OneCalifornia Bank Viewpoint

OneCalifornia Bank, FSB, November 20, 2007 Download PDF

Home Mortgage Foreclosure Prevention Partnership

OneCal Bank urgently seeks to help minimize the expected wave of foreclosures expected among non-confirming sub-prime mortgages in its target markets. OneCal Bank proposes to reach out to its community in search of homeowners at risk of triggering foreclosure on subprime mortgages. After an analysis of the financial situation of the homeowner and their ability to carry said mortgage, OneCal would propose to eligible borrowers to restructure their mortgage in partnership with an equity provider so that the loan to value ratio comes back into compliance with convention (70 to 80 percent) so long as the borrower’s family income can support the anticipated mortgage payments. In the absence of such balance, OneCal proposes to extend or find bridge loans to enable non-qualifying borrowers the time to pursue an orderly sale of their property.

To find willing equity partners, OneCal would partner with large foundations (including Fannie and Freddie Mac Foundations) whose target communities correspond to ours, with financial institutions holding such mortgages at risk of foreclosure, and with large net worth individuals who might be interested. The equity partner would agree to inject equity into the mortgage in exchange for knowing they are preventing an otherwise costly foreclosure and also in order to deed restrict the home so that, over specified time periods, it could not be sold for more than a reasonable percentage over the previous purchase price. In this way, the equity partner would be creating a unit of affordable housing in markets where there is severe shortage and preventing any undue windfall to participating borrowers even while they still build wealth through homeownership. These affordable units could be created in ways and locations that normal permit and approval processes or economics might otherwise prevent and be seamlessly integrated into non-subsidized housing communities.

The equity position could take the form of a second, non-interest bearing mortgage, actual percentage ownership of the property, or any other tried and true method of joint ownership that meets the equity partner’s objectives. On the books of foundations, this would create an asset rather than an expense through granting, and possibly qualify as a program related investment at a time when foundations are under pressure to show that their marshalling of resources will result in maximum impact toward their mission and goals.

Financial institutions that own the subject mortgage could participate in this partnership by either selling the asset at a discount (a "haircut") to OneCal Bank or by keeping the asset and relaxing terms that might otherwise produce foreclosure. Even at a discount, the originating financial institution would come out ahead of anticipated proceeds from foreclosure. If OneCal buys the asset, it might sell the underlying mortgage in the secondary market. In any event, OneCal Bank, in keeping with its mission, would take on the servicing of the mortgages in its target communities in order to shepherd the borrower through the necessary financial literacy, restructuring, and monitoring going forward.

OneCal’s role in the home mortgage foreclosure prevention partnership would therefore be to reach out to at-risk homeowners in advance of inevitable foreclosure, to identify qualifying borrowers for the program, to broker the deal among the required partners, to help the borrower to realign income and obligations, to service the mortgage, to acquire and then either hold or sell the mortgage, and to walk through life with the borrower and, possibly, their successor on chain of title. With the deed restriction requiring sale at affordable levels to other low- to moderate-income buyers in the community, it is likely that OneCal would bring or adopt the subsequent borrower if credit risk thresholds were met. Additionally, OneCal Bank could serve as an example to other CDFIs in other markets, demonstrating how to perform a similar role locally.