America’s mortgage woes are spreading from home loans made to high-risk borrowers to encompass medium-risk recipients too, with potentially far-reaching consequences for US homeowners and their lenders.

Problems with risky sub-prime mortgages have been a focus for lenders, particularly HSBC, which is expected to write off about $11 billion (£5.6 billion) — much of it relating to this area — when it reports its annual results today.

However, lenders in the US face a new threat as defaults on the fast-growing “Alt-A” mortgages, medium-risk policies that stand between sub-prime and prime loans in the credit rankings, are also on the rise.

They have doubled to about 2 per cent in the past year, while 5 per cent of the two million such mortgages issued in 2006 will eventually end in foreclosure, according to David Liu, a mortgage analyst in UBS.

HSBC, Europe’s largest bank, is facing a crisis in its US sub-prime business and this has triggered a cull in the division’s senior management. Rising bad debts forced HSBC to issue its first profit warning in the run-up to its results announcement.

However, HSBC is also a lender in the “Alt-A”, or near-prime market, and while the bank played down the impact of its exposure in that area, the spectre of deteriorating credit quality across more of the US market is likely to be unsettling.

Federal regulators have become so concerned with the state of the sub-prime market — in which a fifth of mortgages issued in 2005 and 2006 are expected to end in repossession — that they are preparing to clamp down on home-loan providers’ lending policies.

The value of new Alt-A mortgages issued reached $400 billion in 2006, compared with just $85 billion in 2003, according to Inside Mortgage Finance. Mr Liu said: “The issues with sub-prime mortgages are clearly spreading and will cause particular problems for the investment banks whose involvement in higher-risk loans has become increasingly significant in recent years.”

As well as lending mortgage providers’ money to issue new home loans, investment banks such as Goldman Sachs, Credit Suisse and Bear Stearns often buy existing mortgages and package them as bonds backed by their interest payments.

The banks could potentially make huge losses on the loans they have made as well as the mortgage-backed bonds they have underwritten as the number of defaults jumps.

Adam Compton, analyst with RCM Investors, said that prime mortgages are far safer because they are made to clients with higher credit ratings and they require proof of income. He said: “The danger is that increasingly lax lending practices on sub-prime and Alt-A mortgages of the last two to three years has led to an artificial demand that could lead to an increase in losses among prime mortgages as well.”

By lending to people who could not really afford repayments, mortgage providers lift prices across the market, Mr Compton says. So, an expected fall in the value of cheaper properties as defaults on risky loans surge will drag down costlier houses’ prices. This will make it harder for borrowers to keep up payments by refinancing mortgages if they lose their job.

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