Community banks did not create the subprime mortgage mess that is leading to waves of foreclosures, but one prominent banker believes they can be part of the solution.
James Montgomery, the former chairman of what was once one of California’s largest banking companies, says he wants community banks to take an active role in getting foreclosure-bound homeowners into fixed-rate mortgages by identifying loans that are in default and negotiating with lenders or servicers to buy the mortgages at a discount. Under his plan, the community banks would then turn around and make new loans at market rates so that borrowers could stay in their homes.
“We then end up with loans by the people that should have made them in the first place,” said Mr. Montgomery, former chairman of Great Western Financial Corp. in Los Angeles (which was sold to Washington Mutual Inc. in 1997) and now the chairman of two affiliated community banks, El Paseo Bank in Palm Desert, Calif., and Frontier Bank in Park City, Utah. “For the banks, we end up with a good loan that we can sell to Fannie Mae or Freddie Mac.”
He said his “bottom-up” plan sharply differs from the “top-down” approach the Bush administration laid out this month to freeze interest rates on certain adjustable-rate loans for five years.
“I think there were good intentions,” he said of the president’s plan. “But it’s too broad-brushed and is not very practical.”
So far, though, Mr. Montgomery’s plan it is not generating much interest among community banks because no real evidence shows that scouring the marketplace for troubled loans would be worth their while. And even Mr. Montgomery admits that servicers or lenders that hold the loans have little motivation to sell them at a discount.
Still, he said, he believes banks need to act quickly to head off what he believes will be “a national crisis.”
Under his plan, community banks would gather lists of homes in their markets that are in default and from there determine which homeowners could afford their payments if the mortgage terms were modified. The banks would then assess the market value — probably lower than when the owner first bought the home, given current residential real estate trends — find out how much the buyer can afford and then approach the lender or servicer about buying the loan at a discount.
Mr. Montgomery said that, though his own banks have tried this method, they have hit a “logjam” because the master servicers have either been hard to reach or unwilling to sell at a discount.
Karen Thomas, executive vice president of government relations for the Independent Community Bankers of America, said community bankers might be more willing to embrace a program like Mr. Montgomery’s if they knew the master servicers would be receptive.
“There are a lot of pieces that have to work here,” she said. “Without receptivity from the master servicers, there is a damper on the whole feasibility on an approach like this.”
One community bank is trying to stave off foreclosures in its market, but it is taking a more traditional approach.
The $2.2 billion-asset ShoreBank, a community redevelopment bank in Chicago, has identified 10,000 homeowners, mainly on the city’s south and west sides, with adjustable-rate mortgages that have reset or soon will, said Michelle Collins, the senior vice president of mortgage lending.
Since September, the unit of ShoreBank Corp. has refinanced $6 million worth of loans into 30-year-fixed loans and has another $4 million in the pipeline, she said.
David Kaiser, the chairman and chief executive of Granite Community Bank in Granite Bay, Calif., said community banks would like to be more active in bailing out borrowers stuck in high-rate mortgages but that doing so can be easier said than done.
He recalled a customer who last year turned down an offer of a traditional mortgage and opted for a negative amortization loan from a mortgage company. The customer returned to Granite last month, Mr. Kaiser said, seeking to refinance.
“We couldn’t offer her anything,” he said. “She had no equity in the house, and we couldn’t refinance.”
