HSBC Sees Improvement in U.S. Home Market
Sales of Foreclosed Properties Begin to Pick Up, but Hurdles Loom; Subprime Salvation?
By Sara Schaefer Munoz
The Wall Street Journal
November 18, 2009
When the subprime-mortgage crisis hit in the U.S., HSBC Holdings PLC’s U.S. unit foreclosed on thousands of homes, many of which it then couldn’t unload. Now, there are modest signals that the bank is having an easier time reselling those homes and recouping losses.
The signals are positive for HSBC, the London-based banking giant that has been dragged down by billions of dollars in losses in its U.S. unit as it seeks to expand in emerging markets, especially Asia. Yet the progress may be short-lived, as selling distressed properties could again become more difficult when government foreclosure-protection programs and other measures come to an end.
The bank entered the U.S. subprime market in 2003 with the purchase of lender Household International Inc. and quickly built up a large portfolio of assets consisting mostly of risky mortgage loans. It has so far taken more than £40 billion ($67 billion) in impairment charges on its U.S. unit. The bank said earlier this year it would exit from its entire U.S. consumer lending businesses, except for credit cards, but it would continue to service existing loans.
According to regulatory filings, HSBC’s U.S. consumer-lending arm had 6,266 repossessed properties on its books in the third quarter, down nearly 12% from the 7,105 properties in the previous quarter. The number of new foreclosures added to HSBC’s books held steady, dropping slightly from 3,463 in the second quarter to 3,448 in the third quarter.
The repossessed properties on HSBC’s books during the third quarter represented a 43% drop from the 10,887 in the third quarter in 2008, when 5,416 of the properties were new foreclosures.
The filing also shows the bank has been able to sell repossessed properties slightly faster, unloading them in an average of 184 days in the third quarter, compared with a peak average of 201 days at the end of the first quarter.
The movement is “helpful because it allows the bank to realize collateral and convert it into cash,” says Robert Law, a banking analyst at Nomura. “The hope is that you are past the worst in terms of the asset quality.”
The bank’s average 8.4% loss on the sale of a foreclosed property in the third quarter was also down from a loss of nearly 13% in the second quarter, and nearly 17% at the end of the first quarter. The bank said that was due to stabilization in home prices in the third quarter, which resulted in less value deterioration between the time HSBC took possession of the property and when it was sold.
The average total loss on the sale of foreclosed properties, which includes the cumulative write-downs on the unpaid loan, has remained steady, at around 52%, in the past three quarters.
To be sure, the bank notes that part of the reason it is holding fewer properties on its books is that many foreclosures have been delayed due to backlogs and government-backed foreclosure-prevention measures. The bank has also modified a number of mortgages to keep people in their home. So far in 2009, the bank has modified 95,000 customer accounts, up from 92,500 in 2008.
However, an HSBC spokeswoman said the current figures also reflect more price stability in some markets—which encourages potential buyers—and some reduced sales time. She said HSBC works with 450 real-estate agents across the U.S. and ensures the properties are maintained.
The latest HSBC foreclosure data illustrate that in some pockets of the U.S., lenders are making modest progress in unloading the glut of foreclosed homes on their books. That is due partly to steep price declines from market peaks in some hard-hit areas, such as Florida and Nevada. Also, new-home inventory has fallen sharply, leading more buyers to consider foreclosed homes, says Mike Inselmann, president of Metrostudy, a Houston-based real-estate research firm.
“Generally they are able to move [foreclosed homes] a little faster,” Mr. Inselmann said. “There’s been a response to price discounting…especially in areas with restrictions on new building.”
How long that trend will last remains uncertain. HSBC points out the number of its repossessed properties is expected to increase as more foreclosed homes hit the market, which could happen when government foreclosure-prevention programs wind down within the next several years.
“The uncertainty is whether the stabilization you are seeing reflects actions authorities have taken…and whether once those things come to an end and you will start to see a deterioration again,” Mr. Law said.
HSBC’s third-quarter results last week contained other positive signs for its U.S. consumer-lending business. Loan-impairment charges in the U.S. unit fell slightly in the third quarter, to $3 billion, compared with $3.36 billion in the previous one and $4.19 billion a year ago. The provisions are still ample enough to handle the bank’s expected bad loans, analysts say.
Still, HSBC Finance posted a pretax loss of $2.7 billion, and the bank expects losses at the business “for some time to come,” HSBC’s finance director, Douglas Flint, said last week.
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