Can Members Afford To Borrow

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How difficult is it to enter the high-priced housing market in the San Francisco Bay Area? According to the CEO of one credit union here, the best mortgage loan her average loan officer could qualify for would only allow him or her "to buy a condominium in Vallejo."

Not that there's anything wrong with Vallejo, but it is 31 miles northeast of downtown. Driving into the city requires crossing two busy bridges, and the one-way commute can stretch to two hours during rush hour - a nightmare familiar to many Californians as they are forced by rising home prices to live long distances from their jobs.

Given these circumstances, The Credit Union Journal asked CU executives from each of the state's major population centers: Can the average CU member afford to buy a house?

Can members make their mortgage payments and still eat? Despite the dire predictions, most of the credit union executives said they believe sufficient options exist to allow members to pursue the dream of home ownership.

But it isn't easy. The situation is particularly bad in the Bay Area, said Lynn Athens, CEO of Spectrum FCU.

"For the average person, without some form of family help on the downpayment, I don't think a house is affordable any more," she appraised. "Even with an interest-only loan, the prices are so high, it is forcing people to rent."

Across California property values are skyrocketing. Double-digit appreciation is great news for those who bought a house or condo four or more years ago, but people who have waited on the sideline for prices to cool off frequently find they have been priced out of the market.

The latest statistics from the California Association of Realtors paint a gloomy picture for home shoppers. In August, just 18% of the state's households could afford to purchase a median-priced home, which in California is a stunning $474,370-more than twice the U.S. median price of $190,100.

The CAR's "Affordability Index" is based on an effective mortgage interest rate of 5.83% and assumes a 20% down payment. The group says the household income necessary to purchase a median-priced home in California is $111,180. In August 2003, the median-priced house was $406,140, placing it within reach of 23% of households.

The situation does not appear to be improving. The CAR's California Housing Market Forecast for 2005, which was released Oct. 6, predicts the median price of a single-family home will again increase by 15%, reaching $522,930. Sales are expected to be off by 2.5%, but prices will rise due to a continuing shortage of housing across the state, according to the association's economists.

"Homebuyers next year will face slightly higher mortgage interest rates, approaching 7% by year's end, which will make it more difficult for many families in California to be able to afford a home," CAR President Ann Pettijohn said in a released statement. "Coupled with rising home prices, affordability in California will fall to an all-time annual low of 16% next year."

Will Rising Rates Cool Prices?

Mortgage rates remain under 6%, not far above the generational lows they reached in the last two years. While CAR cites the possibility of rising rates as another factor that will reduce affordability, some say such a move might help.

Art Metras, the real estate lending manager for California Coast Credit Union, oversees one of the hottest housing markets in the country: San Diego. He said the recent low rates both help and hurt homebuyers.

"In the last 18 months, a significant increase in home prices has made it more difficult for people to qualify. One mitigating factor has been low interest rates," he said. "But, it is a double-edged sword. The low rates have fueled buyers, which results in an increase in property values. If rates go up, that makes fewer people eligible for loans, which means less upward pressure on prices."

Tom Orman, vice president of real estate lending for Pasadena-based WesCom Credit Union, agreed. He said "rising rates" has been a watchword for lenders for the past two years. "We haven't seen that rate appreciation yet, but if they go up, it will reduce demand," said Orman.

Robert Dorsa, president and CEO of NACUSO, said he has heard economists point to markets such as Las Vegas and nearly all of California as being ripe for big price corrections. "But, it's not happening," he observed. "Seventy percent of Americans own a home-the highest percentage on record. But what about the other 30%? Can they just not afford to own? If rates go up, that will certainly lead to prices going down."

Not everyone is convinced rising mortgage rates would be a good thing. Dwight Johnston, vice president of economic and market research for WesCorp in San Dimas, Calif., said the combination of lenders giving mortgages to people who are overextended and borrowers taking on adjustable rate loans with low "teaser" rates that expire after a few months could bring heavy fallout.

"The historical rule of thumb was, the housing payment should be no more than 35% of take-home pay. But now people are getting approved for loans when they are at 55%. People have been getting in over their heads, buying houses they can't afford, but hoping to sell them at a profit. Some people are so stretched just to get into a house, they have no cushion-no room for error if they lose their job, have medical expenses, or divorce."

"Cracks are beginning to show, but, as rates rise, you'll see foreclosures," Johnston added.

Making It Work

Despite high prices and the specter of mortgage rates approaching 7% in the near future, homebuyers still have options - if they know where to look.

WesCom's Orman said all parts of the mortgage-lending industry are "moving more and more to address home affordability." These include government-sponsored entities such as Freddie Mac or Fannie Mae, on down to individual lenders.

"We have to help individuals afford a home," he said. "Products include 40-year mortgages and interest-only mortgages. A lot of what a lender does depends on what will sell on the secondary market. Right now, 40-year mortgages are non-standard mortgages, but, from discussions I've had, it sounds like more might be offered."

Credit unions can help members by partnering with community organizations or government-sponsored enterprises, Orman continued. These include the Federal Home Loan Bank.

WesCom partners with several community organizations, including Pasadena Neighborhood Housing Services, which counsels people on how to build credit and save for a downpayment. The group brings potential borrowers to WesCom; usually first-time homebuyers or low- to moderate-income families.

"People are looking at adjustable-rate mortgage loans with great starter payments, which is helping drive demand, but there is the issue of payment shock when the loan indexes," said Orman. "Borrowers must have an in-depth talk with their lender to determine if they can handle such an increase."

Orman suggested people investigate additional government and private programs, including those that offer assistance making a down payment.

"Home buyers can still get into a home as long as they take advantage of programs that can help them. With research, they will find there are many programs out there."

The Growth In Hybrid Loans

California Coast CU's Metras said homebuyers have much more available to them than just a short time ago, when their choices were limited to a 30-year fixed rate or a "vanilla" adjustable-rate.

"Hybrid adjustable rate mortgages began to appear a couple years ago. The borrower knows the rate will be fixed for some time, and the rate will be lower than the fixed rate, therefore, it will have a lower payment."

"In the last 12 to 15 months, the interest-only loan has become very important," he continued. "Affordability often means the monthly payment, and the advantage of those loans, obviously, is a lower payment. People pay only interest for the first three, five or seven years, and some longer terms are being offered. The upside is they get into the property, perhaps building equity with a rise in property values. With a fixed-rate loan, not that much principle is paid in the first five years, anyway."

The key for credit unions, Metras said, is letting borrowers understand their options. He said there is more of a need for education than before.

"People used to just go to a housing development and sign up for whatever terms lenders were offering. With property values at $100,000 to $150,000, coming up with 20% was not that difficult. With higher prices, that is much more difficult."

California Coast tells its members the interest rates of all available products, it has a website with a glossary of real estate and mortgage terms, as well as loan calculators that allow people to figure their monthly payment. "We stress that people get educated on what types of loans are available before committing to a particular type of loan."

Beautiful weather and geographical limitations have fueled the rapid rise in San Diego home prices, Metras explained. The Pacific Ocean is to the west, Mexico is to the south, there are mountains to the east, and the sprawling complex of Camp Pendleton- one of the country's largest Marine Corps bases-lies to the north. Many homebuyers have been forced to look at inland communities they would have shunned five years ago. "People are driving in from Temecula and Murrieta-and prices have doubled in those cities." Temecula is 60 miles north of downtown San Diego.

Metras said prices in and around San Diego have leveled off in the last four to six months because more inventory has appeared on the market. While he sees no indications of a drastic drop in property values, he believes instead of 15% to 30% annual increases, appreciation will slow to 3% to 5%-especially in the $300,000 to $700,000 price range.

"Generally, there is some way to afford a house if people plan ahead and manage their debt," he said. "People need to get educated, get rid of their credit cards and don't buy that expensive SUV. It is a lifestyle tradeoff."

Orange County-which is south of Los Angeles and north of San Diego-has experienced rapid appreciation of home prices for several years. Fred Ferrell, vice president of mortgage operations for OCTFCU Mortgage, a subsidiary of Orange County Teachers Federal Credit Union, said the upward spiral appears to be leveling off.

"We are seeing evidence of that, demonstrated by the increased inventory of homes listed for sale, the difficulty of getting valid appraisals for homes with list prices at the top of the market, and seeing the listed prices for homes reduced over time when the seller and their agent see there is little interest in the home at the price listed," he said.

While home prices in Orange County might not be climbing, they still are often higher than other areas of Southern California. Ferrell said OCTFCU members seeking to purchase a traditional single-family home are either move-up buyers with larger down payments or those who are buying in outlying suburbs.

"Other members sometimes co-habitate with others or purchase condominium homes, which are more affordable," he said. "Occasionally, we have members who are first-time buyers purchasing in Orange County, but those members typically have a very low downpayment or use one of our specialty products."

OCTFCU Mortgage offers first-timer buyers and educators loans that allow the purchaser to buy with no downpayment, no PMI and "relaxed" underwriting standards, Ferrell explained. By the end of October, he said the company will have added interest-only loans to its adjustable-rate mortgage options.

"Those loans will be available to all members. The interest-only loans will require a downpayment."

No Purchase Loans

Back north in San Francisco, Spectrum FCU serves a fairly affluent field of membership, including employees of Charles Schwab, said Athens. However, the credit union must rely on its branches in Maryland and Texas to generate new mortgages because, "We are not doing purchase loans in the Bay Area, just refis, because people can't afford to buy houses here."

"We don't offer interest-only loans or 40-year mortgages, but we are looking into interest-only because so many people are asking about them," she said. "But even with interest-only, things aren't affordable. If an interest-only loan stretches people to the absolute max, then there's no room when rates rise."

WesCom's Johnston shared Athens' pessimistic outlook.

"Unless people have an extraordinary downpayment or already own a house, no, the average credit union member cannot afford the average house," he said. "The other option is for people to go to places like Hemet or Victorville, geographically farther and farther out."

Johnston said the mortgage market kept the housing market going as long as it has, but now people can't afford fixed-rate loans. While purchase prices have gone up, rents have stayed flat. "There has never been this wide a gap historically. It is not sustainable."

"There are a lot of signs out there about the psychology of the market," he continued. "Prices will go down sharply in the next one to two years. Not too many people agree with me, other than [noted economists] Edward Leamer at UCLA and Robert Shiller at Yale."

So what does Johnston see as options for credit union members? Leave the state, relocate to less-pricey parts of California, or just wait out the market. "There is lots of talk that Freddie and Fannie are encouraging building low-cost housing," he said.

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