UK Mortgage Lenders in trouble in the US

Twenty percent of all bad credit mortgages will end in repossession in the U.S.

Bad debts are adding up to a $164bn black hole for American banks. And Britain's banks are caught up in it, reports Heather Connon...

Federal investigations, corporate collapses, borrowers who never manage to make any loan repayments, soaring bad debts ... sub-prime lending to riskier borrowers in the US has all the hallmarks of an industry in crisis.

The Centre for Responsible Lending predicts that one in five of all sub-prime loans written over the past two years will end in foreclosure, the US term for repossession: that's 2.2 million loans and a cost of $164bn (£85bn).

One British bank has already become embroiled: HSBC's bad debt charge rose by 35 per cent to more than $10.5bn in 2006, a fifth of which came from its sub-prime mortgage servicing business. Its chief executive, Michael Geoghegan, warns that it will take at least two years to sort the problem out.

Default rates are certainly eye-popping: at its results last week, HSBC revealed that almost 6 per cent of the second lien mortgages - loans on property that has already been mortgaged - in its mortgage services division were more than 60 days in arrears, three times the level a year ago; the fear is that they are still rising. While this type of lending is high risk - default rates of around 2.5 per cent are normally factored in - these levels have taken the industry by surprise. But that reflects their failure to appreciate the high stakes behind some lending practices.

Sunday March 11, 2007
The Observer