OneCalifornia Bank Viewpoint

OneCalifornia Bank FSB, November 20, 2007 Download PDF

Introductory Comments to Articles about Subprime Mortgages

The mission of OneCalifornia Bank is to provide fair, comprehensive banking services in low-income communities in a financially sustainable manner, while also achieving positive social outcomes for the communities in which we operate. The fall-out from the subprime mortgage problem stands to be devastating for our constituents and communities. We anticipate the collateral damage from mass foreclosures in our market to extend to downward spiraling of sector housing prices, neighborhood degradation, economic slowdown, and the proliferation of many societal ills that have plagued Oakland in the absence of economic vitality. 
 
We have posted two papers regarding two ideas in draft stage. One proposes granting regulatory relief to banks holding distressed mortgages so that they can restructure or refinance them to a viable position without harming their balance sheets or regulator and capital market relations so severely. The other suggests a reason why large foundations or government might have an interest in injecting equity in select mortgages to create affordable housing that helps but does not create a windfall benefit for troubled borrowers.
 
We know that regulatory relief which encourages banks to refinance viable mortgages and that equity infusions which correct loan to value ratios may not touch enough of the affected mortgages to stem this disaster. Of course, many of the affected mortgages were originated by brokers and subsequently securitized so that they are now held by highly disaggregated investors. We believe ultimately any scaled solution will require consolidation with the servicing bank through purchase from the investors. Also, most borrowers will never be able to pay the reset rates and so salvaging mortgages will require broad restructuring of pre-payment penalties and interest payments over the life of the loan, if not actual forgiveness of some portion of interest or fees. 
 
Therefore, in addition to the proposals attached, we would propose creating incentives for banks servicing mortgages in targeted markets to restructure contractual payments with investors and/or to buy those mortgages back with the added tool of foundation subsidies. It would seem better to repatriate these mortgages back to the servicing bank which stands to know the most about the mortgages and borrowers it serves and shored up by outside resources -- in essence creating an economic deal where one previously did not exist -- these mortgages may become more attractive to their servicing banks. 

For instance, foundations trying to preserve the viability of low-income neighborhoods in Oakland might be induced to place certificates of deposits with banks holding Oakland mortgages, but foregoing market rates of interest and allowing the foregone interest to augment interest payments from borrowers in workout. The borrower and bank would need a plan for the ultimate viability of the mortgage over time, but, for that subsidy in the near term, foundations would get to deed restrict those mortgages to create affordable units, as in the other proposal.
 
We face a daunting challenge and think about it a lot because we will not succeed ultimately at OneCalifornia Bank by being an excellent bank in a bad neighborhood. We would relish any opportunity to hear your thoughts on the matter at your convenience.