Two San Francisco-area banks have come up with a new twist on an old loan product that they say will allow more residents to afford apartment homes in one of the nation's most expensive cities.
How much they catch on, though, will depend largely on whether a secondary market develops for them and on customers' willingness to pay a little more to reduce their risk.
The banks offering the so-called "fractionalized" tenant-in-common loans, Bank of Marin in Corte Madre and Circle Bank in Novato, also have to contend with tenants'-rights advocates, who say the products will further deplete San Francisco's rental stock.
Tenant-in-common loans are not new to San Francisco. For years lenders there have offered these "blanket" loans, in which groups of residents band together to buy apartment buildings.
With these loans the overall price for the individual apartments is typically 15% to 20% cheaper than comparable condominium units. But if one occupant stops paying his or her share, the rest of the group has to make up the difference.
Bank of Marin and Circle Bank say they have addressed that issue with their new fractionlized loans. They make separate loans to each occupant, so the group is not liable if a single occupant defaults.
But since occupants do not actually own their units - just a percentage of the property - the loans are still cheaper than comparable condo loans, said Keith Zimmerman, a senior vice president at the $850 million-asset Bank of Marin, which was the first bank to offer the loans.
"This new loan gives members of the group more comfort going in, because they're not on a blanket mortgage with a bunch of people they don't know," Mr. Zimmerman said. He said he got the idea for the loans from talking with prospects who were concerned about the risk of sharing loans.
Ann Bassi, a mortgage broker with GT Financial in San Francisco, said she doubts the new loan will be as popular as the blanket loan.
She said that a number of groups she has worked with have rejected the idea of a fractionalized loan in favor of a blanket loan because the interest rate on the newer loan is higher - 0.5% to 1% higher for units in a one-to-four-unit apartment building, and up to 2% higher for units in a larger building.
"Until the rates are more stabilized, I don't think many people will be willing to pay the difference," Ms. Bassi said.
But Andy Sirkin, a San Francisco attorney who helped develop the new loan product, said rates should come down some as more banks begin to offer them and should drop even more if a secondary market emerges and banks do not have to price the loans higher for having to keep them on their books.
Lenders in expensive cities like San Francisco are offering more innovative products to help people buy homes, and for more than a century lenders in New York City have offered loans allowing occupants to buy shares in a cooperative that jointly owns and manages an apartment building.
Similar co-op loans are slowly catching on in Boston, Atlanta, southern California, and elsewhere, said Douglas M. Kleine, the executive director of the National Association of Housing Cooperatives in Washington. He added that tenant-in-common loans are gaining traction in southern California but that co-op loans may be more popular because there is a larger secondary market for them.
The new fractionalized loans are not without controversy in San Francisco. Ted Gullickson, a spokesman for the San Francisco Tenants Union, said they violate the spirit of a condo conversion law stating that just 200 apartment units a year can be converted into condos.
"More than 90% of the people in San Francisco can't afford to buy a home, and they are very dependent on the city's rental stock," Mr. Gullickson said. "It's long been the city's policy that we maintain a good solid stock of rental units." The fractionalized loans "will just make it easier for developers to cannibalize the rental stock."
Mr. Gullickson's group also dislikes the older blanket tenant-in-common loans, because apartments are ultimately taken out of the rental pool. However, the number of these conversions is limited by the city's condo conversion law, he said.
Mr. Zimmerman concedes that the loans Bank of Marin is offering thin the rental stock, but he said the city should make increasing opportunities for homeownership a high priority.
"I think the desire to own a home is very strong here, and city officials need to be aware of this, too," Mr. Zimmerman said.
Despite their drawbacks, blanket tenant-in-common loans have been very popular in San Francisco, which consistently tops the list of cities with the highest housing prices. Residents of about 7,500 apartments in San Francisco, mainly first-time homebuyers, took out blanket TIC loans. Many people who take out such loans do so with the hopes of later winning the city-run lottery that lets them convert their unit into a condo with a less risky mortgage.
Mr. Zimmerman said that with the new fractionalized loans, borrowers may not feel the need to convert their units into condos later, because the risk of a blanket mortgage has been eliminated.
Bank of Marin closed its first group of loans, on a building for $1.5 million, on Sept. 30, and is closing more deals. For now it only wants to make such loans on properties owned by real estate investors who take out apartment and renovation loans with the bank, in part to increase its commercial real estate and construction portfolios.
The $156 million-asset Circle Bank followed suit and closed three groups of loans over the last two months, and it too has more in the pipeline. "It's a product the market would like to see right now," said Pat McCarty, Circle Bank's vice president of lending.
Both banks are initially committing just $20 million for their new loan programs, waiting to see if more banks offer them and a secondary market grows. The $623 million-asset Sterling Bank and Trust in Southfield, Mich., which makes blanket loans in San Francisco, is considering making fractionalized loans, said Stephen Adams, the managing director of Sterling's West Coast operations.
Mr. Sirkin said Wall Street brokerage and law firms have expressed an interest in creating a secondary market, and Mr. Zimmerman said several investors are considering buying Bank of Marin's fractionalized loans.
