Robert Johnson Creates Lending Facility for Mortgage Servicers

For African Americans, the foreclosure crisis isn’t just about losing homes–it is about losing the majority of their net worth.

“A recent study found that the wealth of African Americans is one-tenth that of whites, and when home equity is subtracted, it shrinks to less than 1%,” announced Robert L. Johnson, chairman of Urban Trust Holdings Inc., during a Dec. 8 speech. At the National Housing Forum sponsored by the Office of Thrift Supervision, he unveiled a plan to help curtail the drastic increase of foreclosures which instigated the country’s economic spiral downward.

“If this housing crisis causes African Americans to lose their homes, it will be a huge setback to personal wealth creation in the entire black community,” says Johnson, the founder and chairman of the RLJ Cos. who also created Black Entertainment Television (BET) in 1979 and sold it for $3 billion in 2000.

Through Urban Trust Bank, Johnson created a new entity, Homeowners First Bank. Homeowners First is an advanced lending facility or a bank designed specifically to provide temporary, advance funding to mortgage servicers. Mortgage servicers are the middlemen, who may or may not be the same company as the lender, but who retrieve money from borrowers on behalf of lenders.

Johnson has requested $1 billion from the U.S. Treasury Department’s Troubled Asset Relief Program–a $700 billion plan to strengthen the weakened credit markets–and hopes to raise an additional $7 billion to $8 billion from deposits and deposit interest from Urban Trust Bank. He proposes that the plan that will contribute to the stabilization of the housing market and save more than 200,000 people from losing their house in the first year.

“If you are a servicer for a securitization, you have to pay the interest and principle whether or not you’ve collected it,” says Alex J. Pollock, resident fellow at the American Enterprise Institute for Public Policy Research, a nonpartisan think tank. “In normal times when there aren’t that many delinquencies, it’s not that big of a problem, but in a time where there is a housing bust and widespread mortgage delinquencies, the more money they have to advance and the harder they have to work.”

In the past, when borrowers made payments late or missed them all together, loan servicers could borrow money from an advance lending facility and still pay the lenders. Unfortunately, as a result of the faltering economy, the banks that would traditionally make this type of loan to the mortgage loan servicers have stopped making them.

“Loan servicers are financially incentivized to push toward foreclosure because they can’t afford to work out loan modifications with the homeowners,” says Kathy Boden Holland, executive vice president of Urban Trust Bank, which has 16 branches located in Walmart supercenters throughout Maryland and Florida. Without advance lending facilities, the loan servicers are less willing to help mitigate foreclosures because they can recoup the outstanding balance once they resell the house.

“The kicker is this: If the mortgages are renegotiated, that means that the mortgage lenders would get anywhere from 15% to 25% less in the repayment

of the unpaid balance of the mortgages,” says Bernard Anderson, a member of the Black Enterprise Board of Economists. “The question is why loan servicers would agree if they are going to take a 15% to 20% haircut on those outstanding mortgages?”

Given the costs loan servicers incur to foreclose and resell a house, and the increased difficulty for consumers to get a loan to purchase homes, there might be incentive for loan servicers to renegotiate the loan with the homeowner if they had access to advanced lending, explains Anderson, who is also a former professor of management at the Wharton School of Business.

Johnson believes that Homeowners First can drive an increase of 50% in modifications of delinquent loans, allowing upwards of 882,000 families to remain in their homes over five years, according to the Urban Trust news release. The timeline for executing the plan is dependent on whether the government approves their request and whether they can raise enough deposits.

“This is the most direct way to interact with

the homeowner and at the same time protect the lenders or mortgage trustee,” says Johnson, who adds they will eventually pay all of the money back to the government. “This program is strictly aimed at providing loan modification help to homeowners through working with mortgage servicers.”

Anderson suggests that Johnson’s plan probably won’t be approved until President-elect Barack Obama’s administration is in office. Sheila Bair, the chairman of the Federal Deposit Insurance Corporation, made a similar suggestion earlier in the year, but Treasury Secretary Henry Paulson, shot it down in favor of his plan to infuse capital into the banks. He had hoped that they would increase their lending to consumers and small businesses, something banks have been criticized for not doing.

“Bob is taking a risk, quite frankly…but it is a good idea, and he should be commended for stepping out front,” Anderson says. “It is significant that an African American businessman is coming forward to try to address the root cause of the financial crisis.”