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Beware This New Warning on Housing

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London-based HSBC Holdings (NYSE: HBC  ) is willing to admit what many banks may not be capable of even recognizing: U.S. housing is still weakening. HSBC's first-quarter earnings included an impairment charge of $400 million to reflect "a change to underlying assumptions" about the U.S. economy and housing market. Noting that HSBC always expected a "very slow" recovery, the CFO stated, "we expect it to be slower now."

It must be easier to fess up when North America accounts for only about 15% of revenue and 2% of pre-tax profit. That makes me want to delve into what HSBC has to say, particularly in light of the recent surprisingly large decline in home values. According to Zillow, in the first quarter, U.S. home values posted their largest decline since late 2008, falling 3% in the quarter and 1.1% in March.

It was just last month that Bank of America's (NYSE: BAC  ) chief accounting officer described a 4% decline in home prices this year as a "shock" scenario. Oh, and he said such a scenario could result in another $1.5 billion in charges this year. But hey, what's another $1.5 big ones compared to the $2.9 billion pre-tax loss B of A reported for the last year?

There are more than a trillion dollars of residential mortgages sitting on the books of just a handful of large U.S. banks, including B of A, Wells Fargo (NYSE: WFC  ) , Citigroup (NYSE: C  ) , and JPMorgan Chase (NYSE: JPM  ) . That's a lot of money susceptible to the same falling housing prices and economic conditions that convinced HSBC its mortgages are worth $400 million less than it thought just three months earlier.


Residential Mortgages ($M)

Total Capital


Residential Mortgages % of Total Capital

Wells Fargo $326,384 $147,100 222%
HSBC Holdings $268,681 $167,555 160%
Bank of America $274,536 $229,094 120%
Citigroup $151,469 $162,219 93%
JPMorgan Chase $134,284 $182,216 74%

Source: Capital IQ, a division of Standard & Poor's.

Foolish takeaway
Early in 2007, HSBC was famously among the first to call the U.S. subprime crisis. That lends weight to its concern about weakness in U.S. housing. The big U.S. lenders are exposed to the same market dynamics, whether or not they'll admit it to investors or themselves. What's more, there's so much wiggle room nowadays in how banks value loans that you can't even trust their historical financials.

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Fool contributor Cindy Johnson does not currently own shares of any stock in this story. No way. The Fool owns shares of Bank of America and also holds a short position in the stock in a different portfolio. The Fool owns shares of JPMorgan Chase and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On May 13, 2011, at 7:25 PM, ronbeasley wrote:

    Wells Fargo is Warren Buffett's second largest holding, and he is their largest shareholder. He added aggressively to his sizable holding in the fourth quarter at current price levels. Billionaire hedge fund managers David Teppr and John Paulson also added to their large Wells Fargo holdings in the fourth quarter. Wells is Prem Watsa's largest holding.

    You can follow them, or Cindy Johnson, who evidently thinks she sees things the best investors in the world are missing.

    Wells is the largest equity holding in my personal and client portfolios. "Be greedy when others are fearful."

    Ron Beasley

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