HSBC Ups Reserve to $10.6 Billion

Stung by losses and anticipated writedowns on adjustable-rate second-lien subprime loans, HSBC Holdings in February increased the bad debt reserve on its B&C unit to $10.6 billion, a stunning 125% increase from its Sept. 30, 2006 figure.

A spokesman for the company noted that the $10.6 billion figure represents "reserves" and not necessarily losses.

HSBC Mortgage Services of Charlotte, N.C., is the nation's seventh largest subprime servicer with $51 billion in receivables. The mortgage unit is a subsidiary of the U.K. bank.

Speaking to analysts in London, company chief financial officer Douglas Flint said "more action will be taken" in regard to the problem. But the firm maintained it will not be exiting the subprime niche.

For now, it appears that most of the trouble is centered around residential loans - particularly seconds - funded through the bank's wholesale and correspondent network in the U.S.

Thanks to falling home values, rising delinquencies and razor-thin profit margins, the subprime sector is in the midst of a major correction with at least a dozen small- to medium-sized funders failing since early December. More failures are anticipated. HSBC officials told analysts that ARM "resets" are set to explode and credit-impaired consumers likely will not be able to make their payments when interest rates rise. This potentially will cause huge headaches for HSBC's servicing operation, which will try to collect on the bad debts.

Bank officials, including Mr. Flint, noted that in recent quarters HSBC has improved its modeling of delinquent borrowers which in turn has signaled more trouble ahead.

A majority of HSBC's subprime business is housed in HSBC Financial, Prospects Heights, Ill., the old Household Finance. Almost four years ago HSBC bought the publicly traded Household Finance for $14 billion. At the time some analysts believed the bank was overpaying for Household.

In response to the deteriorating situation, HSBC officials signaled that it will scale back its wholesale/correspondent channel significantly. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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