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HSBC’s Mortgage Lending Decision:
What Went Wrong?
HSBC the world’s local bank
指導老師 : 張心馨 博士
學生 : 江萬彥、張凌寰
The formation of HSBC Holdings plc In 1991
creating a holding company for the entire Group with its shares quoted.
HSBC the world’s local bank
HSBC Group History
The HK and Shanghai Banking Corporation Limited (HSBC)
which was established to finance the growing trade between Europe, India and China.
1865 1991 Year
HSBC the world’s local bank
HSBC Group History
HSBC's international network comprises around 9,500 offices in
85 countries and territories in the world
2008
Shares in HSBC Holdings plc are held by around 200,000 shareholders in some
100 countries and territories.
Year
HSBC the world’s local bank
Housing Boom
Housing Boom.
Mortgage Competition
Relax lending standards
Low-end borrowers enter with*no down payment
*have low introductory rates
2001Year
2006
Subprime mortgage grow rapidly
2003
HSBC the world’s local bank
Beginning in 2003
Begin lending to consumers
March,2003
A Major subprime lender, Household International Inc. merged by HSBC
Use the system designed by 150 Ph. Ds that originated from Household International Inc. call
Worldwide Household International Revolving Lending System, or Whirl
To underwrite credit card debt and support collection services.
HSBC the world’s local bank
Qualify Method
FICO score-- Credit Ranking
Pros
To qualify applicants for
Credit card
Car loans
Fixed-rate mortgages
Cons
Not a reliable tools for predicting performance of
Second-lien loans
Adjustable-rate mortgages
Do not distinguish the borrowers pay the down payment of the loans or not (data scarce)
Do not take into account what will happen if the house price is lower than the value they evaluate.
HSBC the world’s local bank
Mortgages are financial products
Bank
Insurance companies
Sell with
high rates Mortgage wholesalers
With high rates lead to high revenue
Large financial institutions
Sell with
high rates
+
Others
Buy billions of dollars in 2005 and 2006
+
HSBC Bank
Mortgage broker
HSBC the world’s local bank
What does HSBC buy from?
Piggyback loans
A home financing option in which a property is purchased using more than one mortgage from two or more lenders. There are three common types:
80-10-10 80-20-0 80-15-5
The first number indicates that 80% of the home's purchase price will be financed by a mortgage of lender number one
The second number indicates the percentage amount of a loan secured by a second mortgage with a different lender
The third number indicates the down payment percentage.
HSBC the world’s local bank
What does HSBC buy from?
Second lien loans (or last-out participation)
A form of loan with a security interest in the assets of a company that are second in ranking behind a traditional senior credit facility.
The second lien lender will typically be required to agree contractually (through an intercreditor agreement or other contract) to subordinate its claims on the assets to the first lien secured lenders.
Between September 2005 and March 2006,HSBC bought nearly 4 billion in second-lien loans.
HSBC the world’s local bank
What does HSBC buy from?
Stated-income loans (Liar loans)
A stated income loan is a mortgage where the lender does not verify the borrower's income, by looking at their pay stubs, income tax returns, or other records. Instead, borrowers are simply asked to state their income, and taken at their word.
90 percent of stated-income loan applicants declare their incomes to be higher than the are in IRS (Internal Revenue Service) records.
Sixty percent of these people inflate their incomes by 50 percent or more.
HSBC the world’s local bank
Big Problem to HSBC
Even a similar increase was expected for the fourth quarter in 2006
+
+
Profit disappearing
10.6 billion provisions in bad debt in 2006
Percentage of overdue by 60 days or more jumped from 2.95 to 3.74 in the third
quarter in 2006
+
Apply FICO score in a wrong way
+
Loan delinquency
HSBC the world’s local bank
Changes after Big Problem
Portfolio segmentation
Cease originating and purchasing stated-income loans
Boost the required FICO score for some loans
Inside
Adopt analytics software - - Experian-Scorex to support decision-making
Deploy scoring model
Improve risk management decisions
Manage customer relationship
HSBC the world’s local bank
Changes after Big Problem
Utilize IT to screen which customers of adjustable-rate mortgages are most in danger of being delinquent
Outside
Call on borrowers who have missed payment
Make payment plans are more manageable
HSBC the world’s local bank
What’s about “ Subprime Mortgage”
FICO Scores less than 620缺少證明文件或自備款非常低 (甚至為零 )者
The benefit from “ Subprime Mortgage”
讓信用等級不佳者可獲得融資機會提高房屋自有率 (65%->69% in past 10 years)
HSBC the world’s local bank
FICOUse a credit rating from “Fair Isaac Corp.”
FICO scores are your credit rating
They range from 300-850, higher is better
Most lenders base approval on them
Higher scores mean lower interest rates
Provided from
“Equifax” 、“ Experian” 、” TransUnion”
HSBC the world’s local bank
FICO scores are calculated based on your
rating in five general categories:
30%
15%
15%
10%
35% Payment History
Amounts Owed
Length of Credit History
New Credit
Type of Credits uesd
HSBC the world’s local bank
“Build once, deploy many”
=> The Whirl system One of the HSBC’s most successful global tech.
The platform consists of 17 linked applications
•Credit assessment
•Risk-based pricing
•Card ordering
•Transaction processing & reporting
89% of HSBC credit card accounts support Whirl
The platform performs 440 million authorisations a year
HSBC the world’s local bank
“Build once, deploy many”
=> The Whirl system The benefit to HSBC
• has reduced transaction processing costs,
generating an estimated annually saving £ 23M
• also allowed the bank to handle a 25% growth in
credit cards at no incremental cost
CIO- Ken Harvey said Whirl had played a big part in
HSBC cutting transaction processing costs by another
11% this year
About Experian- Scorex
15,500 employees around 38 countries
supporting clients in more than 65 countries
annual sales are US$4.1 billion
principal activities:•Credit Services
•Decision Analytics
•Marketing Services
•Interactive
HSBC the world’s local bank
CEO- Don Robert
HSBC the world’s local bank
History• Originated from CCN(1980)- an information services business
established in former parent company, GUS
• CCN developed the databases, systems and analytical skills,
becoming the UK's leading credit bureau
• 1980-1996 CCN expanded into adjacent business lines in the UK,
including credit account processing, direct marketing, business
information and micromarketing
• CCN's first expansion into the US came in 1986 with the acquisition
of Management Decision Systems (MDS)
• 2002, Experian has expanded through organic development
Major Clients
• 51% of sales came from North America
•8% from Latin America
•24% from UK and Ireland
•17% from EMEA/Asia Pacific
•Major clients:
American Express 、 Bank of America 、 BMW Financial 、 CiticardDell 、 Discover 、 eBay 、 Ford 、 HSBC 、 IBM 、 Marks & Spencer Morgan Stanley 、 Procter & Gamble 、 Tesco 、 Toyota 、 Visa 、Yahoo!
HSBC the world’s local bank
Q & A
HSBC the world’s local bank
Thanks for your attention
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