If San Franciscans can afford the city’s skyrocketing rents, then they can afford the monthly payment on a $2 million mortgage. That is the logic behind the San Francisco Federal Credit Union’s new “POPPY” loan (Proud Ownership Purchase Program for You).
“We have programs to help low-income people, but for the vast majority of young professionals, there is no hope or no help for this middle-class band in San Francisco,” said Rebecca Reynolds Lytle, the credit union’s senior vice president and chief lending officer.The nonprofit credit union has 34,000 members.
To qualify for the loan, which requires no down payment, borrowers must work in San Francisco or nearby San Mateo County. The loan must be used for the purchase of a primary residence and cannot be used for a refinance. Private mortgage insurance is not required. The loan is a 5/5 adjustable-rate product, which means it can adjust only at five-year intervals. This is atypical of most adjustable-rate loans, which usually change annually after the initial lock period (for instance, a 5/1 loan would be locked for five years, then be subject to adjustment once a year). This loan can only increase by 2 percentage points each time, up to 6 percentage points over the life of the loan.
“The credit union is willing to take the additional collateral risk if we can mitigate our long-term interest rate exposure. There are built-in protections for the borrower. When we qualify people for the loan we calculate the payment today and again if rates were to change by 2 percent, and that’s the payment they qualify for,” said Lytle, who points to the credit union’s very low delinquency rate now and during the recent housing crash.
Homes in San Francisco are some of the priciest in the nation, and rents are equally high. The median San Francisco home price was $1,110,000 in October, an increase of 11 percent from one year ago, according to CoreLogic. That is about five times the median value nationally. Renters in the city pay nearly 47 percent of their incomes for rent, according to Zillow. That share was just 30 percent between 1985 and 2000.
“What we would pay here for a down payment you could take to another market and pay cash for a house,” added Lytle, who received over a hundred emails from potential customers Wednesday, just after the product went live on the credit union’s website.
San Francisco’s home values have soared in the last decade, thanks to an abundance of tech-sector cash. With very little room for additional construction in the city, competition for housing, both rental and owned, is fierce. Middle-income workers there are struggling, doubling and tripling up in housing or commuting long distances to their jobs. Because rents are so high, they are also finding it next to impossible to save for the down payment necessary on a traditional loan.
In an atmosphere of continued cautious lending, the product has raised some eyebrows, but it is nothing like the risky no-down-payment, no-documentation products that were behind the housing crash. Borrowers are fully vetted, income and assets verified, and while there is no minimum credit score, the vast majority of the credit union’s borrowers have above-average credit scores.
“We’ve always done very conservative lending. Our philosophy is you lend to the person, you have to understand their situation and verify what they’re telling you,” said Lytle.
The credit union, which has been in existence for 60 years, holds all the loans on its own books. Credit unions make the loans to their members, so they already have a relationship with their customers.
“Credit unions have quietly carved out a niche of offering what appear to be high-risk (low or no-down payment loans, loans to borrowers with low credit scores and/or high DTIs) products to its members,” said Guy Cecala, CEO of Inside Mortgage Finance. “They are very comfortable making these loans to members who they know and understand, and the loans have performed very well, with low delinquencies or defaults.”
Large banks have a much larger and more diverse customer base, he said, and therefore could not offer these products. Nonbank lenders, who have stepped into the lending market in a big way over the last few years, generally sell their loans to Fannie Mae and Freddie Mac, or offer loans insured by the FHA, none of which would accept a no-down payment loan at that high a price. Another credit union, Navy Federal, offers a similar no-down payment mortgage product for up to $1 million in the Washington, D.C., area.
“Credit union regulators appear very comfortable with the risks credit unions are taking in their mortgage product offerings,” added Cecala.