HSBC Expands Home Loan Modification Options

by admin ~ November 18th, 2008.

HSBC was one of the first mortgage banks that were affected by the subprime-mortgage meltdown. Changing the terms with some loan modifications for a portfolio of questionable home loans has failed to keep borrowers from defaulting.  The British banking giant, which bought an Illinois subprime mortgage lender called Household International Inc. in 2003, has modified since the beginning of last year 238,000 mortgage loans with a combined outstanding balance of $28.8 billion.  But even as HSBC tries to hold-off emerging home loan defaults and foreclosures, some borrowers are falling further behind on their monthly mortgage payments. Approximately 21% of the consumer home loans modified under a program that essentially declares a loan current had fallen into default as of Sept. 30, up from 18% three months earlier, according to HSBC.

With the economy putting even more pressure on struggling borrowers, HSBC provides an array of mortgage loan modifications, including by freezing interest rates and extending help for longer periods of time.  “It’s not a particularly easy route to chart,” said Niall Booker, chief executive of HSBC Finance Corp., the U.S. consumer-lending arm of HSBC. “Our program has stood up pretty well.”  The difficulty in steadying borrowers and avoiding charge-offs is another ominous sign as the credit crisis drags on. As mortgage lenders from Citigroup Inc. to Bank of America Corp. to J.P Morgan Chase & Co. rev up their own loan-modification efforts, HSBC’s results show hard it is to rehabilitate troubled mortgages.  Banks can modify loans in a host of ways. They can freeze the rate to help a borrower avoid pain from an adjustable-rate mortgage that changes from a low, teaser rate to a higher interest payment. Or they can reduce rates and forgive part of a loan’s principal, which reduces homeowners’ monthly costs, for example. In the rush among banks to come up with plans this month, Credit Suisse analyst Rod Dubitsky says they have confused borrowers and established a “cluttered landscape of complex loan features.”

Home loan lenders try to prevent foreclosure because it costs them liquidity which hurts them as well as the borrower losing their home. A recent study by Alan White at Valparaiso University in Indiana cited an Illinois property acquired with a $630,000 loan in late 2006. In June 2008, the home foreclosed and sold at a loss of $332,000. Modifying the loan likely would have produced “a smaller ultimate loss for investors,” Mr. White said.  HSBC’s problems trace back to its purchase of Household, which was renamed HSBC Finance. HSBC bought subprime home loans in an effort to boost profits in 2005, a time now seen as one when lenders were reducing underwriting standards.

In February 2007, HSBC said its portfolio of subprime mortgages was souring more sharply than expected and increased its bad-debt costs. That warning kicked off months of banks reporting losses tied to subprime loans and related securities.  Initially, to modify loans, HSBC tried a strategy called “re-aging.” If a borrower fell behind on payments by two months or more, HSBC effectively allowed some to catch up by declaring the loan current and adding the delinquent amount to the balance owed.  But even consumers with such loans defaulted. As of Sept. 30, 21%, or about $6 billion, of HSBC’s $28.7 billion in re-aged consumer loans subsequently experienced defaults, HSBC disclosed in its third-quarter regulatory filing. The default rate was higher than in the period ended June 30, when 18% fell into default.

HSBC said it is scaling back on seasoned mortgage loans, saying consumers need expanded foreclosure assistance “in the current marketplace.”  HSBC is making more loan modification options available to more people. They continue to contact their loan customers before their ARM mortgages reset to higher rates and freezing the existing interest rate or allowing the borrower to lock into a fixed rate lower than what the new interest rate would be. This progressive bank is even reducing fixed rates for selected homeowners.

HSBC also is increasingly willing to provide mortgage loan relief for as long as five years, longer than in May 2007, when the bank told analysts and investors that a “temporary solution” worked best for “the largest component of our customers.”  In offering such aid, HSBC and other lenders risk that borrowers seek to get their loans adjusted even if they don’t need it or take on riskier loans with the belief they will be bailed out. When loan modification programs receive publicity, the “moral hazard risk is high,” said analyst Mr. Dubitsky in his report.

After the issue receives publicity, “we do tend to get an increase in phone calls from people saying, ‘I want to be part of this process,’” HSBC’s Mr. Booker said.  HSBC is also reaching out to customers who aren’t delinquent but who soon could fall behind. To identify candidates, for example, the bank used data about the impact of a steep downturn in California home prices and the impact on loan defaults and then applied it to other states. The bank then contacted homeowners who were not yet delinquent and modified their mortgage payments, says Tom Detelich, president of consumer and mortgage lending at HSBC Finance.  The bank then contacted borrowers who weren’t yet delinquent and modified their loans, says Tom Detelich, president of consumer and mortgage lending at HSBC Finance.  “The sooner you can intervene with the customer … the more likelihood that that modification will be effective,” he says.

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