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Super fast mortgage approval and zero down. Say what?

Sally Herships Jul 27, 2016
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A $4 million home for sale in Acadia, California.
FREDERIC J. BROWN/AFP/Getty Images

Mortgages with “exceptionally fast financing” and no cash down. Terms like these may sound familiar. But this time, it’s not regular Americans lenders are catering to. It’s the hopefully-one-day-to-be-rich tech workers of Silicon Valley. But while many of these workers may turn out to be the next Steve Jobs, success is by no means certain.

“There’s no doubt about it, these are risky loans,” Susan Wachter said, a professor of real estate and finance at the University of Pennsylvania’s Wharton School.

“Because home prices, while they have gone up, and only up recently in tech markets like San Francisco, they very well can go down,” she said. “In fact, in markets where prices are rising and fast, and high, these are the most volatile markets. They’re likely going to see the most ups and downs.”

And while young tech workers wait for their companies to go public, a lot of their assets may be tied up in stock which may or may not turn out to be worth anything.

“High-income workers don’t even necessarily themselves have enough funds for a 10 percent down payment,” she said.

Notes Wachter, lenders need to spread out their risk.

“This is a niche market,” she said. “This is just one market, that’s the nature of finance, if you diversify you can make loans like this.”

And loans like these are about way more than one mortgage. They’re about a relationship — between brogrammer and bank. 

“This is where you’re going to get your second loan for a second home. This is where you’re going to perhaps borrow for your children’s,” she said.

Which may be why First Republic Bank has offices at Twitter and Facebook headquarters. It wants to meet young brogrammers.  But it’s not just tech workers who qualify for deals.

“Several banks have been doing zero down loans for doctors and lawyers, high end professionals over the last few years,” Rocke Andrews said, president of the National Association of Mortgage Brokers. He says many banks are offering deals to who they consider to be the cream of the professional crop.

“Not necessarily for zero down, but for three percent down or very minimal amount down.”

Historically, banks have long turned to mortgages as profit making machines. “And they want to get back into the business,” Richard Parker said, a professor who teaches the political economy of growth at Harvard University’s Kennedy School of Government.

“We’re seeing this because banks are desperate for customers right now, and they’re looking for them in every corner of the land,” he said.

Besides, he points out, especially in today’s low interest rate environment, these loans are not the worst kind.

“The carrying costs for the employee who takes these mortgages is not nearly as hefty as it would have been in terms of much higher interest rates,” he said.

“These are low interest loans being offered to the employees of high valued tech companies in Silicon Valley, and if I were a banker that’s probably a better bet than offering them to line workers at an automobile assembly plant, across the bay in Fremont.”

While Parker says banks are taking a risk, he notes, it’s likely a calculated one.

“Even if a lender cannot pay, the bank will have an asset that is a home in the silicon valley that should cover most of its exposure if it has to go back and repossess it.”

But Parker says there’s another problem with these mortgages, aside from risk – what they symbolize.  

“The problem is that it’s another sign of the tier-ing of American Society,” he said. “So that things that are available to the one percent or the five percent are not available to the 99, or the 95 percent and if available, certainly not on the sweet terms that are being offered to these folks.”

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