HSBC 2010 Annual Report Download - page 110

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Areas of special interest > Personal lending
108
a low initial rate, either variable or fixed, before
resetting to a higher rate once the introductory period
is over. Offset mortgages are products linked to a
current or savings account, where interest earned is
used to repay mortgage debt.
UK mortgage lending
On a constant currency basis, total mortgage lending
in the UK, comprising residential and second lien
lending, increased by 7% to US$104bn at
31 December 2010. Growth was achieved largely
through the enhancement of our product offerings,
successful marketing and competitive pricing.
Nonetheless, mortgage lending was constrained by
the decline in re-mortgage activity due to the low
interest rate environment and consumer concerns
over future employment and higher interest rates.
Our UK mortgage portfolio remained of high
quality, consisting primarily of lending to owner-
occupiers. We restricted lending to purchase
residential property for the purpose of rental and
almost all new business was originated through our
own salesforce, with the self-certification of income
not permitted. The majority of mortgage lending was
to existing customers holding current or savings
accounts with HSBC; this facilitated and
strengthened the underwriting process.
Loan impairment charges and delinquency
levels in our UK mortgage book declined despite
unemployment remaining high, mainly due to
improving economic conditions and low interest
rates, which helped make mortgages more affordable
for customers. Our continuing enhancements in
credit underwriting, credit policies and collection
processes contributed to the reduction in
delinquencies.
The percentage of loans that were 30 days or
more delinquent declined from 1.6% at 31 December
2009 to 1.4% in 2010 in the HSBC Bank mortgage
portfolio and remained at less than 1.0% in the First
Direct portfolio.
In 2010, the average loan-to-value ratio for
new business in the UK was 54%, an increase of a
single percentage point on the previous year.
Interest-only mortgage balances increased
by 4% to US$45bn compared with 2009. The
majority of these mortgages were offset mortgages
at First Direct for which delinquency rates remained
at very low levels.
US mortgage lending
US mortgage lending balances, comprising
residential and second lien lending, were US$67bn at
31 December 2010, a decline of 14% compared with
the end of 2009.
Mortgage lending in HSBC Finance fell by 17%
to US$51bn with declines in both the Consumer
Lending and Mortgage Services portfolios from
their planned run-off. See table on page 110 for a
breakdown of mortgage lending in HSBC Finance.
Mortgage lending in the UK rose by 7% to
US$104bn, while in the US balances
declined by 14% to US$67bn.
Mortgage lending balances in HSBC Bank USA
remained broadly unchanged at US$16bn. We
continue to sell the majority of new origination to
the secondary markets as a means of managing our
interest rate risk and improving structural liquidity.
This reduction was partly offset by an increase in
originations to Premier customers with whom we
already held a banking relationship. At 31 December
2010, approximately 32% of the HSBC Bank USA
mortgage portfolio were fixed rate loans and 77%
were first lien.
During 2010, state and federal officials
announced investigations into the procedures
followed by mortgage servicing companies and
banks, including HSBC Finance and its affiliates,
in relation to foreclosures. This included a joint
examination by the Federal Reserve and the Office
of the Comptroller of the Currency. Following the
examination, our examiners issued supervisory
letters noting deficiencies in our processing,
preparation and signing of affidavits and other
documents supporting foreclosures, and in the
governance of and resources devoted to our
foreclosure process. We have suspended foreclosures
pending correction of the weaknesses. Management
is reviewing all foreclosures which have not yet been
completed, and will correct deficient documentation
and refile documents where required.
As a result of the investigations, we expect that
the scrutiny of documents will increase, and in some
states additional verification of information may be
required. If these trends continue after we reinstitute
foreclosure, there could be additional delays in the
process.
A discussion of credit trends in the US mortgage
lending portfolio and the steps taken to mitigate risk
is provided in ‘US personal lending – credit quality’
on page 110.
The following table shows the levels of
mortgage lending products in the various portfolios
in the US, the UK and the rest of the HSBC Group.