HSBC takes $3.4B charge on U.S. mortgages

But company says third-quarter operating income up from year-ago period, boosted by revenue growth.

HSBC Holdings PLC said Wednesday it was taking a $3.4 billion charge against third-quarter profits because of accelerating losses in its HSBC Finance Corp. mortgage business in the United States.

However, in a trading update the company said that those losses were "more than offset by revenue growth in the group" as a whole and that third-quarter operating income was up compared with a year ago.

There is the probability of further deterioration if the current housing market distress continues and further impacts the broader economy, the company said.

Shares in HSBC gained 4 percent to 877 pence ($18.11) on the London Stock Exchange.

Source - CNN Money

A seasoned pro scoops up mortgage stocks

Aldo Zucaro's ORI has boldly bought shares of two other mortgage insurance outfits. But what if the housing market is down for years?

As mortgage insurance stocks have gone into freefall over the past month, speculation has been intense about whether a deep-pocketed investor would step in and start buying, in the belief that the stock prices had fallen too far.

Old Republic International, a sleepy Chicago-based insurance company led for the last 17 years by Aldo Zucaro, has made that bet.

ORI, which has its own mortgage insurance business, purchased 15% of PMI Group and 11% of MGIC Investment Corporation, the nation's largest mortgage insurer, over the past 11 weeks, according to a Thursday filing that ORI made with the Securities and Exchange Commission.

Zucaro has a reputation in the insurance industry as a conservative, long-term investor who has helped steer ORI through several cycles. As a result, his decision to buy stakes in PMI and MGIC could be seen as a vote of confidence in both companies. On the other hand, the down swing of this housing cycle may be much harsher and longer than past ones, so it could confound even the most experienced investors.

Both stocks rallied strongly Friday, though PMI is still down 60% since the end of Sept., while MGIC is off 40%. ORI didn't say whether it is up or down on its investment, which together is worth about $350 million.

The core business of a mortgage insurer is to write policies that agree to make up a certain amount of losses for mortgage lenders if loans default. The rising amount of past-due mortgages will hurt the insurers' earnings, and some of them have also had to record big losses on the value of securities and financial instruments in their investment portfolios.

Another source of worry about the mortgage insurers is that they are particularly vulnerable to a cut in their credit ratings, since clients and investors expect insurers to have very high ratings.

Given such fears, why would ORI be scooping up PMI and MGIC in such size? After all, it's a particularly aggressive trade for ORI, because it will add to the overall exposure the company has to mortgage insurance, a business line that recorded an operating loss at ORI for the first time in 19 years in the third quarter.

In an interview, the 68-year-old Zucaro let us into the thinking behind the PMI and MGIC bets.

These two companies are here to stay, says the CEO. We bought them on the basis that recent market prices underestimate their long-term value. At today's prices, ORI's PMI stake would be worth around $172 million, and the MGIC holding $177 million.

If these positions in PMI and MGIC had been built evenly over the past 11 weeks, ORI could already be sitting on large losses. But Zucaro appears to be taking a long-term view on this investment. He believes there'll be a strong recovery in their stock prices, but it could take two to three years.

This investment is not about instant gratification, he says.

One of the bull's arguments about the mortgage insurers is that their cash flows are positive, even if they report losses, because the losses reflect estimates of claims. Zucaro, however, believes that operating cash flows could turn negative for mortgage insurers, but he claims that the companies have good liquidity overall because of their investment portfolios.

But why make an investment like this when a negative ratings agency action could have such a large impact on PMI or MGIC? Zucaro responds: The rating agencies have got to do what they've got to do and we've got to do what we've got to do, but it is in no one's interest to see these companies go under.

Zucaro also believes that the stress tests that the rating agencies have run for PMI and MGIC factor in the difficulties these two companies will experience over the next two years.

But, thus far, the rising levels of mortgage defaults have happened without an economic recession, so if there were a real downturn in the wider economy, the mortgage companies might have to issue large amounts of new capital to strengthen their balance sheets, a move that would hurt their stocks.

So could the investment in PMI and MGIC hurt ORI itself if it doesn't go well? No, says Zucaro, it's a very small part of our shareholders' equity.

That's true, since ORI has equity of $13 billion. But with housing market likely to be in trough for years, it's a very big bet indeed.

Source - CNN Money

Early signs of easing seen in subprime lending

Former Federal Reserve chairman Alan Greenspan defended the U.S. subprime mortgage market Monday, arguing that the securitization of home loans for people with poor credit not the loans themselves were to blame for the current global credit crisis.

Greenspan also said there were some early signs of an easing in the crisis, but warned that the longer term effects on the economy were still being determined.

"Subprime mortgages were and are risky, but they are worth it," Greenspan said, adding that is better to have a larger property owning class with a vested interest in the system.

"I'm terribly concerned that we would cut back on the availability of subprime that has enabled a very significant increase in mortgages among minorities in the United States," he added.

The current credit market turmoil began with rising defaults in the United States on subprime mortgages. Those problems have since spread as banks repackaged risky loans with the more reliable and sold them to a wide range of investors, including several European banks.

Credit dried up in early August, roiling financial markets, as banks became wary of exposure to the risky loans.

Greenspan acknowledged that a number of people should not have been taking out those mortgages, but that the current crisis was due "not the subprime problem itself, but to the securitization of subprime."

Greenspan said there are "some positive signs" that the crisis is calming.

"For example, the yields on what has been the poster child of this crisis, asset backed commercial paper, have jumped up sharply," he said. "It has since come down, but not all the way."

Similarly, the interbank lending rate, which jumped in recent weeks amid fears about insolvencies, have started to come down, but "not all the way," he said.

"We are not through with this yet," he added, suggesting there could still be what he termed an "Act II," in which falling house prices feed into slower consumer spending.

However, he reiterated earlier comments that he believed the probability of a recession in the United States was "less than 50/50."

Greenspan also implicitly criticized the role of ratings agencies in the crisis.

"The problem was that people took that as a triple-A because ratings agencies said so," he said. Yet when they tried to sell the products they ran into difficulties, which shook confidence.

"What we saw was a 180 degree swing from euphoria to fear and what we've learned over the generations is that fear is a very formidable challenge," Greenspan said.

Ratings agencies such as Standard & Poor's Corp., Moody's Investors Service Inc. and Fitch Ratings have come under fire for being slow to lower their ratings on securities based on mortgage loans to U.S. borrowers with poor credit records.

Source - The Associated Press