A credit union in San Francisco is offering a $2 million, no down payment mortgage loan to borrowers. And while this is being offered by a credit union, credit unions of necessity being more cautious lenders than banks, and the credit union will no doubt vet potential borrowers very carefully, what could be more indicative of a bubble than a no down payment, adjustable rate jumbo loan? Sure, this may not be a NINJA loan, but it’s being offered because of the huge amount of easy money pumped into the financial system by the Federal Reserve.
San Francisco’s real estate market is widely regarded as being in a bubble, boosted by the money flowing into the tech industry. The tech industry, of course, is also regarded as being in its own bubble, brought about by the massive amounts of money poured into the financial system by the Federal Reserve in response to the 2008 financial crisis. With the Fed possibly on the cusp of raising rates, one has to wonder how much longer the tech bubble will last. The amazingly huge valuations of tech companies that, even years into their operations, have yet to make profits anywhere close to projections (assuming they’re in the black at all) point to injections of massive amounts of easy money.
In the age of zero interest rates, investors are desperate for a return, and thus have created Dotcom 2.0. When the tech bubble eventually collapses, the San Francisco housing market will go down with it. Borrowers who thought that their big tech payouts would mean that a $2 million mortgage would be no big deal to pay off will find themselves in a tough spot. And with very little equity in their house, the temptation to walk away from their mortgages will be immense. All the money flowing into real estate in recent years may have financial institutions thinking things are A-OK, but jumbo loans aren’t a foolproof bet. Rich people default too, so let’s hope the credit union does a good job in vetting the recipients of its loans.