HSBC Holdings PLC said Wednesday that it will take a $3.4 billion charge in its third quarter results, tied to accelerating losses in the company’s U.S. mortgage business — $1.4 billion more than expected, according to the company’s press statement. The bank characterized further write-downs as probable should current housing and market woes continue, but also said it has “very little” direct exposure to CDOs backed by subprime mortgages. HSBC had said it would close its Decision One lending unit in late September amid worsening mortgage industry conditions. The bank also said today that it will close an additional 260 retail branches nationwide in order to bring the company’s operations in line with “the level of forecast demand implied by our credit underwriting risk appetite.” Talk about beating a banking retreat. There is also evidence that all of that REO is piling up, as the company noted:
There is also some evidence of changed customer behaviour as foreclosures increase, repossessed properties remain unsold and rental alternatives become more attractive. All of these factors are contributing to the increases in loan delinquency now emerging in the branch-based real estate-secured consumer lending business and in Mortgage Services. [emphasis added]
The above is something to keep in mind, although unsold REO doesn’t really have anything to do with delinquencies per se. It’s important because there are often insurance policies and guidelines to consider in any recovery effort by a lender after foreclosure — not to mention real losses that have yet to appear on the books, since the REO in question hasn’t yet been sold and instead keeps piling up. REO inventory sitting unsold in this market means not just increased cost of carry, which increases loss severity, but also more exposure to declines in market value. All of this ends up feeding back into those loss assumptions driving whatever was originally put into reserve for losses; and reading between the lines, it look as if HSBC has had to make some adjustments here.
