Housing woes slam big bank

By Elizabeth Strott

The suffering U.S. housing market continues to have a global impact.

One day after Europe's biggest bank, HSBC Holdings (HBC, news, msgs), surprised analysts with news that its charge for bad debts would be more than $10.5 billion for 2006 -- 20% higher than analysts' $8.8 billion estimate -- the bank said today that it is shaking up management and changing its lending policies.

"The buck stops with me," CEO Michael Geoghegan said. "I am responding, and more action will be taken."

• Video: HSBC's subprime meltdown

This is the third time since November that HSBC has told shareholders that revenue growth would be hurt by bad loans in the United States.

HSBC shares fell 2.65% in New York on the day, to $89.78.

A bad bet

HSBC used its 2003 acquisition of Household International, which makes loans to U.S. consumers with poor credit records, to take advantage of rising home prices in the United States. That bet has not been paying off, however.

Rising interest rates and slowing home appreciation have prevented many low-income borrowers from refinancing mortgages. Just a few years ago, borrowers could sell their homes if they were late in their mortgage payments or refinance based on the higher value of their homes.

Then the housing market started to slump.

Now subprime mortgages, which are issued to high-risk borrowers, are defaulting at a faster rate than during the recession in U.S. six years ago, Friedman Billings Ramsey Group told Bloomberg News. Lenders generally charge 2% to 3% more on those types of mortgages.

"This is a material negative surprise for HSBC," John-Paul Crutchley, an analyst at Merrill Lynch, told MarketWatch.com.

Housing still heading down

Elsewhere, economists have been predicting that the housing market won't start to turn around until the middle of the year.

The weak housing market will continue to hurt existing-home sales and new-home sales, the economists told MarketWatch.com yesterday.

David Berson, chief economist for Fannie Mae (FNM, news, msgs), expects the home-price index to show a decline in values for 2007 across the country, the first time since the Office of Federal Housing Enterprise Oversight started collecting data.

"A seriously large inventory situation" is the big problem, said David Seiders, chief economist for the National Association of Home Builders. Seiders said the housing boom of 2004 and 2005 produced at least 400,000 more housing units than demand called for.

Freddie Mac (FRE, news, msgs) chief economist Frank Nothaft added, "We're a few years from the robust levels of activity we saw in 2005."

But Seiders said the strong U.S. economy "has been able to handle the dramatic correction in housing. . . . GDP growth, unemployment, the overall inflation situation and interest rates" have all been positive despite housing's woes.

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