How do you know when a mortgage cycle has ended and rougher times are ahead for the industry? Answer: When a foreign bank pays a ton of money for a lender, claiming it’s a great value play.
Case in point is HSBC’s purchase of Household Finance back in 2003 when it ponied up a cool $14 billion for the subprime and consumer finance firm. A few short years later the entire subprime market imploded, popping the nation’s housing bubble and the U.S. economy in the process.
The Household disaster has been well documented in this and other publications: billions were lost, branches were closed and heads rolled in the executive suite, both in America and back home in London.
But there’s one side to the HSBC “mortgage” story that hasn’t been told—its acquisition of Marine Midland Bank of New York. That purchase happened back in 1980 and under HSBC both the banking and mortgage franchises thrived. HSBC Bank was also a top-ranked warehouse lender to nonbanks.
Then Household happened.
Today, HSBC is trying to find an exit strategy for what’s left of its “A” paper business (the old Marine Midland Mortgage) and isn’t finding many takers.
Last year it began shopping around HSBC Mortgage as a “whole company” franchise, including its $60 billion servicing portfolio.
With interest in the unit weak, the bank then changed course and began peddling its MSRs and Depew, N.Y., servicing platform as a standalone asset in the spring.
So far, there’ve been no serious takers.
“They weren’t getting any bids that they considered satisfactory,” said one servicing advisor, requesting anonymity.
To date, the bank has said little about the process and its future in mortgage banking in general. A spokesman for the company declined to comment on either the MSR sale or new reports that HSBC is contemplating exiting the origination business entirely, and is toying instead with a plan to outsource production to a third party.
It seems incomprehensible that a bank of HSBC’s stature would kiss mortgage banking goodbye—and perhaps all the recent talk of outsourcing production is just that, talk. But one former executive who worked in the mortgage department at the bank told me recently that the Household purchase had the “effect” of reducing loan standards throughout the bank, leaving it with credit problems across the board in both “A” paper residential and even commercial.
The only credit area that escaped unscathed was mortgages extended through its private client group—that is, loans made to rich folks.
Industry sources are now suggesting that even if HSBC exits mortgage banking it will stay in the “high end” part of the business, funding jumbo loans.
“They’re done with conforming mortgages,” said one source who has done business with the bank. “In the future they want to cater to high net worth individuals who are bank customers—foreign nationals in particular.” Then again, the jumbo business isn’t exactly thriving these days.
But maybe HSBC sees something the rest of can’t see. Some analysts suggest the bank is due to be right one of these days. But is this it?
