HSBC 2007 Annual Report Download - page 230

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Credit risk > Credit quality > Renegotiated loans / Impairment allowances and charges
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product, and the availability of empirically based
data. Criteria vary between products, but typically
include: receipt of one or more qualifying payments
within a certain period, a minimum lapse of time
from origination before restructuring may occur, and
restrictions on the number and/or frequency of
successive restructurings. When empirical evidence
indicates an increased propensity to default on
restructured accounts, the use of roll rate
methodology ensures this factor is taken into account
when calculating impairment allowances.
Renegotiated loans that would otherwise be
past due or impaired totalled US$28 billion at
31 December 2007 (2006: US$21 billion).
Restructuring is most commonly applied to
consumer finance portfolios. The largest
concentration was in the US and amounted to
US$24 billion (2006: US$17 billion) or 86 per cent
(2006: 81 per cent) of the Group’s total renegotiated
loans. The increase was due to a significant
deterioration in credit quality in the US. Most
restructurings in the US related to loans secured
on real estate.
US loan modifications
(Unaudited)
In October 2006, as part of its efforts to mitigate risk
in the affected components of the mortgage services
portfolio in the US, HSBC Finance established a
new programme specifically designed to meet the
needs of selected customers with ARMs. HSBC
Finance is proactively calling and writing to
customers who have ARM loans nearing their first
reset that HSBC Finance expects will be the most
affected by a rate adjustment. By a variety of means,
HSBC Finance assesses the customer’s ability to
make the adjusted payment and, as appropriate and
in accordance with defined policies, HSBC Finance
modifies the loans, allowing time for the customer to
seek alternative financing or improve their individual
situation. These loan modifications primarily provide
for temporary interest rate relief for 12 months by
either maintaining the current interest rate for the
entire 12-month period or resetting the interest rate
for the 12-month period to a rate lower than that
originally required at the reset date. At the end of the
12-month period, the interest rate on the loan will
reset in accordance with the original loan terms,
unless the borrower qualifies for, and is granted, a
further modification. In 2007, HSBC Finance made
more than 33,000 outbound contacts and modified
more than 8,500 loans with an aggregate balance of
US$1.4 billion. Since the inception of this
programme, HSBC Finance has made more than
41,000 outbound contacts and modified more than
10,300 loans with an aggregate balance of
US$1.6 billion. These loans are not included in the
figures quoted above, because HSBC Finance has
not reset delinquency on them as they were not
contractually delinquent at the time of the
modification. However, loans which have been
restructured in the past for other reasons are included
in the figures above. HSBC Finance also continues
to manage a Foreclosure Avoidance Programme for
delinquent consumer lending customers designed to
provide relief to qualifying home owners by either
loan restructuring or modification. HSBC Finance
also supports a variety of national and local efforts
in home ownership preservation and foreclosure
avoidance.
Collateral and other credit enhancements
obtained
(Audited)
HSBC obtained assets by taking possession of
collateral held as security, or calling upon other
credit enhancements, as follows:
(Audited)
Carrying amount
obtained in:
2007 2006
US$m US$m
Nature of assets
Residential property ................. 2,509 1,716
Commercial and industrial
property ................................ 18 6
Other ........................................ 373 215
2,900 1,937
Repossessed properties are made available for
sale in an orderly fashion, with the proceeds used to
reduce or repay the outstanding indebtedness. Where
excess funds are available after the debt has been
repaid, they are available either for other secured
lenders with lower priority or are returned to the
customer. HSBC does not generally occupy
repossessed properties for its business use. The
majority of repossessed properties arose in the US in
HSBC Finance, which experienced higher levels of
foreclosure and higher losses on sale due to
declining house prices. The average time taken to
sell a foreclosed property in the US during 2007 was
184 days and the average loss on sale was 11 per
cent. A quarterly breakdown is provided below: