HSBC 2010 Annual Report Download - page 132

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Securitisation exposures and other structured products
130
Categories of
ABSs and CDOs Definition Classification
Sub-prime Loans to customers who have limited credit histories,
modest incomes or high debt-to-income ratios or have
experienced credit problems caused by occasional
delinquencies, prior charge-offs, bankruptcy or other
credit-related actions.
For US mortgages, standard US credit scores are
primarily used to determine whether a loan is sub-
prime; for non-US mortgages, management judgement
is used.
US Home Equity Lines
of Credit (‘HELoC’s)
A form of revolving credit facility provided to
customers, which is supported by a first or second lien
charge over residential property.
Holdings of HELoCs are classified as sub-prime.
US Alt-A Lower risk loans than sub-prime, but they share higher
risk characteristics than lending under fully conforming
standard criteria.
US credit scores and the completeness of
documentation held (such as proof of income), are
considered when determining whether an Alt-A
classification is appropriate. Non sub-prime mortgages
in the US are classified as Alt-A if they are not eligible
for sale to the major US Government sponsored
mortgage agencies.
US Government agency
and sponsored
enterprises mortgage-
related assets
Securities that are guaranteed by US Government
agencies such as the Government National Mortgage
Association (‘Ginnie Mae’), or by US Government
sponsored entities including the Federal National
Mortgage Association (‘Fannie Mae’) and the Federal
Home Loan Mortgage Corporation (‘Freddie Mac’).
Holdings of US Government agency and US
Government sponsored enterprises’ mortgage-related
assets are classified as prime exposures.
UK non-conforming
mortgages
UK mortgages that do not meet normal lending criteria.
Examples include mortgages where the expected level
of documentation is not provided (such as income with
self-certification), or where poor credit history
increases risk and results in pricing at a higher than
normal lending rate.
UK non-conforming mortgages are treated as sub-
prime exposures.
Other mortgages Residential mortgages, including prime mortgages, that
do not meet any of the classifications described above.
Prime residential mortgage-related assets are included
in this category.
Our exposure to non-residential mortgage-
related ABSs and direct lending includes securities
with collateral relating to:
• commercial property mortgages;
• leveraged finance loans;
• student loans; and
• other assets, such as securities with other
receivable-related collateral.
ABSs classified as available for sale
Our principal holdings of available-for-sale ABSs
(see table below) are in GB&M through special
purpose entities (‘SPE’s) which were established
from the outset with the benefit of external investor
first loss protection support, together with positions
held directly and by Solitaire Funding Limited
(‘Solitaire’), where we have first loss risk.
The following table summarises our exposure to
ABS’s classified as available for sale:
Available-for-sale ABSs exposure
(Audited)
At 31 December 2010 At 31 December 2009
Directly
held/
Solitaire39 SPEs Total
Directly
held/
Solitaire39 SPEs Total
US$m US$m US$m US$m US$m US$m
Total carrying amount of net principal
exposure .......................................................... 41,106 13,586 54,692 34,040 14,021 48,061
Notional principal value of impaired
securities ......................................................... 3,015 2,399 5,414 2,641 1,565 4,206
Carrying value of capital notes liability ............. – (254) (254) – (740) (740)