Hurt by B&C 2nds, HSBC Hikes Reserve

Anticipating a major spike in subprime second-lien delinquencies, HSBC Holdings, London, on Wednesday increased the bad-debt reserve on its U.S. B&C unit to $10.56 billion -- a stunning 125% increase from the reserve level on Sept. 30.During a Feb. 7 conference call, HSBC officials in London noted that adjustable-rate mortgage resets are set to explode -- and that most of the anticipated damage will come from residential loans funded through the wholesale/broker division of HSBC Financial, Prospects Heights, Ill. (the old Household Finance). In response to the deteriorating situation, HSBC officials signaled that the channel will be scaled back significantly, focusing only on broker-originated loans that have cross-sell or emerging market opportunities. HSBC bought Household Finance almost four years ago, agreeing to pay $14 billion for the business. In a December conference call with analysts, HSBC said it had increased the bad-debt reserve on its subprime business to $8.8 billion. According to a third-quarter Securities and Exchange Commission filing by HSBC Finance (the unit that houses HSBC Financial, the lender), the reserve was $4.64 billion. According to the Quarterly Data Report, HSBC services $51 billion in subprime mortgages, ranking seventh nationwide. In the third quarter, HSBC funded $11.7 billion in subprime loans, ranking third. (For more details, see the Feb. 12 issue of National Mortgage News..)