Mortgage delinquencies: up!

Freddy Mac's official statistics notwithstanding, HSBC is facing heavy weather in its US subprime operations:

The impact of slowing house price growth is being reflected in accelerated delinquency trends across the US sub-prime mortgage market, particularly in the more recent loans, as the absence of equity appreciation is reducing refinancing options. Slower prepayment speeds are also highlighting the likely impact on delinquency of higher contractual payment obligations as adjustable rate mortgages reset over the next few years from their original lower rates.

As a result, says HSBC, its total provision for the year 2006 is likely to exceed by 20% the $8.8 billion consensus estimate. Says Peter Thal Larsen in the FT:

The worsening picture in the US helped push HSBC shares, which were the worst performers in the UK financial services sector last year, to a 9-month low on Thursday. By mid-morning they were down 231⁄2p at 907p, the lowest level since last May.
Concerns about HSBC’s US mortgage book have triggered a sharp fall in the bank’s share price, largely because the problems raised questions about the bank’s ability to price correctly loans in the sub-prime lending market.

Mike Verdin at Breaking Views also piles on, but he has a few more numbers:

The bank has just added an extra $1.8bn in 2006 provisions for Household, now HSBC Finance. That will drag the division's pre-tax profits to about $2.3bn, 40% below previous estimates. It's a big enough hit to deprive the whole group of half its profits growth.
The bad news will certainly revive doubts about whether Household was worth buying, even at the cut-price $14.2bn HSBC paid in 2003.

There seems to be $300 million missing somewhere, since profits seem to be only $1.5 billion lower than expected, by these calculations. But putting that to one side, can I just point out that HSBC's subprime mortgage business is still on track to make well over $2 billion in 2006? I appreciate that 2007 might be worse, with ARMs resetting and all that. But I have a feeling that the subprime business is never going to lose money for HSBC – the worst that happens is that its profits will be less spectacular than they might have hoped.

Once again, there's nothing indicating a massive credit crunch. I see increased provisioning much the same way as I see wider MBS spreads: as an indication that the market's own cushioning systems are working pretty well.

Posted by Felix at 13:27 EST