Traditional credit scores haven’t done a good job in accessing risk for non-traditional mortgage products such as interest-only loans and option adjustable rate mortgages, says a senior executive with HSBC Holding Plc, a British international banking giant.
In discussing trends in HSBC’s U.S. mortgage business this year, company officials this week told analysts that they expect to see mortgage delinquencies rise in 2007 as consumers increasingly have difficulty meeting higher payments required on adjustable rate loans made in 2005 and 2006.
“Our preparation for ’07 is based on there being a continued trend towards higher delinquency,” said Douglas Flint, HSBC group finance director. HSBC has found that for unconventional mortgages, “the ability to use historic data to predict outcome has ceased to be effective.”
As U.S. housing prices climbed in the past two years, mortgage origination moved from traditional loans to what Flint terms affordability products – mortgage structured to lower initial payments for borrowers.
“What is now clear is that FICO scores are less effective or ineffective in circumstances where the ability to meet payments is beneficially enhanced by virtue of the fact that the payment obligations have been reduced because of very low interest rates,” Flint explained. Someone’s ability to pay a lower initial payment isn’t a good indicator of their ability to make the higher payment that will follow in later years, he explained.
Advocates at Household - HSBC Watch claim HSBC Finance Corporation, once known as Household International, is familiar with skyrocketing mortgage payments and often raised interest rates and payments for sub-prime and fringe buyers until foreclosure took place.
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