HSBC 2009 Annual Report Download - page 224

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Credit risk > Areas of special interest > US personal lending – credit quality
222
Mortgage lending
In line with its exit strategy for non-prime real estate
secured mortgage lending, HSBC continued to
reduce mortgage lending exposure in the US and
balances declined from US$96 billion to
US$78 billion as the portfolios ran off.
Although delinquency increased during 2009,
credit quality deteriorated at a slower rate than in
previous years as the effect of higher unemployment
was not as severe as expected due to actions
previously taken by HSBC to reduce risk in the
loan portfolio.
Following the revision of the write-off period
described on page 205, two months and over
delinquent balances in the real estate secured
portfolios of HSBC Finance decreased in dollar
terms but, excluding the effects of the change, they
rose. Delinquent balances also increased in HSBC
Bank USA. Increased delinquency reflected portfolio
seasoning in an environment of continuing weakness
in the housing market and diminished availability of
refinancing opportunities. In addition, delays to
foreclosure caused by changes in some state
government practices and backlogs in court
proceedings resulted in balances that would
otherwise have proceeded to foreclosure remaining
reported as contractually delinquent.
Excluding the effects of revising the write-off
period:
• delinquency in the Consumer Lending business
increased, primarily in the 2006, 2007 and 2008
vintages of the first lien real estate secured
portfolio. Two months or more delinquent
balances rose from US$5.6 billion in 2008 to
US$7.4 billion at 31 December 2009, and two
months or more delinquency rates grew from
12.1 per cent to 18.2 per cent;
• two months or more delinquent balances in the
Mortgage Services portfolio declined from
US$4.7 billion in 2008 to US$4.5 billion at
31 December 2009 as the portfolio continued to
season, and two months or more delinquency
rates increased from 17 per cent in 2008 to
19.6 per cent at 31 December 2009 as balances
declined at a faster pace than delinquencies.
At HSBC Bank USA, the level of dollar
delinquency increased within the first lien prime
residential mortgage and Home Equity mortgage
loan portfolios, reflecting the weakened US
economy, high unemployment and continued
deterioration of the US housing market. Delinquency
rates also rose, in part due to lower balances as
mortgage portfolios were sold to third parties. In
2009, HSBC Bank USA sold US$4.5 billion of
mortgage portfolios to third parties and it continued
to sell the majority of new mortgage loan
originations to government-sponsored enterprises
and private investors. Two months or more
delinquencies increased from 3.4 per cent to 7.5 per
cent at 31 December 2009, as delinquency balances
increased from US$0.7 billion to US$1.2 billion,
while balances declined.
In HSBC Finance, loss rates on the sale of
foreclosed properties were broadly stable throughout
2009 but were higher than those incurred in 2008
as house prices continued to fall. The number of
properties foreclosed decreased, in part due to delays
in foreclosure proceedings and the lengthening by
certain states of the foreclosure process. HSBC
continued to assist customers in restructuring their
debts to avoid foreclosure, including by modifying
their loans when it was decided that they could be
serviced on revised terms. For further details, see
‘HSBC Finance loan modifications and re-ageing’
on page 224.
Second lien mortgage loans have a risk profile
characterised by higher loan-to-value ratios because,
in the majority of cases, the loans were taken out to
complete the refinancing or purchase of properties.
HSBC Finance has typically experienced loss on
default for second lien loans approaching 100 per
cent of the amount owing, as any equity in the
property is initially applied to the first lien loan.
Excluding the effects of the change to the write-off
period, in the HSBC Finance Mortgage Services
second lien portfolio, two months or more
delinquency rates decreased to 17.3 per cent at
31 December 2009 as the portfolio continued to run
off. In the Consumer Lending second lien portfolio,
two months or more delinquency rates increased to
18.6 per cent at 31 December 2009. In HSBC Bank
USA, second lien two months or more delinquency
rates increased from 3.5 per cent at 31 December
2008 to 4 per cent at 31 December 2009.
Stated-income mortgage balances in HSBC
Finance declined from US$5.7 billion to
US$3.9 billion as the portfolio continued to run off.
The decline included US$0.2 million as a result of
the revised write-off period referred to on page 205.
These mortgages were underwritten on the basis of
borrowers’ representations of annual income and
were not verified by supporting documents and, as a
result, represent a higher than average level of risk.
Two months or more delinquency rates decreased to
22.7 per cent at 31 December 2009. In HSBC Bank
USA, stated-income balances decreased from
US$2.2 billion to US$2.1 billion and delinquency