HSBC 2008 Annual Report Download - page 212

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Credit risk > Areas of special interest > Mortgage lending
210
declined by 11 per cent to US$29 billion, driven by
lower originations, reduced marketing activities and
lower customer appetite for unsecured borrowing.
Credit quality in the unsecured portfolios of M&S
Money, HSBC Bank and Partnership Cards in the
UK showed a slight deterioration in 2008,
particularly in the second half of the year, due to the
weakening UK economy.
In Latin America, in response to rising
impairment charges and the weaker economic
conditions, HSBC moderated loan growth from that
achieved in the previous year, with gross loans and
advances to personal customers rising by 11 per cent
to US$20 billion compared with 31 per cent in 2007.
Loan impairment charges were 20 per cent higher in
Brazil but 57 per cent higher in Mexico following
strong growth in recent years in lending portfolio
seasoning and credit deterioration. As a consequence
of this experience, in Mexico, HSBC’s other
personal lending balances at 31 December 2008
were US$3.7 billion, 1 per cent lower than at
31 December 2007 as management realigned the
business towards customers of higher credit quality.
Mortgage lending products
(Unaudited)
The Group offers a wide range of mortgage products
designed to meet customer needs, including capital
repayment mortgages subject to fixed or variable
interest rates and products designed to meet demand
for housing loans with more flexible payment
structures. HSBC underwrites both first lien
residential mortgages and loans secured by second
lien mortgages.
Interest-only mortgages are those for which
customers make regular payments of interest during
the life of the loan and repay the principal from the
sale of their home or alternative sources of funds.
Introductory interest-only mortgages are typically
where the interest-only element is for a fixed term at
the start of the loan, after which principal
repayments commence.
Affordability mortgages include all products
where the customer’s monthly payments are set at
a low initial rate, either variable or fixed, before
resetting to a higher rate once the introductory
period is over. These include adjustable-rate
mortgages (‘ARM’s), loans on which the interest
rate is periodically changed based on a reference
price. HSBC Finance no longer originates or
acquires interest-only loans or ARMs.
Affordability mortgages are primarily offered in
the US and the UK. Under the HFC and Beneficial
brands, HSBC Finance and HFC Bank Ltd (‘HFC
UK’) offer a range of products predominantly
designed for the needs of customers with non-
standard or less favourable credit profiles. Offset
mortgages are products linked to a current or savings
account, where the interest earned is used to repay
mortgage debt.
US mortgage lending
US mortgage lending, comprising residential
mortgage and second lien lending, made up 22 per
cent of the Group’s gross loans and advances to
personal customers at 31 December 2008.
Balances declined by 18 per cent from
31 December 2007, as the Mortgage Services
portfolio continued to run-off and tighter
underwriting standards were applied to originations
for the consumer lending portfolio. As the bulk of
the mortgage lending products sold in the US
consumer lending branch network are for refinancing
and debt consolidation, rather than for house
purchase, the limited availability of home equity
severely restricts the number of eligible customers.
As a consequence, HSBC began the process of
repositioning its consumer lending business in 2008,
reducing exposure to lower tiers of sub-prime credit
and expanding its range of lending for real estate
loans to include both government-sponsored entity
and conforming loan products. At the end of
February 2009, HSBC authorised the discontinuation
as soon as practicable of all new receivable
originations of all products by the branch-based
consumer lending business of HSBC Finance in
North America (see page 70).
Mortgage lending in HSBC USA also declined,
following a series of management actions to reduce
risk in the portfolio. These included closing the
prime wholesale and third-party correspondent
mortgage business in November 2008, selling
US$7.0 billion in loans during 2008, and continuing
to sell newly originated residential mortgages to the
US government-sponsored mortgage agencies.
Affordability mortgage balances in HSBC
Finance declined from US$19 billion at
31 December 2007 to US$14 billion at 31 December
2008. These mortgages continued to experience the
heightened levels of delinquency that began to
emerge in late 2006. They are no longer originated
through the consumer lending branch network. In
aggregate, HSBC Finance’s mortgage balances
declined to US$74 billion at 31 December 2008
(31 December 2007: US$87 billion) as set out in
the table on page 211. Within this, the portfolio of
real estate secured business originated through the
branch network was US$46 billion at 31 December