HBOS warns of sharp house price fall

By Clara Ferreira-Marques

LONDON (Reuters) - Britain's biggest mortgage lender HBOS warned of a sharper fall in house prices and said more of its customers were falling behind on their repayments, sending its shares sharply lower.

HBOS, set to raise 4 billion pounds in a rights issue starting later this month, said on Thursday it expects house prices to fall 9 percent in 2008, having in April forecast a "mid-single digit" drop.

As recently as February HBOS -- parent of Halifax and Bank of Scotland -- was forecasting prices to be flat this year.

The bank said a projected 1.03 billion pound asset writedown -- increased by 58 million pounds from its April estimate -- would hit its first-half results.

But it said it was passing on more of its higher costs through better pricing on new lending as a third of its mortgage book moves off fixed-rate or discounted deals.

It forecast a slower decline in margins in 2008 than in 2007, before margins stabilise or improve next year.

Its shares closed down 6.9 percent at 296.75 pence, underperforming a 0.8 percent fall in the FTSE 100 index, as the worsening economic outlook and rising arrears overshadowed reassurance that trading continued in line with expectations.

"The statement demonstrates they are managing the business defensively. It shouldn't be a surprise to anyone -- arrears, house price deflation, margins," analyst Mike Trippitt at Oriel Securities said.