NEW YORK (Reuters) - Experts have warned all year that a slowing U.S. economy and rising borrowing costs would lead to an increase in bad loans by homeowners and other borrowers.
``We think the sky may be falling,'' said Mark Fitzgibbon, director of research at Sandler O'Neill & Partners LP. ``Credit quality has been deteriorating for two quarters and we think the pace of deterioration will accelerate this quarter.''
HSBC, the world's third largest bank by market value after Citigroup Inc. and Bank of America Corp., on Tuesday said U.S. lending results may worsen from the third quarter, when higher loan losses crimped overall revenue growth.
``We've seen more data coming into the fourth quarter and there is a weakening,'' Finance Director Douglas Flint said.
In 2003, HSBC paid about $14.8 billion for Household International Inc., which lent to many people with below- average credit histories. It has since evolved into HSBC Finance Corp.
The bank's North American operations, which include HSBC Finance, last year generated 31 percent of total profit, but 65 percent of bad loans.
Most major U.S. lenders will report fourth-quarter results in January.
Many have cautioned that loan losses will increase as economic growth moderates and bankruptcy filings rise to more normal levels. Some may set aside more reserves for losses.
Rising risk and shrinking rewards are why H&R Block Inc. (HRB.N), KeyCorp (KEY.N), National City Corp. (NCC.N) and others are selling or scaling back their subprime mortgage lending businesses, which lend to people with weaker credit histories.
H&R Block's Option One unit, which the tax preparer is trying to sell, posted a $39 million fiscal second-quarter pretax loss, compared with a year-earlier $48.8 million profit.
Other lenders are taking precautions.
Wells Fargo & Co. (WFC.N) on Tuesday began an education program to help subprime borrowers handle their finances. The No. 2 mortgage lender, like many rivals, has long denied charges it unfairly burdens such borrowers with onerous rates and fees.
ARM WORRIES
Still, what particularly worries analysts is how many borrowers will skip payments as rates on many adjustable-rate mortgages (ARMs) reset higher in 2007.
Many borrowers obtained ARMs earlier this decade, when borrowing costs were at or near multi-decade lows, helping them afford costlier homes as prices soared.
About one-third of U.S. single-family home loans in 2004 and 2005 were ARMs, up from 12 percent in 2001, according to the Joint Center for Housing Studies of Harvard University.
Experts, however, now expect delinquencies to rise as home prices stabilize or decline and many consumers find themselves unwilling or unable to take on much more debt.
``I've never seen a soft landing in 53 years,'' said Angelo Mozilo, chief executive of Countrywide Financial Corp., the largest mortgage lender, cautioned in July.
Sandler's Fitzgibbon noted that benchmark short-term rates have risen 4.25 percentage points since 2004, while oil prices have more than doubled over three years.
``Consumers are stressed,'' he said.
This stress may lead to more bankruptcy filings, which government data released Tuesday show have begun to rise from a 10-year low.
``The amount of consumer credit and mortgage debt outstanding drives a lot of filings and those are rising,'' said Robert Lawless, a University of Illinois College of Law professor.
"When in doubt, empty the clip."
