Mortgage Industry Crisis Looming?

In an article from USA Today, HSBC has indicated that it will have to substantially increase risk provisions from approximately $7.1 billion to $10.6 billion. According to a company executive, it could take as much as two to three years for the lender to "work out" the issues with problem loans.

HSBC is a big player in the US "subprime" loan sector. What this means is that HSBC gives loans to borrowers with lower credit ratings. In the US subprime market alone, HSBC has seen a 20% increase in bad debt charges. We've been following the HSBC story, including its problem with bad loans. The ongoing problems are definitely more bad news for the US housing market, which is showing less and less signs of a quick bounce back.

Even the folks who have been saying that the market is already recovering can't continue to ignor that all is not well.

In fact, HSBC appears to be in the midst of a pull-out from the subprime market in the US. HSBC Finance Director Doug Flint said that there are a number of lending products no longer being offered in the United States, and that mortgage lending to sub-prime borrowers has "virtually" ended. Flint is actually predicting more softness in the housing market through 2007.

However, HSBC will weather this storm. Despite problems in the US market, HSBC overall saw a 5% increase in profit in 2006.

Other lenders have not been so lucky. On this morning's check of the "Implode-O-Meter" (which could use a name that would lend it more credibility, rather than notoriety), I noticed there are now 31 lenders listed as "kaput". The guy behind this site tracks the news well, and provides links for stories that he's used to manage his "counter".

The number of lenders that he considers kaput only includes those who have gone out of business, been sold or otherwise ceased business since December 2006

This is more bad news for borrowers, especially when interest rates on adjustable rate mortgages (ARMs)  are on the move up. Those lovely introductory rates don't stay in place forever, and the Fed has moved overall interest rates up over the past year to combat "inflation". At the same time, there are also new tougher federal regulations for lenders who provide subprime mortgages. With defaults high and lending riskier, many lenders are also taking a tougher look at lending, even without the Fed's interference. As a result, you may find that you can't move your mortgage, even if you are being gouged.

If you are in an ARM and have a good credit score, it could be a good time to move your loan --  before you get stuck. If you don't have a good credit score and are struggling with your mortgage payments, don't default! Get to a non-profit credit counselling agency fast and see if you can make a deal that will keep you in your home and get you out of the hole. If you need this kind of service, check out a few of these agencies that sponsor our site.

Michael Chantrel
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