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Chicago Bank Takes Action Against Subprime Housing Crunch

October 24, 2007 at 6:25 PM EDT
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ELIZABETH BRACKETT, NewsHour Correspondent: The boarded-up homes tell the story: Foreclosures in largely minority neighborhoods on Chicago’s south and west sides have tripled since 2004. But the people in this neighborhood may have a second chance.

MICHELLE COLLINS, ShoreBank: We are here tonight to tell you that ShoreBank is committed to the people of these communities. And if you’re in a situation where you have a mortgage that you didn’t know what kind of a mortgage it is, or if it’s adjusting, or if it’s a high-cost loan, we’re here to help you with that.

ELIZABETH BRACKETT: Loan director Michelle Collins meets with community groups several nights a month to let them know about ShoreBank’s new rescue loan program to refinance mortgages in danger of default.

ShoreBank identified 10,000 homeowners in their service areas who have subprime loans with rates due to adjust up in the next 18 months. The bank says some with subprime loans are just in way over their heads with loans that cannot be successfully refinanced. Though Collins believes at least 20 percent of the 10,000 could have qualified for a fixed rate loan, but were sucked in by enticing offers from mortgage brokers.

MICHELLE COLLINS: So if someone said to you three years ago, “Oh, I could offer you 1 percent interest,” you might say, “Really, 1 percent interest?” Maybe you didn’t ask the question, “Is it fixed?” So if a normal bank offers you 5.50 percent, which is an excellent rate, you might say, “Fixed,” you might say, “Oh, I don’t care if it’s adjustable. Let me take the 1 percent.”

That happened to city worker Rudy Villareal. Two years ago, he, his wife, Edith Hidalgo, and their 10-year-old son fell in love with this four-bedroom house on Chicago’s west side. First-time homebuyers, they didn’t realize the consequences of getting a loan that was set to adjust up to a 12 percent interest rate after two years.

EDITH HIDALGO, Homeowner: When you go in there, and you’re telling them your dream, you’re, like, showing them everything you want. So I think they take advantage of you by saying everything is going to be well. This is not what you can do right now with the loan that’s not the best, but in two years, you’re going to change the mortgage, and it’s going to be way better.

But you got the house. That’s what you want, the house. So you’re like, “Yes, that’s what I want, the house.” And two years later, it’s like, “How did I get into this?”

ELIZABETH BRACKETT: Terrified that he would lose the house, Villareal turned to his local alderman, who told him about ShoreBank’s rescue loan program. Working with the family’s finances, ShoreBank was able to offer a fixed-rate 30-year loan at 6.75 percent.

RUDY VILLAREAL, Homeowner: It means peace of mind, at least. You have a house to live in, and that’s your dream. It’s the American dream to have a house, you know?

ELIZABETH BRACKETT: And it’s now possible.

RUDY VILLAREAL: Now it’s possible. It’s very possible, yes.

MICHELLE COLLINS: Can I ask about the mortgages — are they fixed rates or are they adjustable?

MARIA TRAVIS, ShoreBank: Well, it was an adjustable rate.

ELIZABETH BRACKETT: The rescue loans, like all ShoreBank loans, are carefully vetted by a series of committees. More than just credit scores are considered.

MARIA TRAVIS: If we do nothing, there will be a struggle now with increases of the adjustable rate. So us refinancing, they will not have to pay that increase and then they won’t — you know, they’ll fall into financial hardships. They will not be able to pay the adjustable rate and may be in line for foreclosure.

What we’re doing is taking them out of the two adjustables and putting them into one fixed rate. And they will not see the payment shock.

MICHELLE COLLINS: Right.

MARIA TRAVIS: You know, the loan officer is comfortable with the security of her job and comfortable with — you know, they went through some financial hardships with the medical and with the job change. And it looks like they’re, you know, making the right choices, going down the right track to making some right financial decisions.

ELIZABETH BRACKETT: At a recent staff meeting, Collins had good news about the first 30 applicants for bank president Joe Hasten.

MICHELLE COLLINS: We closed 13 of those already. The rest are kind of somewhere in the middle. We’ve only denied about four of them, so, so far, we’re doing very well. We are building capacity in order to service 10,000 borrowers of this nature.

JOSEPH HASTEN, CEO, ShoreBank: Well, if you get all 10,000, I’ll be delighted.

ELIZABETH BRACKETT: And more good news: There have been no foreclosures on ShoreBank’s loans this year. Collins thinks one reason is that, unlike some banks which sell their mortgages to secondary institutions, which then bundle and sell them to investors, ShoreBank’s loans are rarely sold.

MICHELLE COLLINS: If you don’t have the relationship, if you just sold it off, if something goes wrong, and you have to call 1-800-FLORIDA to find out, “Can I talk to someone?” And they’re saying, “No, you can’t talk to anybody. Where’s the money? Where’s the money? Where’s the money?” That’s a problem.

ELIZABETH BRACKETT: The rescue loan program fits right into ShoreBank’s history. Founded by four idealistic young bankers in 1973, it was the country’s first community development bank. From the beginning, the bank had a double bottom line: to make a profit and to invest in and develop the communities it served.

Founder Mary Houghton says many skeptics in the early days didn’t believe a bank with a mission to develop poor neighborhoods could also make a profit. Thirty-four years later, with a healthy $2.1 billion in assets, Houghton thinks the bank’s rescue loan program is just the kind of new challenge the bank should take on.

MARY HOUGHTON, ShoreBank Founder: I think it’s a great plan, and I hope we reach, you know, genuinely thousands of people. I do think it is sort of similar to the original bravado of the bank in the ’70s, when redlining was so prevalent, and we just, as young bankers, said we were going to change it. So I think this is a great step up for the bank.

ELIZABETH BRACKETT: To finance the rescue loan program, the bank’s holding company plans to raise $52 million. And the bank has introduced a new product for socially conscious investors.

JOSEPH HASTEN: We did launch last week an online electronic high-yield deposit savings account product that we hope will cause us to raise core deposits at a rate which will support this increased lending.

ELIZABETH BRACKETT: ShoreBank hopes bigger banks will follow its lead and begin to refinance their troubled loans.

MICHELLE COLLINS: I can tell you, I’ve been a lender for a number of years. I don’t enjoy driving up and down blocks and seeing boarded- up homes. I’m thinking to myself, “Look at that.” And then if you live next door, again, whether you have a subprime loan or not, your home is impacted when the house next door is for sale.

Now, you put three or four or five of those on a block, you have devastated the block. Somebody has to step up. We are stepping up, and we encourage others to step up with us. We encourage the regulators to encourage other banks who have these subprime loans to modify these loans so that we can curb and reduce the projected number of foreclosures.

ELIZABETH BRACKETT: Collins says the Chicago area is only about a third of the way through the subprime loan crisis. Another two-thirds of the subprime loans will reset at higher rates within the next two years.

Debate over subprime help

Michael Calhoun
Center for Responsible Lending
The first thing is, folks need to talk to a trusted adviser and find out, do they have one of these mortgages with this built-in payment shock? If they do, they need to get to a trusted counselor.

JIM LEHRER: Jeffrey Brown takes the story from there.

JEFFREY BROWN: How to respond to the subprime crisis is being debated around the country these days. The nation's largest mortgage provider, Countrywide Financial, has just announced it will refinance or modify $16 billion in loans to help some struggling homeowners. In Washington, including at a hearing just today, Congress is looking at several proposals on new industry regulations and help for borrowers.

Two people involved in this debate join us now. Both were at today's hearing. Mike Calhoun is the president of the Center for Responsible Lending, a consumer advocacy group. Bill Himpler is president of the American Financial Services Association, which represents many mortgage lenders.

Welcome to both of you.

BILL HIMPLER, American Financial Services Association: Thank you.

JEFFREY BROWN: Mr. Calhoun, when you bring it down to neighborhood level, as Elizabeth Brackett just did, what is the most important thing you think needs to be done to help borrowers in trouble right now?

MIKE CALHOUN, President, Center for Responsible Lending: There are millions of families facing mortgage payment increases like the Chicago couple. And the real surprise for people is that these payment increases, which are usually 30 percent to 50 percent -- so if you were paying $1,500 a month, you would suddenly owe over $2,000 a month -- those payment increases come even when market rates don't go up.

They were built-in payment shocks in the mortgages that most borrowers didn't realize. So the first thing is, folks need to talk to a trusted adviser and find out, do they have one of these mortgages with this built-in payment shock? If they do, they need to get to a trusted counselor.

You can go to a HUD-certified counselor. HUD has that on their Web site. One of the things they actually need to be careful of is there's a cottage industry of unscrupulous folks who try to take advantage of people facing foreclosure, and come in, and promise them the moon, and often offer them even a worse product.

JEFFREY BROWN: From the Financial Services Association perspective, what should be done right now for those people?

BILL HIMPLER: I think Mike has really hit on it. When anyone faces foreclosure, it's not good for the family that's facing the possible foreclosure, for the community, or for the lender. We lose money when folks go into foreclosure, so we are undertaking a number of initiatives with the likes of NeighborWorks, a new initiative that the administration called for industry to partnership with them on, called Hope Now.

A lot of these are outreach efforts. There's still kind of a stigma about reaching out to your lender if you think you might be in trouble. We encourage folks to do that.

Possibility of modifying loans

Bill Himpler
American Financial Services Association
We are thrilled to death with the announcement out of Countrywide today, one of our member companies. Our industry is committed to loan modifications wherever possible.

JEFFREY BROWN: Excuse me. But if you reach out, is there the possibility of modifying your loan, of resetting your loan, I think it's called?

BILL HIMPLER: Absolutely.

JEFFREY BROWN: Is that what we're talking about specifically to help people?

BILL HIMPLER: Very much so. We are thrilled to death with the announcement out of Countrywide today, one of our member companies. Our industry is committed to loan modifications wherever possible.

And the first step of that is, on our part, to reach out to potentially vulnerable customers to assess with them and work with community groups, like the ones that were in the piece just now, to make sure that folks are getting into a modification that makes sure that they have the ability to repay the loan.

JEFFREY BROWN: I don't know if you've had a chance to look yet at the Countrywide announcement today. That or in general, do you see the industry stepping up and responding effectively and quickly?

MIKE CALHOUN: We are hopeful with the Countrywide announcement, but there are some structural obstacles to making that happen. First of all, the Countrywide announcement represents a change. Only three months ago, Countrywide was still writing and making more of these mortgages that have these built-in payment increases. They were quite profitable for the industry.

And in their most recent report last month to investors, Countrywide noted that they had not engaged in any significant modifications of interest, so this is a big change. And we're hopeful in Countrywide's practices.

Looking at it on the big picture, one of the problems is most of these loans are not owned by the lenders anymore. They were sold by the lender who made the loan quickly into the secondary market. And it's much harder to do modifications there.

A lot of the loans have second mortgages that make that hard, and a lot of the security owners object to modifications of the mortgages. And so we believe most borrowers will not get help unless there's intervention in two specific ways by Congress.

First is, these types of modification efforts ought to be required for lenders before they can go to foreclosure. They ought to have to try to modify before they file for foreclosure.

Requirements for borrowers, lenders

Michael Calhoun
Center for Responsible Lending
Congress needs to provide relief for borrowers in bankruptcy. Currently, surprisingly, your home is the only loan in bankruptcy where you cannot get relief from the bankruptcy judge.

JEFFREY BROWN: OK, stop on that one. Let's get a response. A requirement that you'd have to do that?

BILL HIMPLER: Well, from our vantage point, what we're looking for is flexibility. We think that providing as many options as possible for both the lender, the community groups that we partner with, as well as the borrower is the best way to ensure that they get into the product they need.

We think that the requirement to require foreclosure mitigation is, although appealing on its face, is a little tough to achieve in effect. As Mike correctly pointed out, you've got a number of investors who are overseas that do make it difficult in certain instances for us to get to loan modifications. But we can look for other venues, other opportunities to help out the borrower.

JEFFREY BROWN: What was your second key point?

MIKE CALHOUN: Well, the second point would be that Congress needs to provide relief for borrowers in bankruptcy. Currently, surprisingly, your home is the only loan in bankruptcy where you cannot get relief from the bankruptcy judge. If you own a vacation home with a mortgage on it, if you own even an investment property with a mortgage on it, you can go to the bankruptcy court and say, "Please modify this loan in a way approved by the court. For example, give me more time to pay it off." We think the bankruptcy law should be narrowly changed to allow that same option for borrowers.

Relief for homeowners facing resets

Bill Himpler
American Financial Services Association
We are going to face a number of resets through the rest of this year and into the first part of next year. So we're happy to join forces with groups like Mike's to see wherever possible it is that we can provide relief to homeowners facing resets.

JEFFREY BROWN: Yes, this is on the table I know in Congress and being discussed, whether a bankruptcy judge could step in, I guess, and reset the loan.

BILL HIMPLER: Well, we're already dealing with a credit market where liquidity is pretty tight. We believe that opening up the bankruptcy code to do this sort of cram-down, if you will, by a bankruptcy judge that's not a party to the transaction will create uncertainty in the very market we're trying to infuse liquidity into. And an investor may be more reluctant if he doesn't know who it is that would be putting a loan modification into place in the first instance.

JEFFREY BROWN: Just a bottom line here, in the minute we have left, do you see, as in Elizabeth Brackett's piece that we're talking about, that it's getting worse in a place like Chicago? Do you see this expanding over the next few years?

BILL HIMPLER: I think that the reset issue that was talked about in the piece earlier, we are going to face a number of resets through the rest of this year and into the first part of next year. So we're happy to join forces with groups like Mike's to see wherever possible it is that we can provide relief to homeowners facing resets.

JEFFREY BROWN: And I'll ask you, and I need a very brief answer. Do you see it getting...

MIKE CALHOUN: It will get much worse. Just in the next year, over three million borrowers will be facing this. And projections are that as many as half of them could end up losing their homes.

There was a recent survey by the industry that showed that only 1 percent of these loans to date had received these kinds of modifications. And it's noted in the story, this hurts all families in the neighborhood, even ones who don't have a mortgage. If the house next door to you is foreclosed and boarded up, it affects your house and your neighborhood.

JEFFREY BROWN: All right. Mike Calhoun, Bill Himpler, thank you both very much.

MIKE CALHOUN: Thank you.

BILL HIMPLER: Thank you.