
Some Silicon Valley Tech Workers Get Home Loans with No Money Down - svtrent
http://www.bloomberg.com/news/articles/2016-07-27/zero-down-on-a-2-million-house-is-no-problem-in-silicon-valley
======
refurb
_One reason: Almost half of their compensation packages are in Apple shares.
So their lender, Opes Advisors, assigned the couple a financial adviser who
used a software program to factor in debts and future income, including the
stock, and the costs of education over the years for two young children._

They don't go into much detail, but this part scares me.

I'm assuming the "model" estimates some sort of future value for the stock.
"You only make $150K, but don't worry, our model says that once your stock
starts to vest, you'll be making $250K per year thereafter".

Of course that assumes their "model" of the stock price is correct.

However, California is a no-resource [edit:non-recourse] state, so if the
owners get to the point where they can't afford payments, then it's the lender
that is on the hook for the loss.

~~~
protomyth
what is a "no-resource state"?

~~~
refurb
Typo! I meant non-recourse.

~~~
protomyth
I ended up turning off autocorrect- too many problems

Searching for no-resource state brought up a huge number of programming links
- sometime I worry about user customization in search and other UI elements

------
jasonmp85
I realize this headline is meant to be inflammatory (look at those entitled
people who get it all!), but this practice already exists for medical doctors:
[http://whitecoatinvestor.com/personal-finance/the-doctor-
mor...](http://whitecoatinvestor.com/personal-finance/the-doctor-mortgage-
loan/)

Basically: "you're about to have a high income and—as a class—have a very low
default rate. We'll let you put 0% down and not count your student debt
against you". Usually before you get your first paycheck (just need to show
them the contract).

FWIW I'd argue that tech workers are—financially speaking—much more varied
than doctors, who generally exit residency, get a position (sometimes in a new
city) and see their income skyrocket. So I can't say this is perhaps as
justifiable an idea as it is for new doctors, but I can buy the rationale for
certain workers.

If you're in the boat of "I could afford a mortgage around here, but would
take years to save a huge downpayment on these prices", the doctor mortgage
can be a great thing. Not least of all because it's not always savvy to make a
big downpayment: [http://themortgagereports.com/18520/20-percent-
downpayment-r...](http://themortgagereports.com/18520/20-percent-downpayment-
risk-mortgage-interest-rate)

~~~
patcheudor
I found it to be a particularly interesting headline because I thought such
things were normal. When I bought my home in 2004 it was not only zero down
but on a 7/1 interest only arm at just 1 point above the basis rate with a
maximum increase over the life of just 4 points. As a bonus I got $50K out to
pay off the boat. Needless to say when the housing market crashed I wasn't
freaked out because I had effectively nothing to loose. Sometimes not having
any money invested, especially for the first decade or so can be a relief if
one must consider a strategic default of the mortage.

~~~
refurb
_When I bought my home in 2004_

I think the "2004" in your reply is key. Crazy things were happening back then
and as you called out, the housing market crashed.

I think what freaks people out is that only ~8 years out from the crash, you
can already see lending standards getting more relaxed. Didn't we learn
anything last time?

Not to mention the number of people I've talked to that said "housing always
goes up, it's a great investment!". In less than a decade people have gone
from "housing sucks" to "it will never go down".

Amazing.

~~~
freyir
> _Not to mention the number of people I 've talked to that said "housing
> always goes up, it's a great investment!"._

"One inflation-adjusted value index between 1928 and 2012 placed the annual
rate of appreciation for real estate prices at just 0.2%." [1]

Overall, real estate has historically been a bad investment. That said, it
does _seem_ like there have been obvious indicators when an particular area is
becoming a more desirable place to live, and when home prices are likely to go
up significantly in the future. Although I imagine people have been hard at
work modeling and forecasting this, and current prices will better reflect
future appreciation (if this hasn't already happened).

[1] [http://www.investopedia.com/ask/answers/052015/which-has-
per...](http://www.investopedia.com/ask/answers/052015/which-has-performed-
better-historically-stock-market-or-real-estate.asp)

~~~
refurb
Housing looks like a bad investment overall, but housing is local. I have no
doubt you can make good money off of a house in a "up and coming" city.

The challenge is, how do you identify an "up and coming" city? Is it the same
way you identify and "up and coming" stock? It's all just attempting to time
the market.

------
gmarx
Does anyone else experience mild anxiety reading stories about Bay Area real
estate? Long ago I decided it can't be wise to buy instead of rent. Logic and
math argue this must end and yet it seems there is always another "sucker". We
seem to have entered a new phase in which Chinese are moving money offshore
and into the local market. Lots of Chinese, lots of money, could go on and on
but for how long? Ultimately a home is only worth what someone can rent it
for, right? right? please????

~~~
mmanfrin
I think the market is over-exuberant right now for sure, but I also feel that
people like the Bay Area because the Bay Area is an _exceedingly pleasant
place to live_. This market has hit a little perfect storm of pricing and may
correct, but I think the longview is that Bay Area housing prices will just
keep marching up.

A lot of the price of homes is the land, which means that (barring local
regulation) homes will begin to be built up a lot more. Already on my
residential street there is a 7 story live/work building going in where a
pottery store used to be. Density will lower renting costs but the land itself
will remain valuable.

~~~
superuser2
It won't be an exceedingly pleasant place to live when there's no salary left
over for food after taxes and rent.

~~~
mmanfrin

      after taxes and rent
    

If you have no money left over for food after rent, do not live here -- full
stop.

If you have no money left over after taxes, then you are doing your witholding
wrong. And the Bay Area isn't some zone-of-enormous-taxation. We've got like
2% more sales tax and maybe 4% for restaurants who are passing on the medical
buck.

~~~
superuser2
I am not referring to the present, but the hypothetical "prices continue to
rise" the parent comment mentioned.

------
tinbad
We looked at financing through some of those new 'hip' lenders. My wife works
for Google and SoFi had some of the highest rates (even with 'Google discount'
and 10/20% down). They may get your pre-approval within a day, but in reality
most lenders get that done quickly. In the end, they have to play the game
everyone else is playing and it means long turnaround times to actually close.
This is the part that is fundamentally broken and really in need of
'disruption'.

~~~
brebla
Yes. Completely irrational. I can secure $60k+ in a matter of hours to
purchase a new Tesla or Merc. Drive it off the lot and suddenly worth less
than the loan. Real Estate, however, can take 45 days to close a loan when the
projected value of the asset is surely positive. Antiquated and balkanized
title process and (I suspect) unhealthy regulatory requirements are a bog.
From there, I think it is simply inefficiencies in the lenders' operations.
Would love an insider's take.

~~~
Domenic_S
I'm on my 3rd house. The escrow length isn't just about the loan, it's also to
give you time to complete inspections. Home inspectors -- especially in hot
areas -- can be booked out for weeks.

It also gives the sellers time to find a new place/get packed and moved.

The lender gets their ducks in a row because they're going to package and sell
the loan, and there are lots of compliance issues to jump thru to get it sold
(properly) after what happened during the crash. Lenders are very careful now,
verifying down payment sources, income, credit, etc.

I also did cars for a while and I can tell you most (all?) in-house car
financing is provisional, and they do the hard work AFTER you drive off the
lot. They like it this way because once you've parked that shiny car in your
driveway and shown your friends, you'll work hard to keep it should something
come up with the financing. If it doesn't work out they can (at worst) tow the
car back to the lot. Not quite that easy with a house ;)

~~~
brebla
The contingency period in the contract is parallel with the financing process.
They are not intertwined - apart from the contract being contingent upon
securing a loan. If the inefficiency results from compliance issues due to
needing to rate, package, and sell the loan, then couldn't an enterprising
banker market speed of closing and absorb moderately more risk by having the
loan on his books for a few additional weeks? In a competitive market, cash
offers (one less contingency, sure but also speedy closing) are preferred.

~~~
Domenic_S
Speed is just not that important for most residential purchases. The most
critical thing is ability to close, which is where cash excels. Predictability
is #1 - given the choice between 80% chance to close in 10 days (remaining 20%
the deal falls thru) or 99% chance to close in 30, almost everyone takes the
latter, all else being equal. I just can't think of any situation where a
turbo close gets you so many more deals that it's worth the extra risk as a
lender.

On the other hand, people often pay extra for a lender that has a history of
closing on-time.

------
elgabogringo
How does it make sense to tie up $1M+ at 1%? Are they turning around and
selling the note to Fannie or Ginnie Mae? Unless we are Japan (and that's a
slight possibility, but not likely IMO) this will be a total loser - not as
bad as buying Spanish/French/Italian debt at negative rates, but pretty bad.

Who else has friends going through all sorts of ridiculous acrobatics to buy
houses in the bay right now? Where they are "lucky" to get their 10-20% over
the list price offer accepted? Yeah, this will end well.

~~~
JumpCrisscross
> _How does it make sense to tie up $1M+ at 1%?_

Three things likely going on here: loss leading, promotion and a hunt for
yield.

Let's start with the hunt for yield. Yesterday's auction priced the 3-year at
0.87% and the 5-year at 1.15% [1]. We don't know the term of Zuckerberg'a
mortgage. If it was less than 5 years, the bank might make a spread.

If it's a loan with a longer term the lender could have made more by lending
to the U.S. Treasury. In that case, the difference may be booked as a
promotional expense. "We're the guys Mark Zuckerberg gets his mortgage from"
is succinct and memorable.

Finally, the lender may eat a loss on the loan for the opportunity to do more
business with Zuckerberg in the future. One sees this with credit facilities
in investment banking: JPMorgan and friends give companies cheap loans in
hopes of winning their more-lucrative IPO and debt capital markets business.

[1] [https://www.treasury.gov/resource-center/data-chart-
center/i...](https://www.treasury.gov/resource-center/data-chart-
center/interest-rates/Pages/TextView.aspx?data=yield)

~~~
Johnie
Also, someone like Mark Zuckerberg has almost 0 default risk. To the banks,
this is free money.

Remember, when the bank issues a mortgage for 3.5%, the spread between that
and their cost of capital covers the risk of default. But if the default risk
is minimal, they can basically issue the loan at cost.

~~~
refurb
Most banks don't hold mortgage risk. They sell the mortgages to investors who
hold the risk.

------
vermontdevil
Medical school graduates get similar deals as long as they verify proof of
residency. They can get up to $500k with no money down and $1m with some down
and near zero interest rates.

I'm sure other types of employees get these deals.

See this for example: [https://www.53.com/mortgage/physician-
loan.html](https://www.53.com/mortgage/physician-loan.html)

~~~
abbottry
Came here to mention this exact thing -- you don't even have to be an
attending, my wife and I have this loan through a different company, and she
is still a resident. We had banks fighting over our mortgage. No money down,
no PMI, and they portfolio the loan instead of selling it right away like a
standard mortgage. We live in a Detroit suburb.

~~~
sandinmyjoints
Why would they "portfolio" (I'm inferring this means keep it on their books)
such a loan instead of selling it? Because the risk is thought to be so much
lower than standard mortgages that keeping it somehow helps them in some way?

------
random28345
tl;dr: Houses are so expensive that people can't afford a down payment, so
banks let people buy houses for no money down, driving up the purchase price
of houses.

~~~
refurb
This is a great point to reinforce. Low interest rates are a HUGE driver of
housing prices.

No one knows what interest rates will do, but if they go from 3% to 6%
(historical average), then suddenly everyone can't afford as much house and
prices decline.

------
aresant
I'm going to counter the "math" in this thread

Let's take the example of Nick eg:

"Nick Merz knows how tough it can be. He’s a 41-year-old product designer at
Apple Inc. whose wife also works there, and says they couldn’t figure out if
they could afford to own a place anywhere near the company’s offices in
Cupertino, where the median value is $1.8 million."

Glassdoor check for sr product designer = base of $157,000 to a max of
$200,000.

With 7 years figure he's at $180,000.

Figure his wife is in another $100,000 territory as a co-apple employee.

So maybe they're at $280,000.

With a 20% downpayment they can "afford" $1,931,000 of house (2)

Why?

Because interest rates are insanely low.

But problem for nick and others is that lenders want a 20% down payment
because that gets skin in the game.

On that $1.931 house that's $386,200 which is damn near impossible to cobble
together after dropping crazy SF rents for a decade (or two).

My guess is that the bankers are using significant stock options as a swap or
partial collateral for that down payment.

That's a bet I would take eg:

\- You've got a guy with a 7 year track record at the most valuable company in
the world + his wife there too which is solid income criteria.

\- You've got him with real skin in his game - his life savings which just
happens to be in apple stock and probably will always be worth more than zero,
and likely enough to continue working for even in a downturn.

\- Even if the house drops in value when interest rates go up (which is the
most common prediction from mortgage bankers I know) Nick needs a place to
live by Apple, is invested in his house, and is as likely as anybody to
continue paying a mortgage on an asset that technically is worth less than he
paid, but because it's tied to a monthly payment he can "afford", will stay on
for the long haul.

(1) [https://www.glassdoor.com/Salary/Apple-Senior-Product-
Design...](https://www.glassdoor.com/Salary/Apple-Senior-Product-Design-
Engineer-Salaries-E1138_D_KO6,36.htm)

(2) [https://www.zillow.com/mortgage-calculator/house-
affordabili...](https://www.zillow.com/mortgage-calculator/house-
affordability/)

~~~
balls187
> But problem for nick and others is that lenders want a 20% down payment
> because that gets skin in the game.

Lenders typically charge PMI if you have LTV > 80%.

Our first home was purchased with 0 down (perks of being military brat), and
no PMI. Current home was ~10% down, with ~$500 in PMI (kind of a cluster-fuck
--the mortgage broker said the loan had no PMI, but last minute it had PMI. We
had 2 days before closing, and couldn't find a better deal, so we had them
drop the rate).

Our family income is north of the projected Merz' family income of $290k, and
while we could afford that 1.8m home, financially it wouldn't make sense to
tie up so much of our income into a house (even though it would be straight
baller).

~~~
orky56
Have you tried making extra payments to get your principal up from 10% to 20%
sooner? That's the ideal situation for someone with more disposable income but
less in savings (or doesn't want to tie up more saving in equity). The main
thing to note is that you need to get up to 20% as quick as possible. That's
because 20% is based on the current appraisal value of the property, not the
purchase price. With Bay Area and other real estate markets appreciating so
much, it's a ticking time bomb to get out of PMI.

~~~
jdmichal
> That's because 20% is based on the current appraisal value of the property,
> not the purchase price. With Bay Area and other real estate markets
> appreciating so much, it's a ticking time bomb to get out of PMI.

I think you have that reversed. If values are rising, you have to do _less_
work to get to 80% LTV (loan-to-value).

Example: I put $10 down on $100 worth of stuff with a $90 loan, giving a 90%
LTV. If the value of stuff jumps to $120, then that $90 loan is now at 75%
LTV, with zero payments made.

------
czep
Any advice on where to look for a house in the bay area right now?

Like I'm sure a million others, I'm sick of renting in a market where
landlords sell and evict every day (happening to me right now, again). Got a
kid, need good schools. Other than that, anything goes. I just want to live
without constant fear of being upended every 6 months. Is that so much to ask?

~~~
jhspaybar
I'm in the same boat, rented for my first year back in the bay after living in
Seattle for a number of years and my landlord wouldn't let me sign another
year long lease(meaning, I'm going to get booted sometime sooner). I just
bought a home in Pleasanton and I'll be taking a shuttle to my
office(everything in the south bay seems to have them). And, if I change jobs
I can make it into SF on bart.

------
6stringmerc
I seem to recall Angelo Mozilo doing some similar "deal making" type things
for US Government Employees during the time he was turing Country Wide into a
cesspool of bad loans. And, for some reason, he's never had to atone for his
role in the 2008 crash. Not like he's the only one though.

------
baq
the more money you've got, the cheaper it is to get more. money follows
economies of scale.

~~~
zanalyzer
and having no money is expensive..

see Louis CK :) [https://youtu.be/rMG1MOn49Ts](https://youtu.be/rMG1MOn49Ts)

------
artursapek
Why does someone like Zuck need a mortgage? Is it economically advantageous to
him in a significant way?

~~~
mywittyname
He doesn't _need_ a mortgage, it's just financially savvy to have one.

He avoids paying taxes on the sale of stocks to finance the home.

Mortgage interest is tax deductible.

His stocks will almost certainly yield more than the interest rate on the
mortgage.

He's getting a sweetheart deal from the bank.

For him, selling stock is a PITA because he has special class of stock that
grant him voting rights far beyond what a normal share is worth. These special
shares are granted to him by the board of directors. So selling 1 share means
losing like 1000 votes (they convert back to 1:1 upon sale), meaning he needs
to be careful when liquidating assets. By waiting five years, he can use
vested options to pay the mortgage, rather than selling his special class
stock.

~~~
sybhn
>He avoids paying taxes on the sale of stocks to finance the home.

Can you elaborate on that?

~~~
gdubs
If you want to buy a million dollar home using shares, you have to liquidate
them and pay capital gains. By getting a mortgage you lower the amount of
income you 'realize' on a year-to-year basis, lowering your taxable income.
There are details on capital gains vs income taxes, etc, but in general I
think the point was that the less income you realize in a given year, the less
taxes you'll pay.

~~~
DannyBee
"If you want to buy a million dollar home using shares, you have to liquidate
them and pay capital gains. "

Just to note: you don't :) In fact, if you wanted to pay all cash, and had
enough shares, you'd generally take out a portfolio loan against the shares at
some very low interest rate (probably not lower than current mortgage rates
however) rather than sell the shares at all.

Whether this is better/worse than a mortgage depends on various things.

------
whack
I have little interest in tying myself down by buying a house, but the part
that's most appealing to me is the mortgage structure. You get to borrow money
at a ~3.5% interest rate, in order to invest in something that produces 5-7%
yearly returns. On average, this is going to make a ton of money in the long
term.

Is there any way to do something similar with stocks, without paying an insane
amount of money in interest rates or fees?

Edit: I know returns aren't guaranteed, I'm referring to expected returns. I'm
perfectly willing to take on risk, in order to make positive-EV bets. I tossed
out the 5-7% number as a very rough approximation - assuming that you buy a
house with a buy-rent ratio of < 20, in which case the returns that you make
by not having to pay rent, will be 5% or more.

~~~
refurb
Why do you assume housing provides a 5-7% yearly return?

Past performance is no guarantee of future performance.

You're also ignoring the carrying costs of a house.

~~~
tantalor
> carrying costs of a house

Indeed, taxes and insurance can dominate the mortgage.

~~~
ryandrake
Not to mention a new roof.

~~~
coldcode
Or fixing it up in order to sell it at a reasonable price (not in SF area).

------
GeneralMayhem
>30-year adjustable-rate mortgages

>clients for life

You'd think what is very clearly a paid advertisement for SFCU and SoFi would
leave out the scariest details.

------
bwb
doesn't seem to surprising, high job demand, high salary = low risk to banks.

------
ryandrake
I'm confused. The title says "Silicon Valley Elites" but the article says
"tech workers", then goes on to list Mark Zuckerberg and some Apple guy who's
salary is apparently 50%(!) stock, as examples.

So who are these banks "courting" again? Elites or tech workers? Or just these
two guys? It's hard to tell. Interesting news would be "Banks giving kickbacks
to CEOs and VCs who throw them corporate business." This article seems to just
be "Look! Some people are getting sweet deals on their mortgages."

~~~
CPLX
I find it hilarious that the answer to this isn't obvious.

This is 2016. Tech workers _are_ the American elites.

Did you think elites were still guys with a monacle sitting in a drawing room
that overlooks a coal mine or something?

~~~
GeneralMayhem
The new elites are in tech, but they're not the rank and file. Making even
$250k/yr may be top-5% for income and give you breathing room to make a few
investments, but it will never make you _wealthy_. That's lifetime earnings of
about $10m before taxes, so you likely wouldn't get to fuck-you money ever,
let alone with time to use it.

There's a very serious discontinuity somewhere around the $1m/year mark where
you get to the point that you don't have to work for the rest of your life
while you're still young. There's another huge difference between that and the
guys worth $100m+ who can have whatever they want, including financing insane
research and construction projects, not just the normal comfortable middle-
class lifestyle, and never run out of money.

Putting those people in the same group as your average software engineer for
socioeconomic purposes is ridiculous. Sure, I might have more in common with
Zuckerberg than with a coal miner, but only just, and that's not saying much.

~~~
CPLX
> it will never make you wealthy. That's lifetime earnings of about $10m
> before taxes

This thread has taught me that people in the valley or the HN echo chamber
really sort of have no idea how most people live in this country, let alone
around the world.

~~~
rckclmbr
and you must have no idea how much it costs to live in the bay area. a dentist
in arizona will have a higher net worth at retirement than a tech worker in
the bay area.

~~~
CPLX
> and you must have no idea how much it costs to live in the bay area

I live in New York City. I could probably grok the basic concept.

