HSBC’s Mortgage Lending Decisions: What went wrong?
1.What problem did HSBC face in this case? What people… They came into problems during the global financial crisis because of heavy exposure in the subprime mortgage market. They bought subprime loans from other sources to increase its revenue. Many of these did not require any down payment, but were approved for risky borrowers with a poor credit history. Home values started to go down, interest rates were going up. Unfortunately, borrowers with ARMs could no longer make their mortgage payments. This caused borrowers to become in default of their mortgages. HSBC started to lose its profit. The problems were simply due to greed and poor management ignoring a borrower poor credit history and worthiness. They did not properly determine the risks of investing in these types of loans. It was poor management decisions.
2.HSBC had sophisticated information systems and analytical tools for predicting the risk presented by subprime mortgage applicants. Why did HSBC still run… Data inaccuracies, poor management, being overly optimistic…
3.What solution is 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… Requiring more documentation that simply stated income.
Requiring higher FICO scores
Providing better customer assistance prior to borrowers becoming delinquent and new software to select applicants applying for loans 4.What are the possible consequences of HSBC changing its approach to subprime lending? How might these changes affect the business? How might they affect the… When they reduce the number of approved applicants in subprime lending, they are less likely to default, which has a negative financial impact on the banks. Unfortunately, it will make it harder on customers with lower incomes and lower credit scores to be approved for loans in any market. 5.HSBC made a decision to pursue subprime mortgages as a segment of its business. Explain how this was a structured…. At first, it was an unstructured decision because such decisions would be made by senior management. HSBC made a bad choice (3rd stage) because they chose to take a huge risk by purchasing stated-income loans. These did not require strict documentation or approval processes. Incomes were exaggerated as well as job status. Because HSBC was so focused on increasing revenue from the subprime mortgages, they did not consider external factors such as the changing housing market, lending market, and the world economy. People were losing their jobs.