Last year, Rudy Villareal was living the nation's housing crisis. His two subprime, adjustable-rate mortgages were due to reset at 12 and 13 percent. At those rates, losing his family's first home was an all-too-real possibility.
But Mr. Villareal, a City of Chicago laborer with a wife and 11-year-old son, got a home-saving break through a for-profit program financed by socially minded depositors. Chicago-based ShoreBank saw his solid payment history and put him in a 30-year, fixed-rate mortgage at an affordable 6.75 percent.
"Everybody else wanted me to have perfect credit, but it doesn't always work that way," he says. "Now I'm not stressed out to the point of, 'What am I going to do next?' "
While millions of Americans are struggling to hold onto their homes in the midst of a housing-finance crisis, a handful of mission-driven banks are riding to the rescue.
For now, they are offering programs that will help just a few pinched homeowners and neighborhoods on the precipice of blight.
"Most banks are running as fast they can away from this issue," says David Reiling, CEO of Sunrise Community Banks, a family of three community-development banks trying to help improve troubled neighborhoods in Minnesota's Twin Cities area. "We're running into the fire."
The rescuers are arriving none too soon. This month, the Mortgage Bankers Association reported that 8.8 percent of mortgage loans were either past due or in foreclosure at the end of March. That rate – the highest since the association started keeping track in 1979 – represents 4.8 million loans. More than 1 million of those loans are already in foreclosure, and that number is expected to climb as adjustable-rate mortgages reset at higher rates in the months ahead.
The problem's scale is too vast for a sweeping remedy to come from just a few community-development banks, which are for-profit institutions that cater to underserved communities.
Nevertheless, on a micro scale, this banking niche is plugging gaps in a federal relief program and enabling at least a few hundred homeowners and perhaps more to keep roofs over their heads.
The HOPE NOW Alliance, a federally supported program that freezes certain borrowers' interest rates for as long as five years, has observers saying homeowners need assistance that goes further. According to an April report from the Washington, D.C.-based Pew Center on the States, HOPE NOW "excludes borrowers who have already defaulted on their loans and are already on track to lose their homes in foreclosure." It also excludes borrowers whose rates reset before this year.
In most cases, homeowners at risk of foreclosure need their loans permanently modified to include affordable fixed rates, says Elizabeth Renuart, staff attorney for the National Consumer Law Center, a Boston-based advocacy group with a focus on consumer-credit issues.
"These are adjustable-rate mortgages, so even if there's a moratorium [on rate increases] and there's a fixed rate for a temporary period of time, there's going to be a reckoning at some point," Ms. Renuart says.
Where possible, community-development banks are vying to fill this void. For instance, in Milwaukee, where courts are hearing dozens of foreclosure cases every day, Legacy Bank quietly began refinancing loans in April for a handful of individuals identified through an informal referral network that includes churches and schools.
"If we announced this program, it would be like driving a bus up to the front door of the bank" because demand would be overwhelming, says Margaret Henningsen, the bank's vice president and founder.
These new Legacy customers are primarily African-Americans and Hispanics who fell behind on payments only after their loans reset at higher rates. They're not bad risks, Ms. Henningsen says, because they had always paid on time when their monthly payments were a manageable size. Now if they pay on time over a 12-month probationary period with Legacy, they become eligible for a 15- or 30-year fixed-rate mortgage.
To keep rates and payments low for new borrowers, Legacy pays most depositors a modest 2 percent on certificates of deposit. (Jumbo CDs in excess of $100,000 can earn as much as 3 percent.) Legacy aims to raise $15 million in deposits for the rescue program because, in terms of need, Henningsen says, "this is just the tip of the iceberg."
ShoreBank in Chicago is troubleshooting on a larger scale. The bank issued 90 Rescue Home Loans worth $16.6 million to homeowners between October and April. It aims to issue another 510 rescue loans before the end of 2008.
Those rescued are often ineligible for refinancing elsewhere. That's because they're as many as 90 days delinquent on their current payments, and/or they have mediocre credit scores. But ShoreBank isn't worried because these borrowers are still qualified, says Michelle Collins, director of mortgage lending. They just got in trouble when their monthly payments ballooned to unsustainable levels.
"This is a crisis," Ms. Collins says. "I have a mandate to rescue as many homeowners as possible, [and] we're limited primarily by a lack of capital."
Depositors can fund the program through three ShoreBank products: an online savings account, an IRA, or a CD. They also support a loan program for energy-efficient housing rehabilitation in low- to moderate-income Chicago neighborhoods. Each of these banking products is designed to pay competitive rates. [Editor's note: The original version did not clearly list all methods depositors can use to support ShoreBank's rescue program.]
Other community-development banks are tackling other aspects of the housing crisis. Sunrise Community Banks, for instance, has targeted North Minneapolis and East St. Paul neighborhoods in order to, according to CEO Reiling, "be sure they don't fall into despair."
He says that risk is real. Plummeting home prices in neighborhoods riddled with foreclosures could set in motion a cascade of troubles, from sinking property tax bases to the conversion of vacant homes into crack dens.
The bank's solution, which begins next month, is to capitalize two locally trusted nonprofits: the Greater Metropolitan Housing Corporation and Dayton's Bluff Neighborhood Housing Service. They in turn will try to stabilize the market by buying homes, doing renovations, and providing financing to qualified homebuyers.
This month, Sunrise launched a specialized product for savers eager to support the initiative, which it hopes will be a model for revitalizing hard-hit neighborhoods around the country. These CDs, earmarked for the Sunrise Home Ownership Alliance Fund, require a five-year commitment and pay just 1 percent annualized interest. Depositors will get a personal touch: photos and stories from families who buy homes through the bank's program. Reiling contends that a low interest rate plus a long-term horizon will help the bank keep its promises to depositors as well as home buyers, who'll likely be counting on low mortgage rates.
Even if borrowers do repay rescue-related loans, depositors need to be comfortable with another risk: inflation.
Driven up by rising fuel and food costs, inflation is approaching 4 percent a year, which means investors who settle for significantly less are actually seeing their investments shrink in terms of real dollars and buying power.
What's more, community-development banks can't help in every troubled situation. Homeowners who are holding loans worth more than their homes, for instance, can't receive refinancing even at ShoreBank. So depositors who support these ventures need to know their social impact will be limited by extenuating circumstances.
Consumer advocates, for their part, argue a long-term fix to the housing crisis must include new federal initiatives. But in the meantime, they're applauding efforts among community-development banks to ease burdens faced by their customers.
"If banks have a bigger mission [than simply turning profits]," says Ira Rheingold, executive director of the National Association of Consumer Advocates, a professional association in Washington, D.C., "then they really can make a difference here."