You could be forgiven for wondering if this is a weird time for HSBC to get back into U.S. mortgage lending.
Though the economy is strong and unemployment is low, industry observers are also watching for hints of the next crisis, and interest rates are creeping back up while housing markets in some parts of the country suffer inventory shortages.
On the other hand, millennials are also entering their prime earning (and borrowing) years and are driving growth in the 13.6 million new households expected to form between 2015 and 2025. That’s one big reason Raman Muralidharan, HSBC’s head of mortgage in the U.S., thinks it’s a good time to jump back into the mortgage business.
“People are waiting to buy homes when it’s the right time in their overall lives to buy homes, and there are a lot more people moving into that time in their lives,” he said. “We’ve been positioning our business to take advantage of the market becoming much, much more purchase-oriented.”
Of course, HSBC also has a fraught history where mortgage lending is concerned. The London banking giant entered the U.S. mortgage market in 2003 when it bought and rebranded Household International; that business promptly soured during the financial crisis. The company also settled with regulators in 2016 over claims of abusive mortgage servicing practices — something it attributes in part to its outsourcing of mortgage functions.
This time is different, Muralidharan says. The company is bringing origination in-house, shifting servicing to a subservicer over the next year, upgrading its tech, and focusing its efforts on prime borrowers, with an emphasis on international customers.
Recently, HSBC commissioned a study of the potential impacts of rising rates on borrowers, finding that 24% would struggle with an increase of 2 percentage points in their interest rates and nearly half would struggle with an increase of 5 percentage points. Muralidharan talked to American Banker about why that doesn’t worry him, where HSBC is looking to build up mortgages and how this time is different.
This transcript has been edited and condensed for length and clarity.
HSBC’s study found that borrowers spent an average of 39% of their incomes on their mortgages and that substantial percentages would struggle with interest rate increases of 2 percentage points or more. Do you worry at all about homeowners’ ability to keep up with their monthly payments in a rising-rate environment?
RAMAN MURALIDHARAN: Probably less so than just what that headline would in itself imply. Let me talk through a few reasons why. The U.S. is kind of right at the midpoint in terms of the percentage of income people spend on housing. Thirty-nine percent isn’t an outlier by any means, and in fact the Fannie Mae and Freddie Mac guidelines generally go up to 45% for debt-to-income [ratio] for housing, so 39% I think is what I would consider in line with a prudent expense on housing.
The second thing is that yes, a 5-percentage-point increase would cause a lot of customers to struggle, but most of them will never pay that. If you look at last year’s originations in the U.S. market, 76% were fixed mortgages, and the vast majority of those were 30-year fixed. So for those customers, interest rates will not go up, even as interest rates in the market generally rise.
For customers in adjustable rate mortgages, the ARMs themselves contractually tend to have caps on how much the rate can rise at the time of reset. They also generally have a cap on how much the rate can rise in any given year and over the lifetime of the loan, so all of those offer some protection to customers.
Why does HSBC want to expand U.S. mortgage lending now? Isn’t that a tough business these days?
No. Seventy percent of our mortgages are to people who already are existing customers of the bank. The 30% where we make mortgages to people who are new to the bank, we do this in the context of the mortgages introducing them to the bank and then having the ability to set up a broad-based relationship with the bank over time.
We do this because we’ve got very good data to show that a mortgage really anchors the customer’s relationship with us. If they’re happy with the mortgage they have with us, the attrition rate is one-fifth of customers who don’t have a mortgage. Not only do we get mortgage revenue, but we get material increases in nonmortgage revenues with those customers. So they have bigger deposits with us, we get more deposit revenue, they use our credit cards more, we get more card revenue, they invest more with us, so we get more wealth revenue.
Our portfolio today is about $15.5 billion, and we’re really looking to triple our origination volume over five years. We’re not growing this in isolation — it’s part of our overall growth in retail banking.
HSBC has had some issues in the mortgage area in the past. What are some of the challenges or difficulties that you had to navigate in ramping that business back up? What are you doing differently this time?
The primary issue for us was we had outsourced our mortgage originations to PHH, and we’ve now brought it back in-house. As of Jan. 2 this year we’re originating all our mortgage volume in-house. It’s gone very well. We’ve closed about 85 loans on the new in-house platform. Customers are happy, cycle times are short and the sales force is also getting much more confident that they can go out there and engage with customers, bring applications in, and our processing and underwriting teams will manage the loan through. While we had that outsourced, they didn’t have that confidence and spent a lot of time babysitting their own pipeline.
Over the course of this year, we are making significant tech investments to digitize the mortgage origination process to make it much easier and more convenient for customers. They can start applications online, they will be able to automatically verify income and assets, we’re setting up video chat capabilities so they can talk to a loan officer, they can upload and share documents, have all the disclosures delivered electronically. We’re making the whole system more digital and allowing customers to interact with us any way they like.
We’re also very much focused on our very high-credit-quality customer. Our average [loan-to-value ratio] is in the 60s, our average FICO is north of 700, and these are customers who are by and large of material means. Our delinquency rates are very low on the book we originated post-financial-crisis. We absolutely will continue to maintain those credit standards.
What does that mortgage business look like for you now? Who are you looking to target and how?
Our [mortgage] customers tend to mirror our banking customers, so our banking customers for HSBC tend to bias toward mass affluent and our branch footprint very much has a major metro bicoastal focus, so the focus around New York, Washington, D.C., Miami, South Florida, on the East Coast and then L.A., San Francisco, Seattle on the West Coast. The majority of our mortgage customers are from those markets.
Also, we have a very unique business in making mortgage loans to international customers. Largely two kinds: One is people who are new to the U.S. and haven’t yet established their credit history here, and the other are people who are non-U.S. residents. That could be somebody in Canada or Hong Kong looking to buy a home in the U.S., and it could be as a vacation home or an investment property, it could be that they have a child attending university in the U.S. and they want to buy a condo for their child to live in. That’s a substantial portion of our business, and typically these loans are not made by most other U.S. mortgage lenders.
The standard in the U.S. market and especially for conforming loans is what’s called 2/2/2: two years of credit history, two years of residency and two years of employment in the U.S. We’re able to make loans to folks who don’t have that and underwrite that well based on their credit history in their country of origin, as well as employment history and residency history in that country. We’ve built systems to get that information and underwrite that business, and the loans are performing very, very well.
That’s a real area of focus for us, which is a little different than the U.S. mortgage market as a whole. That business is growing very, very fast.
We’ve heard a lot of tough talk lately on topics like immigration and trade, and that’s made some commercial bankers nervous. Given HSBC’s international focus, does that affect your mortgage business? Or does that not tend to affect your side of the house?
Not so far. Despite all the talk, if you look at actual trade flows and the actual number of new immigrants to the U.S., all of that is growing. Now it’s an open question as to, can the climate change hugely? Can all of that go in a different direction? Possibly. We haven’t seen that as yet. Even if it does go a little bit in another direction, it’s still off a very, very high base historically. We’re still dealing with very substantial numbers where even if this growth rate today was to slow down to a slightly lower growth rate or even in a couple years, we’re still coming down off a great pace.
The National Association of Realtors did a study which said international property purchases [in 2015 to 2016] were $100 billion; they’ve now grown to $150 billion, so it’s a huge growth rate. Even if that moderates some, we’re still very happy to be part of that market.
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Corrected March 13, 2018 at 8:16AM: An earlier version of this story mistakenly said mortgage servicing was being brought in-house. HSBC is shifting servicing to a subservicer and expects the process to be complete by early 2019.