A warning this week from HSBC Holdings PLC that it is raising its provision for bad U.S. loans is turning attention to the health of the U.S housing market and the practice of higher-risk mortgage lending.

HSBC Holdings said Thursday it was boosting its bad-loan provision by 20 per cent to $11 billion US — a move expected to eat into the bank's earnings.

Michael Geoghegan, CEO of HSBC, vowed a management shakeup and said the bank will tighten its lending policies.

In 2003, HSBC bought Household International Inc. for $1.5 billion US to get into the hot U.S. housing market. Household International makes loans to customers with poor credit — what's known as the subprime lending market.

However, rising interest rates in the United States in recent months are now making it difficult for more people to pay their mortgages, leading to more defaults.

A competitor of HSBC in the subprime mortgage market — New Century Financial Corp. — said Wednesday that it expects to lose money in the fourth quarter due to rising defaults.

Earlier this week, Christopher Dodd, chairman of the U.S. Senate's banking committee, said American mortgage lending practices were "out of balance."

Adjustable-rate mortgages worrisome

During congressional hearings on subprime mortgages, Dodd, a Democrat from Connecticut, said an adjustable-rate mortgage, called a 2-28 ARM, was of particular concern. The mortgage allows borrowers to make small payments in the first two years of the 30-year term of the loan.

Dodd said about 80 per cent of U.S. subprime loans are 2-28 ARM loans. And, he said, about 10 per cent of subprime loans were more than 90 days late.

Dodd, citing figures from RealtyTrac Inc., said 2006 foreclosures were up 42 per cent over 2005.

While the subprime loan market has been growing in the United States, the situation is different in Canada, where banks are not heavily involved in that type of lending.

However, some economists here have suggested the sector could grow shortly due to its profitability.

While subprime lending was in the spotlight this week, there was another indicator of weakness in the U.S. housing market: Toll Brothers, the biggest builder in the luxury home market, warned that revenues are expected to fall by 19 per cent in the first quarter.

The company also said its cancellation rate came in at 29.8 per cent. That was down from 36.9 per cent in the previous quarter, but still much higher than the company's seven per cent historical average.

With files from the Associated Press