Mortgage Lenders Warned About Home Loan Losses in Fourth Quarter

Experts have warned all year that a slowing U.S. economy and rising borrowing costs would lead to an increase in bad home loans by homeowners and other borrowers.

Grim comments from Britain’s HSBC Holdings Plc about fourth-quarter trends suggest the experts may have been right.

“We think the sky may be falling,” said Mark Fitzgibbon, director of research at Sandler O’Neill & Partners LP. “Credit quality has been deteriorating for two quarters and we think the pace of deterioration will accelerate this quarter.”

HSBC, the world’s third largest bank by market value after Citigroup Inc. and Bank of America Corp., on Tuesday said U.S. mortgage lending results may worsen from the third quarter, when higher loan losses crimped overall revenue growth.

“We’ve seen more data coming into the fourth quarter and there is a weakening,” Finance Director Douglas Flint said.

In 2003, HSBC paid about $14.8 billion for Household International Inc., which lent to many people with below- average credit scores. It has since evolved into HSBC Finance Corp.

The bank’s North American operations, which include HSBC Finance, last year generated 31 percent of total profit, but 65 percent of bad loans; most major U.S. lenders will report fourth-quarter results in January.

Many have cautioned that loan losses - especially from adjustable rate mortgages that reset - will increase as economic growth moderates and bankruptcy filings rise to more normal levels. Some may set aside more reserves for losses.

Stock prices may reflect this. The Philadelphia KBW Bank Index was up only 1 percent this quarter through Monday, while the Standard & Poor’s 500 was up 5 percent.

Rising risk and shrinking rewards are why H&R Block Inc., KeyCorp, National City Corp. and others are selling or scaling back their subprime, bad credit mortgage lending businesses, which lend to people with weaker credit histories.

H&R Block’s Option One unit, which the tax preparer is trying to sell, posted a $39 million fiscal second-quarter pretax loss, compared with a year-earlier $48.8 million profit.

Other lenders are taking precautions.

Wells Fargo & Co. on Tuesday began an education program to help subprime borrowers handle their finances. The number-two mortgage lender, like many rivals, has long denied charges it unfairly burdens such borrowers with onerous rates and fees.