Here’s a pop quiz for mortgage professionals everywhere: name a foreign bank that successfully bought a U.S. mortgage banking operation—or grew one from scratch—and actually did well with it.
OK, time’s up. The answer is none.
But that doesn’t mean foreign bank contestants haven’t tried to play the game. Over the past 20 years history has been littered with overseas investors who thought they understood American-style residential finance and could compete with the big boys: Wells Fargo, JPMorgan Chase and Bank of America.
B of A, of course, hasn’t done too well in residential lending either, and is actually the poster child for what not to do: buy an established lender that appears to be successful. (That would be Countrywide Financial Corp., a 2008 acquisition that has blown a $20 billion hole in B of A’s balance sheet.)
The foreign banks that have fumbled their U.S. mortgage investments run the gambit: Macquarie and National Bank of Australia from “Down Under,” HSBC from the U.K. and Royal Bank of Scotland, the latter of which played a starring role in the U.S. subprime crisis through its Greenwich Capital affiliate which provided billions of dollars in liquidity via securitizations to such B&C disasters as Ameriquest and Argent.
As to why these firms entered the game, that’s simple: their investment bankers told them it was a good idea.
In late 2001 Morgan Stanley issued an “outperform” rating on then subprime giant Household Finance. A year later HSBC was the proud owner of Household, thinking it had bought the stock at a discount to its 52-week high only to find out that later on it had acquired a falling knife. (I would have to go back and look, but chances are Morgan probably brokered the deal or had a role in it.)
HSBC paid $14 billion for Household and over the ensuing years booked losses that totaled at least that amount, if not more. Today, Household is in run-off mode at HSBC, its 3,000 branches closed and growing dusty with cobwebs.
The odd thing about the Household disaster is that HSBC, back in 1987, bought all of Marine Midland Bank of Buffalo, N.Y., including a halfway decent “A” paper mortgage division housed in the suburb of Depew.
For years, the bank and its Marine Midland Mortgage affiliate were well-managed mortgage assets that ranked among the top 20 lender/servicers in the nation. It also had a fairly profitable warehouse lending division, which has since dried up. When Household came into the HSBC fold, HSBC Mortgage was treated as the dull sister, though allowed to remain in business.
When it became apparent that Household was a disaster, HSBC finally started paying attention to the Depew operation but then, during the height of the housing crisis, decided to put its “A” paper unit on the auction block. The result: no takers willing to pay a premium or even a fair price. (Buy high, sell low.)
Just last week HSBC finally decided to unload (for free) the remnants of HSBC Mortgage, basically giving away its $52 billion of “A” paper mortgage servicing rights to PHH Corp.
HSBC is also selling about 200 of its 500 U.S. branches to another bank, while consolidating other locations, a move that eventually will leave it with about 250 locations.
A spokesman for the bank told me that HSBC will continue to originate home mortgages in its remaining branches but will not service any of the loans. That function will be given over to PHH.
I get the feeling that in time HSBC will give up mortgage banking entirely. But I guess things might be worse: HSBC could have bought a large mortgage banking operation in Europe.
