CalSTRS officials are wondering if a $1 billion home loan program, booming in the wake of the real estate crash, is too risky for the pension fund and putting teachers into homes they can’t afford.
The program that allows teachers to buy a home with a low down payment, 3 percent of the purchase price, did more business last year than the previous five years combined.
Teachers qualify for mortgages based on 80 percent of the value of the home. The key to the program is that 17 percent of the purchase price is covered by a second mortgage, on which payments are delayed for five years.
But in the post-crash world, the California State Teachers Retirement System can no longer get insurance for the second mortgages or resell them on the market.
New accounting rules require that the second mortgages be carried on the books at market value, now an estimated 90 percent less than their cost. And by law, the home loan program is supposed to turn a profit like other pension fund investments.
When home values and salaries were going up every year, teachers with growing incomes could use the increased equity in their homes to refinance the second mortgages before payments started after five years.
Now there is concern that the home buyers, after five years, may feel they are being hit with an unaffordable “balloon” payment. The home loan program for teachers has a foreclosure rate well below average so far.
But at a CalSTRS board meeting last week, there was uncertainty about whether the foreclosure rate will change. Little data was available on the number of homes in the program that are “underwater,“ worth less than owed on the mortgage.
Solange Brooks, a CalSTRS investment officer, told the board that a federal program will help teachers in the program refinance the first mortgage on 80 percent of the purchase price, but it does not cover second mortgages.
One way to look at the situation, said Brooks, is that many home buyers, some with help from the federal program, will be able to refinance their first mortgage, making it easier to begin payment on the second mortgage.
“The other way to look at it is we have incredible risk with all the second mortgages we are holding, because we cannot sell them,” Brooks said.
Chris Ailman, the CalSTRS chief investment officer, said attitudes have changed since the crash. What was once viewed as making housing affordable is now regarded by some banks as “negative amortizing,” where debt increases despite monthly payments.
“We are qualifying people for a home they can’t afford,” said Ailman. “They can only afford to pay for 80 percent of that house, yet we are financing for 100 percent.”
“Prior to 2008 that was a good thing and part of the third leg of the stool (a retirement with pension, individual investment, home equity),” he said. “I’m having a whole new fresh perspective about: Is this really a good thing for teachers or are we suckering them in?”
Ailman said there is a built-in conflict between the desire of the board to provide a home-buying benefit for members and the law requiring that investments be intended to yield a profit.
CalSTRS began its home loan program in 1984 with fixed-rate mortgages for 15 years and 30 years. In 2000 CalSTRS added a zero down payment program with a first mortgage on 95 percent of the purchase price and a second mortgage on 5 percent.
The “95/5” program was suspended in June 2008 because of market conditions and the inability to get insurance. But the “80/17” program begun in 2001 not only continues, but had a growth spurt last year.
The low down payment program was 90 percent of the 4,351 mortgages worth $727.8 million issued through CalSTRS last year — more than the total of loans issued in the five previous years.
Since 1987, the CalSTRS home loan program has issued 39,556 mortgages worth $5.3 billion. More than $1 billion of the total was issued through the two low down payment programs.
Countrywide, a firm linked with subprime mortgages and other problems, became the “master servicing agent” of the CalSTRS home loan program in 2004. The Bank of America, after acquiring Countrywide, took over the task in 2008.
A member of the CalSTRS board, state Controller John Chiang, drew a laugh last week when he made a comment to a Bank of America representative after questioning the staff about the home loan program.
“I don’t want us to be Countrywide, prior to your acquisition,” Chiang said.
CalSTRS board member Carolyn Widener suggested that CalSTRS join with other public pensions to seek federal relief. She was told that CalSTRS and the California Public Employees Retirement System are among the few that have home loan programs.
The CalPERS program begun in 1981 had issued 133,000 home loans worth $21 billion by the end of 2008. The CalPERS program has several low down payment options, one requiring “as little as $500 from your own funds.”
Last year CalPERS suspended a “float down feature” giving the buyer the lowest of the interest rates posted on three key dates. A “whole loan” program also was suspended.
Loans too big to be guaranteed by federal agencies were directly owned by CalPERS. The “whole loan” program had a relatively high delinquency rate, 7.8 percent, and CalPERS reported losing $3 million on the program since 1997.
The sprawling CalPERS home loan program has 31 lenders and about 3,000 certified loan officers. In December 2008, the manager of the program, CitiMortgage, laid off the California staff that had been managing the program.
The CalPERS board was told late last year that the program is now being run by CitiMortgage staff in Dallas and some CalPERS staff. But there has been “a drop in customer service and quality control.”
CitiMortgage does not want to “add resources.” So CalPERS plans to seek a new manager, which may be difficult. Only one proposal was received in 2007 when CalPERS asked for bids to manage the program.
Despite the problems, the home loan programs have strong support on the pension boards. At CalSTRS, Widener urged the staff to dig deep in an analysis of the program and to consider alternatives.
“Let’s see if we can continue our commitment to try to help teachers build wealth in this way, because it has over the long term been very much a matter of making teachers middle class,” Widener said.
“Owning real estate has really done it,” she said. “It has given them an opportunity really to become members of the middle class, and we have done a good job of helping.”
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 11 Feb 10