HSBC’s Mortgage Lending Decision

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 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 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


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


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.


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.


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


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.



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.

http://en.wikipedia.org/wiki/Security_(finance)

http://en.wikipedia.org/wiki/Assets

http://en.wikipedia.org/wiki/Capital_structure

http://en.wikipedia.org/wiki/Secured_loan



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.


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


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


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


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)


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”


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


“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


“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


CEO- Don Robert


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!


Q & A


Thanks for your attention

Documents

HSBC’s Mortgage Lending Decision