ShoreBank Corp. in Chicago is wading into the subprime crisis with a plan to refinance thousands of subprime home loans into traditional mortgages.
The program is designed to extend loans to up to 2,000 homeowners whose adjustable-rate mortgages will reset soon and who may be at risk of losing their homes. The $2.2 billion-asset community development bank says that preventing widespread foreclosures in the South Side of Chicago could sustain property values in one of its most important markets.
Characterizing the situation as one requiring urgent action, Joseph E. Hasten, ShoreBank's president and CEO, said in an interview last week the company has begun staffing up for the initiative.
Since late July members of its mortgage team have been appearing at churches and civic events in Chicago to notify homeowners with subprime ARMs that are due to reset within the next 18 months about the program.
By refinancing the borrowers into traditional mortgages, ShoreBank can lower their interest rates by 1 to 3 percentage points, saving them roughly $500 a month and helping them remain current on their loans, Mr. Hasten said.
"I don't want to stand still as the effects of the subprime makes its way through our neighborhoods," he said.
Over the course of a year the foreclosure inventory rate for subprime loans increased 196 basis points, to 5.52% as of June 30. Over that same period the foreclosure inventory rate for prime loans increased 18 basis points, to 0.59%, according to the Mortgage Bankers Association.
Allen Fishbein, the housing and credit policy director for the Consumer Federation of America, called the problem unprecedented.
"In the past people got into delinquency and foreclosure problems largely through changes in income — they got laid off from their job or some intervening life catastrophe," Mr. Fishbein said. However, the subprime ARMs "have added another layer of complexity and have now posed risks to borrowers that in the past would not have found themselves in this situation."
Mr. Hasten, a former U.S. Bancorp executive who joined ShoreBank in May, estimates that there are 10,000 subprime borrowers in Chicago who are in danger of foreclosure, and that three-fourths of them have strong enough credit profiles to qualify for traditional, fixed-rate loans.
"We can't save everybody," he said. "But we think there is a large number of these 10,000 homeowners that can qualify for a 30- or even a 15-year fixed rate."
ShoreBank will refinance only responsible, creditworthy borrowers, and the effort will not lead to higher levels of nonperforming assets, Mr. Hasten said.
"We know how to say no when it is appropriate," he said. "We are not going to sacrifice credit quality."
Mr. Fishbein agreed that there are a number of subprime borrowers that could qualify for traditional mortgages. "Some portion of troubled borrowers out there could easily refinance into cheaper-rate loans," he said
ShoreBank's is the latest effort to help subprime borrowers avoid foreclosure. In April the Neighborhood Assistance Corp. of America said it had developed a program to refinance $1 billion of subprime mortgages. Shortly thereafter the government-sponsored enterprise Freddie Mac promised to put $20 billion toward helping such borrowers refinance, and Washington Mutual Inc. of Seattle pledged to refinance up to $2 billion of subprime mortgages.
"I applaud ShoreBank for the leadership that it is showing in trying to find ways to be a responsible lender," said Jeannine Jacokes, the senior policy advisor at the Community Development Bankers Association, a trade association that represents community development banks. ShoreBank's neighborhoods "are important to them, so they feel like it is a critical part of their mission that they go in and try to serve those people."
The initiative would add up to $300 million of loans to ShoreBank's mortgage portfolio, roughly doubling its size. But Mr. Hasten said that the company can handle the growth, since it already has a mortgage infrastructure in place.
"It's not like we are heading into unchartered territory," he said.
ShoreBank has already hired nine additional loan officers for its mortgage unit, which now has 25 employees, and it expects to hire more.
"We will watch the volume [of loans], and we will be ready to add people if and when it grows, and I believe it will," Mr. Hasten said.
The initiative will be funded largely through the high-yield online savings account ShoreBank started offering just last week. The program is designed to attract socially conscious investors throughout the country by offering a 5% annual payment yield on deposits. ShoreBank requires only a $1 minimum to open such an account.
"The deposits we generate from that endeavor will more than support our plans on the mortgage side," Mr. Hasten said.
He said he would prefer to hold the mortgages in its portfolio but will consider selling them to Freddie or to Fannie Mae. Even if the loans were sold into the secondary market, ShoreBank would retain the servicing rights, he said.
"The bank wants to be face to face with these customers," Mr. Hasten said.
Mr. Fishbein agreed that ShoreBank's refinancing effort makes good business sense.
"Many of the problem subprime loans are concentrated in particular communities, and foreclosure therefore affects not just the homeowner but the neighbor and the local community," he said. Because ShoreBank is a "very community-based institution … it comes as no surprise to me that they would recognize that keeping people in their homes, and keeping property values stable as a result, would be very much in their best interest."
