HSBC 2009 Annual Report Download - page 160

HSBC HOLDINGS PLC
Report of the Directors: Impact of Market Turmoil (continued)
Overview of exposure > Nature and extent of exposures
158
• sub-prime: loans to customers who have
limited credit histories, modest incomes, high
debt-to-income ratios or have experienced credit
problems caused by occasional delinquencies,
prior charge-offs, bankruptcy or other credit-
related actions. For US mortgages, standard US
credit scores are primarily used to determine
whether a loan is sub-prime. US Home Equity
Lines of Credit (‘HELoC’s) are classified as
sub-prime. For non-US mortgages, management
judgement is used to identify loans with similar
risk characteristics to sub-prime, for example,
UK non-conforming mortgages (see below);
• US Home Equity Lines of Credit: a form of
revolving credit facility provided to customers,
which is supported by a first or second lien
charge over residential property. Global
Banking and Markets’ holdings of HELoCs are
classified as US sub-prime residential mortgage
assets;
• US Alt-A: loans classified as Alt-A are regarded
as lower risk than sub-prime, but they share
higher risk characteristics than lending under
fully conforming standard criteria. US credit
scores, as well as the level and completeness of
mortgage documentation held (such as whether
there is proof of income), are considered when
determining whether an Alt-A classification is
appropriate. Mortgages in the US which are not
eligible to be sold to the major government
sponsored mortgage agencies, Ginnie Mae
(Government National Mortgage Association),
Fannie Mae (the Federal National Mortgage
Association) and Freddie Mac (the Federal
Home Loan Mortgage Corporation), are
classified as Alt-A if they do not meet the
criteria for classification as sub-prime;
• US Government agency and US Government
sponsored enterprises mortgage-related
assets: securities that are guaranteed by US
Government agencies, such as Ginnie Mae, or
are guaranteed by US Government sponsored
entities, including Fannie Mae and Freddie Mac;
• UK non-conforming mortgage-related assets:
UK mortgages that do not meet normal lending
criteria. This includes instances where the
normal level of documentation has not been
provided (for example, in the case of self-
certification of income), or where increased risk
factors, such as poor credit history, result in
lending at a rate that is higher than the normal
lending rate. UK non-conforming mortgages are
treated as sub-prime exposures; and
• other mortgage-related assets: residential
mortgage-related assets that do not meet any of
the classifications described above. Prime
residential mortgage-related assets are included
in this category.
HSBC’s exposure to non-residential mortgage-
related ABSs and direct lending includes:
• commercial property mortgage-related
assets: MBSs with collateral other than
residential mortgage-related assets;
• leveraged finance-related assets: securities
with collateral relating to leveraged finance
loans;
• student loan-related assets: securities with
collateral relating to student loans; and
• other assets: securities with other receivable-
related collateral.
Included in the tables on pages 159 to 161 are
ABSs which are held through SPEs that are
consolidated by HSBC. Although HSBC
consolidates these assets in full, the risks arising
from the assets are mitigated to the extent of third-
party investment in notes issued by those SPEs. For
a description of HSBC’s holdings of and
arrangements with SPEs, see page 181.
The exposure detailed in the table on page 159
includes long positions where risk is mitigated by
specific credit derivatives with monolines and other
financial institutions. These positions comprise:
• residential MBSs with a carrying amount of
US$1.0 billion (2008: US$0.9 billion);
• residential MBS CDOs with a carrying amount
of US$15 million (2008: US$39 million); and
• ABSs other than residential MBSs and
MBS CDOs with a carrying amount of
US$9.2 billion (2008: US$9.8 billion).
In the tables on pages 160 to 161, carrying
amounts and gains and losses are given for securities
except those where risk is mitigated through specific
credit derivatives with monolines, as detailed above,
with a total carrying amount of US$10.2 billion
(2008: US$10.7 billion). The counterparty credit risk
arising from the derivative transactions undertaken
with monolines is covered in the monoline exposure
analysis on page 163.