loan was taken out to
complete the refinancing or purchase of the property.
For HSBC Finance second lien mortgages, the
proportion of customers two months or more behind
on contractual payments rose from 11.2 per cent at
31 December 2007 to 15.9 per cent at 31 December
2008. Loss on default of second lien loans typically
approaches 100 per cent of the amount owed as any
equity in the property is applied initially to the first
lien loan, particularly during periods of house price
depreciation when its value is eroded to the point
where there is no surplus available to support the
repayment of second liens.
Stated-income mortgages, which represented a
small part of the HSBC Finance loan book, also
continued to decline. These mortgages are of higher
than average risk as they are underwritten on the
basis of borrowers’ representations of annual income
and are not verified by receipt of supporting
documentation. These loan balances declined
from US$8.3 billion at 31 December 2007 to
US$5.7 billion at 31 December 2008. Two months or
more delinquency rates on stated-income loans rose
from 19.0 per cent at 31 December 2007 to 27.7 per
cent at 31 December 2008. The percentage rise was
primarily attributable to lower balances and portfolio
ageing as the portfolio continued to run off.
In the Mortgage Services business, credit quality
continued to deteriorate as 2005 and 2006 vintages
continued to season and move into later stages of
delinquency as economic conditions worsened.
Amounts of two months or more delinquency in
Mortgage Services rose by 9 per cent during the year
to US$4.7 billion at 31 December 2008. These
represented an increased proportion of a reducing
portfolio, rising from 11.9 per cent to 17.0 per cent.
An increase in foreclosures in process during the
fourth quarter, arising from a voluntary one month
suspension of final court proceedings in foreclosure
cases relating to owner occupied properties,
implemented in December 2008 and the actions
taken by a number of states to slow foreclosure
proceedings, affected total lending in Mortgage
Services at 31 December 2008.
HSBC undertook several actions during 2008 to
reposition HSBC Finance, including closure of more
than 200 consumer lending branches, reducing the
network to approximately 800 branches, and
tightening credit criteria for originations. These
actions followed the decisions taken in 2007 to
cease purchasing mortgages from third-party
correspondents and to close the wholesale business,
Decision One, in September 2007, thereby ending
new originations for the Mortgage Services business.
The branch-based consumer lending business
continued to experience rising delinquency levels,
particularly on first lien loans in the states most
exposed to falling house prices and rising
unemployment; 63 per cent of the increase in
amounts of two months or more contractual
delinquency was concentrated in the ten states noted
above. Delinquencies rose across all vintages, with
the most pronounced increase for first lien loans
extended in 2006 and 2007. This trend was
experienced across the rest of the industry in the US.
Two months or more delinquencies rose from 4.2 per
cent of loans and advances at 31 December 2007 to
12.1 per cent at 31 December 2008 and delinquent
balances increased to US$5.6 billion. In this
environment, HSBC took additional measures to
tighten underwriting standards, including reducing
the loan to value ratio for residential mortgages,
ceasing to underwrite certain products and raising
the credit requirements for certain risk factors. As a
result, originations declined to 38 per cent of the
levels recorded in 2007.
At HSBC USA, delinquencies rose as credit
quality deterioration was experienced across the real
estate secured portfolio, driven by house price
depreciation and the US economic weakness.
Delinquency rates of prime first lien mortgages
were also affected by the sale of US$7.0 billion of
mortgage portfolios during the year. Originations
declined as HSBC’s risk appetite in the US reduced.
Two months or more delinquencies in prime first
lien mortgages rose from 1.1 per cent at
31 December 2007 to 3.4 per cent at 31 December
2008, and in second lien mortgages from 1.8 per cent
to 3.5 per cent over the same period, on a
management basis. The rise in delinquency was
appreciably worse in third-party originations and, in
response, HSBC USA closed its wholesale and third-
party correspondent mortgage business in November
2008, curtailed certain stated-income mortgage
products, tightened underwriting criteria and sold
US$7.0 billion of mortgage portfolios during 2008.
As a result, stated-income mortgage balances
declined from US$2.4 billion at 31 December 2007
to US$2.2 billion at 31 December 2008.
HSBC has been proactive in approaching
customers to provide financial assistance in
restructuring their debts to avoid foreclosure and, as
a result, HSBC has restructured and modified loans
that it believes could be serviced on revised terms.
For further details, see ‘US loan modifications’ on
page 216.
The aggregate balances of loans which reached
their first interest rate reset continued to decline in
2008. As interest rates fall, the effect of the reset on
affordability becomes less pronounced.