Urban Partnership Bank unloading mortgages on South and West sides
Eight years ago, as the foreclosure crisis was looming, ShoreBank mounted an ambitious campaign to refinance thousands of mortgages for borrowers at risk of losing their homes.
Just a few years later, losses from those loans helped sink the community lender, which had a national reputation for its work in low-income city neighborhoods.
Now, five years after successor Urban Partnership Bank took over ShoreBank’s loans and pledged to continue its mission, Chicago-based UPB wants to excise a substantial portion of its ShoreBank legacy. It’s seeking to sell 1,561 mainly residential loans originated by ShoreBank, including many of the mortgages stemming from its predecessor’s crisis-era rescue effort.
The loan package totals $154 million, with most of it dedicated to single-family homes. The average loan size is less than $99,000.
The move marks a dramatic shift for UPB and carries risks for the South and West Side neighborhoods where most of those properties are located. A buyer of the loans may not have the same desire or incentive to keep struggling borrowers in their homes as did UPB.
“The fact that the (offering) is so (geographically) concentrated is impactful,” says Rob Grossinger, president of Washington, D.C.-based nonprofit National Community Stabilization Trust, which helps reclaim distressed properties in low-income urban areas. “It’s important.”
Bulk loan sales containing hundreds and sometimes 2,000 or more mortgages aren’t uncommon, but typically the properties are spread over a much wider area than the old ShoreBank loans, he says. If those properties and borrowers aren’t handled sensitively, it could lead to foreclosures and abandonment of neglected properties, further damaging neighborhoods that still are struggling to emerge from the recession.
For UPB, doing what’s right by its neighborhoods could come at a price. Selling to a buyer that will strive to keep borrowers in their homes and handle vacant properties responsibly could well mean a lower price for the assets.
“Often, a buyer who could pay the higher price (for the loans) may not be as concerned about the impact on the community,” says Ed Jacob, former executive director of Neighborhood Housing Services of Chicago, the city’s largest nonprofit affordable housing lender.
UPB confirms the size of the loan-sale package. More than 700 of the 1,561 loans—nearly half—are nonperforming, meaning the borrowers are behind on payments, according to sales documents obtained independently by Crain’s.
The sale is unusually large for a bank of UPB’s size. It’s carrying the loans at $82 million on its balance sheet—about 53 cents on the dollar, according to a quarterly filing. That represents 12 percent of UPB’s $672 million in assets as of Sept. 30.
UPB can’t really afford to lose much on the sale.Heavy losses due mainly to the costs of working through more than $1 billion in old ShoreBank loans have resulted in the loss of two-thirds of UPB’s capital in the five years since it was established with more than $140 million from Wall Street titans including Goldman Sachs Holdings and JPMorgan Chase. Its equity is down to less than $50 million, and the bank has acknowledged the likelihood it will need to seek more capital in the future.
The losses have persisted this year. Through nine months of 2015, UPB has lost $17 million.
The bank hired First Financial Network to handle the sale. The Oklahoma City-based firm is the Federal Deposit Insurance Corp.’s preferred vendor for bulk loan sales. In an emailed statement, the bank says, “We are confident FFN will help source buyers with strong servicing capabilities. . . . The asset sale will allow us to focus and direct capital into commercial lending on the South and West sides of Chicago and in Detroit.”
It helps that federal banking regulators will shoulder the majority of any losses from the sale. All the loans for sale are subject to a loss-sharing agreement in which the FDIC bears 80 percent of the losses, according to UPB’s quarterly filing. The rest is UPB’s responsibility.
UPB was in discussions with the FDIC a few months ago on early termination of two loss-sharing agreements as a way to dig out of the bank’s capitalization concerns. Neither party would discuss the talks, but any such deal would have meant violating the FDIC’s policy of limiting such deals to $100 million or less in loans.
UPB’s loss-sharing arrangement with the FDIC on ShoreBank’s commercial loans expired Sept. 30. Its agreement with the regulators on residential loans remains in effect.
At its peak in 2008, less than two years before its 2010 failure, ShoreBank held $2.4 billion in assets. After this sale, which UPB expects to complete before year-end, the bank will be a fourth that size.
The size of the portfolio should spark investor interest despite the economic woes afflicting the neighborhoods UPB serves, says Jon Winick, CEO of Chicago-based Clark Street Capital, a firm that manages bulk loan sales for banks. And a sale could well work out for many borrowers.
“Investors, while they’re not shy about enforcing their legal rights, are nearly always going to be trying to work with existing borrowers to find a payment structure,” Winick says. That said, “some loans just can’t be saved. You can’t just pretend and extend and modify into perpetuity.”
UPB has modified many of these loans already, judging by the hefty write-down the bank has taken. It may be that a buyer will need to do with some borrowers what UPB would rather not.