HSBC’s Billion-Dollar Bomb
11/10/2011 10:45 am EST
Rising mortgage delinquencies in the US cost the bank dearly, and highlight the risk of neglecting the lingering economic malaise, writes senior editor Igor Greenwald.
Lost in Wednesday’s panic over Italian bond yields was another credit issue closer to home. The global bank HSBC (HBC) reported a 36% profit drop, largely as a result of an extra $1 billion in credit impairment over what the bank wrote off in the prior quarter.
HSBC blamed its portfolio of US mortgages, the same one that kicked off the subprime crisis after an eerily similar warning in early 2007. The problem this time around is not the early stages of a housing collapse, but rather foreclosure moratoriums in some states, imposed after lenders improperly “robo-signed” documents without the required case-by-case review.
Absent the stick of foreclosure, more of HSBC’s borrowers skipped the September mortgage payment, though the delinquency spike abated somewhat last month, according to the bank. Still, there’s likely more pain ahead, according to HSBC:
“There remains pressure on the future credit performance…from continued weakness in the housing market and potential changes in customer behavior. The resumption of more normal levels of foreclosure activity following the recent moratoria may lead to further house price weakness as increasing volumes of vacant properties come onto the market.”
HSBC is not the only canary thrashing about in this coal mine. A day earlier, Fannie Mae posted a $5.1 billion quarterly loss as a result of souring housing loans. Also Tuesday, the credit agency TransUnion said the rate of mortgage delinquencies rose nationwide in the third quarter, the first such rise since 2009.
It’s probably best not to make too much of a 1% sequential bump in the number of mortgages delinquent by at least two months. On the other hand, that number could be headed up based on HSBC’s recent troubles with payments.
With consumer confidence back in a recessionary trough, joblessness high, and real estate still down in the dumps, fatigue appears to be setting in. True, home prices are falling at a slowing pace, but that could change once banks resume foreclosures in earnest and dump more homes back onto the market.
That’s what HSBC and other lenders seem to be expecting. And if prices continue to drop, delinquencies figure to rise further.
The Markit PrimeX index tracking the performance of securities backed by prime jumbo loans has been taking it on the chin of late.
There’s a notion out there that even though the economy is hardly firing on all cylinders, it has “stabilized” sufficiently to rule out further rescue efforts, whether through asset purchases by the Federal Reserve, mortgage principal forgiveness, or fiscal stimulus.
HSBC’s missing billion ought to be a reminder that, in fact, we’ve locked in hugely destabilizing declines in the number of available jobs and the number of potential home buyers.
The fact that employment and housing prices are no longer sinking rapidly may have lulled many into a false sense of security. But a bad situation not getting much worse isn’t the same as a bad situation getting better.
And the longer this goes on, the higher the odds of another economic stumble and more nasty surprises from banks.