HSBC's Mortgage Lending Decisions and the Big Melt Down

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HSBC's Mortgage Lending Decisions and the Big Melt Down
1. What problem did HSBC face in this case? What people, technology, and organization factors were responsible for the problem? Did HSBC management correctly identify the problem?
As per forbes, "HSBC's penchant for being "local" is partly why it didn't come out of the subprime meltdown entirely unscathed. Money it wrote off in 2007 came not from recklessly trading securities that were backed by U.S. subprime mortgages, as with many other big banks; HSBC was in the eye of the storm, doling out the subprime mortgages itself though HSBC Financial Corp., formerly known as Household International." 1 HSBC faced the problem of heavy losses during the subprime crisis. Its stock prices have fallen by half from their pre- crisis high, and HSBC had to shed over 6,000 employees, close over a thousand branches worldwide, and write off its mortgage generating unit in the United States called Household International. Following factors were responsible for the problem:
1) Faulty application of financial modeling.
2) Poor assumptions regarding financial scenarios.
3) Failure to take into account human behavioral issues.
4) Excess Greed and herd instinct.
In an economy, which is growing very rapidly and stocks are market driven, such failures tend to happen in the absence of strong statuary norms and financial regulators. Another factor for this failure is the political system, which enables the arrival of people into business without any credentials.

2. HSBC had sophisticated information systems and analytical tools for predicting the risk presented by subprime mortgage applicants. Why did HSBC still run into trouble?

HSBC bought Household International in 2002 for $ 15 billion which was primarily into consumer credit and subprime mortgages in the United States. Hence the company was involved into Subprime mortgages mortgage which is given to a home buyer with less than perfect credit. This resulted in defaults and losses to HSBC. Additionally the factors are discussed in Q1 above.

3. What solutions are HSBC relying on to deal with its problem going forward? Will these solutions be sufficient to turn the subprime mortgage business around? Are there additional factors for which HSBC has not accounted? What are they?

HSBC is relying on following solutions:
1) Improvement in Software
HSBC is adopting business analytics software from Experian- Scorex to help support the decision making of its credit application processing staff. The software provides users with the ability to consistently deploy scoring models and portfolio segmentation. It also includes tools for managing customer relationships and improving risk management decisions. By using these tools, HSBC hopes to be able to create strategies for individual applicants, assess the value of each applicant, and then customize a loan offer that suits the customer's needs as well as the bank's business.
2) Changes in Human resources
HSBC has made changes and it has made the process more rigorous. HSBC has doubled the number of customer repre-sentatives who call on borrowers who have missed pay-ments and discuss payment plans that are more manage-able. Those operations now run seven days a week.

3) Changes in credit policies
HSBC ceased originating and purchasing stated- income loans and boosted the required FICO score for some loans.
Some additional factors that HSBC should take into account is the training of the Human resources about the ethics, human values and the usage of financial models.

4. HSBC made a decision to pursue subprime mort-gages as a segment of its business. Explain how this was a structured, unstructured, or semi structured decision. Then, present your opinion about where in the decision- making process HSBC went wrong. Finally, apply the decision quality concepts of accuracy and comprehensiveness to this case.
This decision was semi structured decision. Subprime lending was a double edged weapon used by lenders and financial institutions. Investors and borrowers were caught napping without foreseeing the risks involved. Lending was given on the basis of financial models. But financial modeling decisions were based on faulty assumptions. For example assumption of home prices in the United States had not experienced a long- term secular decline in prices since the 1930s, that the prices of homes historically were normally distributed, and that therefore, the risks could be estimated, understood, and priced into the instruments were wrong. Another faulty assumption was on the stability of home portfolio segmentation. . By 2009, HSBC had taken a cumulative bad loan charge of $ ...