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Sub-Prime Lending Stocks Hit Hard By HSBC's Surge in Bad Debts

Shares of subprime U.S. mortgage lenders took a hard hit Thursday after Britain's HSBCHoldings warned that bad debts from lower quality loans in its U.S. mortgage lending business would hurt results at the world's third biggest bank.

Though financial stocks also were hurt by the news, most analysts think that the troubles in sub-prime lending, or loans to people with poor credit records, wouldn't spread to other sectors of the mortgage market.

"It's not clear yet that this is going to hit the prime mortgage lenders," CNBC's Bob Pisani said on "Morning Call." "Some people are still quite bullish on the housing industry."

But within the sub-prime mortgage industry itself, some analysts see an ongoing meltdown.

"Too Much Easy Money"

"We're just seeing the downside of too much easy money being given to too many borrowers who probably shouldn't have gotten loans in the first place," Moneyandmarkets.com real estate analyst Mike Analyst told CNBC.

Shares New Century Financial, the No. 2 U.S. subprime
mortgage lender, registered their biggest decline in nearly 8-1/2 years, falling more than 27%.

After the bell on Wednesday, New Century forecast an unexpected fourth-quarter loss. But HSBC's warning further undercut the confidence of investors, further pummeling the stock and those of its peers.

Shares of Countrywide Financial, the fourth-largest sub-prime lender, slid Thursday. Accredited Home Lenders Holding , another sub-prime mortgage specialist, dropped as well.

Some investors are betting that sub-prime mortgage shares have hit a trough, speculating that Thursday's hits may mark the final reckoning for company missteps and other factors that are now in the past. Sub-prime lenders are eating bad loans they made last year and the year before, said Pisani, who also noted that lending standards were tightened in 2006.

"A lot of people are starting to look at these stocks--they've been beaten down--and pick at them a little bit," Pisani said.

Overcoming Bad Debt

While acknowledging the scope of sub-prime lenders' troubles, Promontary Financial Group partner Elizabeth McCaul said the firms will overcome their bad debt woes if they focus more on qualitative analysis and become less reliant on mathematical models.

"We've been through a period of some complacency," McCaul said, adding that it's time "to get back to back to the bread and butter, looking at what the lending practices are, how the originations are being made."

HSBC, Europe's biggest bank, said its charge for bad debts would be more than $10.5 billion for 2006, some 20% above analysts' average forecasts, due to problems in its U.S. mortgage book.

HSBC said that slowing house price growth was being reflected in accelerated delinquency trends across the U.S. sub-prime mortgage market, particularly in more recent loans.

Analysts had expected HSBC's 2006 loan impairment charge to be $8.8 billion, according to the average of 11 analysts' forecasts, the bank said. That figure is now expected to be about $1.8 billion higher, or near $10.6 billion.

The problems follow warnings from experts throughout last year that a slowing U.S. economy and rising borrowing costs would lead to an increase in bad loans by homeowners. HSBC already warned about problems in its U.S. mortgage business on Nov. 13 and said three weeks later that the housing market had deteriorated further.

A series of smaller sub-prime lenders have closed down in recent months, including Mortgage Lenders Network USA, once the 15th-largest sub-prime mortgage lender, and Wachovia's EquiBanc Mortgage unit.

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