This excerpt taken from the HBC 6-K filed Aug 8, 2008.
Mortgage lending portfolio review
The Group offers a wide range of mortgage products designed to meet customer needs. The range includes capital or principal repayment mortgages subject to fixed or variable interest rates, and products designed to meet demand for housing loans with more flexible payment structures. HSBC underwrites both first lien residential mortgages and loans secured by second lien mortgages; the latter are reported within Other personal lending in the
market sector analysis on page 156. The bulk of the mortgage lending products sold in the US consumer lending branch network are for refinancing and debt consolidation, rather than for house purchase.
Interest-only mortgages are those where customers make regular payments of interest during the life of the loan and repay the principal from the sale of their home or alternative sources of funds such as an endowment or other investment policy.
Introductory interest-only mortgages are typically where the interest-only element is for a fixed term at the start of the loan, after which principal repayments commence. Affordability mortgages include all products where the customers monthly payments are set at a low initial rate, either variable or fixed, before resetting to a higher rate once the introductory period is over. These include ARMs, loans on which the interest rate is periodically changed based on a reference price.
HSBC has not offered, and does not expect to offer, ARMs with self-select payment options or other negative amortisation products.
Affordability mortgages are primarily offered in the US and the UK. Under the HFC and Beneficial brands, HSBC Finance and HFC UK offer a range of products and delivery channels designed for the needs of customers with non-standard or less favourable credit profiles. In the US, these mortgages continue to experience heightened levels of delinquency that began to emerge in late 2006. In 2008, management continued to tighten underwriting criteria, reducing loan to value ratios, with tighter restrictions in certain states to respond to these elevated levels of delinquency. These actions contributed to the reduction in HSBC Finances mortgage balances to US$83 billion at 30 June 2008 (31 December 2007: US$89 billion) as set out in the table on page 164.
In the UK, affordability mortgages have shown significantly lower levels of delinquency due to the different credit profiles of the customers to those in the US, tighter underwriting criteria and less marked weakness in house prices to date.