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HSBC is one of the most staid and conservative banks in the industry. Yet, they are issuing warnings of a much higher foreclosure rate than they had expected and are issuing warnings that the future may have more bad news in it.

HSBC said its 2006 charge for bad debts would be about $10.6 billion — or 20 percent above analyst consensus forecasts — as problems deepened in its lending to lower quality U.S. home borrowers. via MSNBC.com.

The real issue is the purchase of Household International, which is a large supplier of piggy back loans. These loans do not have the protection that a first mortgage provides creating a greater risk for the banks. These piggy back mortgages carry a higher interest rate to protect the lenders, but in a period of higher foreclosures and difficulty in repayment, the exposure to these loans is much greater.

“Management made a mistake in this brokerage business, where it went for volume and it went for second-lien business. It won’t happen again.”

The problems add to criticism of HSBC’s purchase of Household International for $14.8 billion in 2003, which was its biggest ever acquisition. The unit is now part of HSBC Finance.

“It (Household) is a deal that has been earnings accretive, so financially it’s been a reasonable deal, but it’s clearly changed the shape of group earnings and made them more volatile, hence the sustained de-rating of the group. So it’s not necessarily been a good strategic deal,” said Ian Gordon, analyst at Dresdner Kleinwort.

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