A new mortgage loan program offered by a Bay Area credit union is making waves for offering no-down-payment, 100-percent financing loans up to $2 million — but for many people living and working in the rental roller coaster that is San Francisco, it may be one of their few paths for homeownership.
Half of income on rent
That’s because some are spending more than half their incomes to rent apartments in San Francisco, where the median rent is upwards of $3,300, according to a recent Zillow analysis. And although Zillow’s Rent Forecast calls for rental prices to slow down slightly this year, San Francisco’s rent still far outpaces other major metropolitan areas like New York City, Seattle and San Diego.
Rebecca Reynolds Lytle
“Many people here are frustrated because home prices are so high, they don’t have the option to buy. At the same time, they are paying a ridiculous amount of rent and someone else’s mortgage payment,” said Rebecca Reynolds Lytle, senior vice president and chief lending officer for the San Francisco Federal Credit Union (SFFCU).
“The exorbitant rent here makes it almost impossible for people to save up for a down payment. It can take people 28 years to save up a 20-percent down payment in San Francisco. Homeownership is just out of the realm of possibility for so many people here, and no one is coming up with any solutions.”
That’s why the SFFCU — which offers a variety of conventional and jumbo loans, including higher loan-to-value financing up to 95 percent — created POPPYLOAN, a new mortgage loan program intended to give Bay Area buyers a way to break out of that vicious cycle. An acronym that stands for Proud Ownership Purchase Program for You, POPPYLOAN offers up to 100-percent home financing on the purchase price of a home up to $2 million, with no down payment or added requirement for private mortgage insurance.
Unmet credit union member needs
“We spent the last year studying our market and figuring out what kind of unmet needs our members have,” Lytle said. “We looked back at our underwriting history and the performance of our real estate loans. Even during the recession, we performed really well and only had three foreclosures during that time. We worked with our members when they had issues and didn’t do things that the big banks did to make them go delinquent. We know our customers and are very confident in our ability to write a solid loan.”
POPPYLOAN is a 5/5 adjustable rate mortgage that is amortized over 30 years. This means the interest rate and monthly payment are fixed for the first five years of the loan, and every five years thereafter. The loan has an opportunity to re-price at five-year year intervals, but that price is capped at 2 percent of each interval, and 6 percent over the life of the loan.
“This prevents the buyer from payment shock,” Lytle said. “We wanted to make sure our members were very comfortable with their loan payments.”
Requirements
There are restrictions and eligibility requirements for both borrowers and properties. Buyers must be at least 18 years old, members of the SFFCU and work in the counties of San Francisco or San Mateo, where the credit union is chartered for membership. Eligibility also depends on credit score, income, employment status and other factors. Borrowers must, of course, pay for closing costs, including fees for appraisal, title insurance, title search, transfer taxes, settlement services, property taxes and hazard insurance premiums and government recording fees. Borrowers must also establish an impound or escrow account for payment of annual taxes each month along with their regular principal and interest payment.
The SFFCU charges a $1,200 origination fee on any type of mortgage loan, but POPPYLOAN has an additional origination fee that varies depending on LTV: For 80.01 percent to 85 percent LTV, the fee is 0.375 percent; for 85.01 percent to 95 percent LTV, the fee is 0.75 percent; and for 95.01 percent to 100 percent LTV, the fee is 1 percent.
Properties must be primary residences located in San Francisco, San Mateo, Alameda, Contra Costa, Marin, Napa, Sonoma, Solano or Santa Clara. Eligible properties include single-family homes, condos, townhomes and two- to four-unit, multifamily dwellings in which the borrower is the primary occupant. Tenants-in-common properties (TICs) are also eligible. Whatever the type of property it is, it must be located in an area that is indicated as stable or increasing value, according to the appraisal report. POPPYLOAN is not available for refinances.
Critics
The program is not without its critics, who point out that no-down-payment, 100-percent financing loans were the sort of risky products that caused the housing market melee. Lytle didn’t shy away from that criticism and noted, “This would never work outside of San Francisco, or in a market where rental prices do not equal or come close to exceeding a mortgage payment. This is not a program for first-time homebuyers. It’s for middle-market professionals, well-paid people. Not everyone qualifies.”
“We don’t do any kind of toxic mortgage programs,” Lytle added. “That’s not what this program is about. That’s not in our lending philosophy. We’re about getting people out of a bad renting situation and putting those rental dollars to work for them so they can start to build their wealth. We do not sell our loans to the secondary market. We hold them in our portfolio.”
One down, 300 in pipeline
POPPYLOAN formally launched in December. Since then, the SFFCU has closed one POPPYLOAN and has about 300 more in the pipeline, and the average loan amount sought is about $800,000.
“We used to get about 25 mortgage applications a month through our online system, but now we get about 10 applications a day,” Lytle said. “About 80 percent of those are POPPYLOAN applications.”
However, Lytle said the credit union has declined about 34 percent of applications so far, and she expects that percentage to increase.
“Borrowers have to have funds in reserves as well as income to qualify,” she said. “Most of the people we’re declining have credit issues, don’t make enough money or don’t have enough savings to cover closing costs.”
For real estate agents, POPPYLOAN brings more choices to the table for their clients, Lytle said.
“For the right type of borrower, this is a new solution to help them better their situation,” she said. “This creates opportunities for clients with no downpayment in the bank, which can sometime force them to look for a lesser-priced home in a lower-quality neighborhood, or a home in an area that isn’t close to where they work.”
The program could expand to other areas in the future, but Lytle said, “we have to start somewhere and set some parameters.”
“It’s refreshing that the conversation has changed to hearing people talk about how they can now buy homes sooner than they ever thought they could. I love that POPPYLOAN helps people in the Bay Area stabilize their housing costs,” she said.
