March 28, 2024

Will Governor Schwarzenegger Trigger 55,000 California Foreclosures?

California’s long running budget crisis has now degraded to the point where Governor Arnold Schwarzenegger has ordered a pay reduction to the minimum wage rate of $7.25 an hour for 200,000 state employees.

The California banking industry, perhaps sensing an opportunity to rebuild their poor public image, has jumped into the budget mess with a plan to rescue beleaguered state employees.   Spearheaded by $7.6 billion asset Golden 1 Credit Union, banks are tripping over themselves to offer “Budget Impasse Loans”, an easy way for over leveraged State workers to tide themselves over until the budget crisis passes.

Bloomberg: The Golden 1 Credit Union, a lender that caters to state workers, will offer zero-interest loans to customers whose pay falls because of the stalled spending plan, according to a July 2 statement.

Golden 1 said as many as 55,000 of its customers may participate this year, if state-employee pay is cut to the federal minimum wage, currently $7.25 an hour. Flyers that tout the program are being distributed in its 84 offices, carrying a message that says “balancing the state’s budget doesn’t have to affect your own.”

“We could survive off our savings for a little while, but it would be a real burden on us,” said Chava Yniquez, a 49- year-old technician in the Senate printing office who has used Golden 1 budget-impasse loans in the past. “It’s a lifeline.”

The California budget crisis and bankers pushing loans are not the issues to ponder here.  Golden 1 Credit Union’s estimate that 55,000 employees will need a loan after seeing their first pay check reduced indicates the very fragile financial condition of 25% of the State’s workforce.  How many more will need a “Budget Impasse Loan” after two weeks, or a month?  Will the first week of the Governor’s budget balancing plan wind up pushing 55,000 home owners onto the path of foreclosure?  Terminator indeed!

The very banks offering “Budget Impasse Loans” may shortly find themselves offering “Loan Modification Plans” if the California budget crisis eventually requires permanent pay concessions from State employees.

Golden 1 Credit Union, which lost $22.6 million in 2008 and $23.1 million in 2009 may be offering a valuable service to strapped State employees, but is a customer one paycheck away from default a solid credit risk?  Golden 1’s website notes that budget impasse loans will be offered with “rates as low as 0% APR”, implying that some borrowers will be paying a “risk adjusted” rate of interest.  Since Golden 1 is offering depositors a whopping .25% on regular savings accounts, even a “low rate” of, say 4%, would still leave them with a very nice spread.

At a time when the universal “solution” for every financial problem is to borrow more money, perhaps the banks should develop a unique “new program” involving financial responsibility, saving and wealth accumulation.

Finally, in the “too ironic not to mention” department, the Press Release issued by Golden 1 immediately prior to the Budget Impasse Press Release reads as follows:

SACRAMENTO, Calif., June 30, 2010—Employees and business partners of The Golden 1 Credit Union participated in the second annual United Way Toilet Paper Drive on June 18 contributing 15,989 rolls of toilet paper to benefit local nonprofits.

Golden 1’s contributions represented 33.5% of the total rolls of toilet paper collected by United Way in this drive. Of these, 10,205 came from the credit union’s employees and 5,784 came from its supportive business partners.

Perhaps soon, California State employees can contribute to this worthy effort by sending Golden 1 their state paychecks.