HSBC 2010 Annual Report Download - page 113

111
Overview Operating & Financial Review Governance Financial Statements Shareholder Information
Mortgage lending
In 2010, we reduced our non-prime mortgage
exposure as balances continued to run-off in our
Consumer Lending and Mortgage Services portfolios
in HSBC Finance. At 31 December 2010, residential
mortgage lending balances were US$58bn, a decline
of 12% compared with the end of 2009.
In both our Consumer Lending and Mortgage
Services mortgage portfolios, two months or more
delinquent balances declined as balances ran-off and
economic conditions improved. In addition, written-
off balances were replaced with lower levels of new
delinquency volumes as the portfolios continue to
season. First lien two months or more delinquent
balances in our Consumer Lending portfolio declined
from US$5.4bn at 31 December 2009 to US$4.9bn at
31 December 2010 and, in our Mortgage Services
portfolio, from US$3.1bn at 31 December 2009 to
US$2.8bn at 31 December 2010. In each case, lending
balances liquidated at a faster pace than delinquency.
As a result, two months or more delinquency rates on
first lien loans in our Consumer Lending portfolio
increased from 15.4% at 31 December 2009 to 16.2%,
while in our Mortgage Services portfolio, two months
or more delinquency rates increased from 16.5% to
18.0%.
At HSBC Bank USA, we continued to sell the
majority of new mortgage loan originations to the
secondary markets. These decreases were partly offset
by increases to the portfolio from new lending to our
Premier relationship customers. Two months or more
delinquency rates decreased from 8.6% to 7.9% at
31 December 2010, while delinquent balances
remained flat at US$1.0bn.
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.
Loss experience on default of second lien loans has
typically approached 100% of the amount owed, as
any equity in the property is initially applied to the
first lien loan. In the Mortgage Services second lien
portfolio, outstanding balances declined by 26% to
US$2.3bn and two months or more delinquency rates
decreased to 10.8% at 31 December 2010. In the
Consumer Lending second lien portfolio, outstanding
balances declined by 28% to US$3.3bn, and two
months or more delinquency rates decreased to 12.7%
at 31 December 2010.
At HSBC Bank USA, second lien balances
declined by 10% to US$3.7bn, and two months or
more delinquency rates increased from 4.0% at
31 December 2009 to 4.8% at 31 December 2010 due
to the effects of high unemployment levels.
Stated-income mortgages are underwritten on the
basis of borrowers’ representations of annual income
and are not verified by supporting documents and, as
a result, represent a higher than average level of risk.
Stated income balances in HSBC Finance declined
from US$3.9bn to US$2.9bn as the portfolio
continued to run off. Two months or more
delinquency rates increased to 24.0% at 31 December
2010. In HSBC Bank USA, stated-income balances
were unchanged at US$2.1bn while delinquency rates
decreased from 11.1% at 31 December 2009 to 10.6%
at 31 December 2010.
At 31 December 2010, HSBC Finance had
US$7.6bn of affordability mortgages, a decline
of 24% compared with 31 December 2009, as the
portfolio continued to run off. At HSBC Bank USA,
affordability mortgage balances of US$10.9bn at
31 December 2010 compared with US$11.1bn at
31 December 2009.
Real estate markets in the majority of the US
have been and will continue to be, affected by
stagnation or declines in property values. As a result,
loan-to-value ratios for our real estate secured loans
have generally deteriorated since origination. Loans
with a loan-to-value of 100% or more have
historically had a greater likelihood of becoming
delinquent. At 31 December 2010 loans in negative
equity were US$14bn, compared with US$19bn at the
end of 2009.
At HSBC Finance, the number of foreclosed
properties at 31 December 2010 increased compared
with the end of 2009. The rise reflected the
improvement in the processing of foreclosures as
backlogs and action taken by local governments and
certain states had lengthened proceedings in previous
years. The average loss on sale of foreclosed
properties decreased compared with 2009 though the
average loss increased in the second half of 2010,
as house prices in many markets showed signs of
deterioration due to a rise in the number of foreclosed
properties and the expiration of the homebuyer tax
credit. We 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 more details
on the investigation into US foreclosure practices, see
page 83.