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Feds warns on Mortgages as HSBC suffers

posted 3/6/2007 9:46:34 AM |
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Fed warns on mortgages as HSBC suffers

Financial Times

THE US Federal Reserve has ordered a more cautious approach to high-risk mortgage lending in an effort to halt the rising tide of late payments and defaults that has prompted HSBC, Britain's biggest bank, to issue its first-ever profit warning.

HSBC is due to report its full- year results tomorrow. The bank will announce "impairment'' charges of $11bn relating to its mortgage problems in the US. It warned last month that its bad debt charges would be 20 per cent higher than expected as a result of the US issues.

Federal Reserve Governor Randall Kroszner issued a new set of lending guidelines late on Friday night, instructing banks to carry out more rigorous checks on loan applications and to issue more overt warnings to consumers regarding the risks of rising interest rates.

Kroszner said lenders should only sign off loans for which they knew the borrower would be able to repay the money. He added that the intention was "to limit risks to both the borrower and the lending institution'' and that borrowers need "clear and balanced information on the risks associated with these loans''.

The guidelines have been endorsed by four other US regulators, who will help enforce the new rules. "The agencies will carefully scrutinise risk management and consumer-compliance processes'' through regularly scheduled examinations, Kroszner said.

"Institutions that do not adequately manage these functions will be asked to take remedial action.'' The statement came just hours after it emerged that New Century Financial, one of the lenders at the centre of the sub-prime lending storm, is facing a criminal investigation by Californian prosecutors into alleged accounting errors and allegations of suspicious trading in the company's securities.

Fremont General, another major lender to consumers with poor credit ratings, has revealed that it will sell its sub-prime lending business after coming under fire from regulators last week over "unsatisfactory lending practices''.

The new regulations also come after Senator Christopher Dodd, chairman of the Senate Banking Committee, told Federal Reserve chairman Ben Bernanke at a hearing last month that regulators weren't doing enough to protect consumers from deceptive mortgage practices.

The combination of aggressive lending, rising interest rates and falling house prices have put more borrowers at risk of losing their homes. Concerns over the impact of the collapsing housing market contributed to the sharp falls in Wall Street's indices last week.

HSBC is expected to unveil pre-tax profits of about $22bn ( pounds 11bn), up five per cent on last year. While investors are broadly satisfied that there is little room for further shocks in the 2006 numbers, the bank has offered little clarity on what it expects to happen in 2007. Some investors believe analysts will be forced to downgrade their earnings forecasts for the current financial year and beyond.

Douglas Flint, the group's finance director, has restricted all lending in the US sub-prime book for the short term.

While the bank's US problems have been restricted to a certain portion of its mortgage book so far, there are also concerns that credit quality issues could seep through to its unsecured lending business.

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Mar 6 @ 11:56AM  
That is just the tip of the iceberg... check this site out if you would like to know the details of what is happening in the sub-prime mortgage business.

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Feds warns on Mortgages as HSBC suffers