Credit Union Strives to Help House Santa Cruz’s Working Poor

The financial meltdown of 2008 had deep roots in real estate lending. While banks recovered, homeownership has not.

The recovery that followed has left many groups behind – from older workers whose retirements were wiped out to younger workers whose careers were delayed. And housing has been particularly vexing for lower income families living in high income areas.

Often they are African Americans, Hispanics or other minorities.

Credit unions were created to help working families get a square deal, providing them with reasonably priced loans, better savings rates and lower-cost options for checking accounts at institutions that they owned and were committed to serving them.

Santa Cruz Community Credit Union ($119.9 million in assets, 12,877 members) is one of them. It was one of the first Community Development Financial Institutions created in the 1990s to serve low-income residents. Last year, nearly one in 10 credit union members belonged to a credit union that the U.S Treasury Department has certified as a CDFI.

Beth Carr, the credit union’s president/CEO, said many founding members in 1977 were “hippies and professors at the university.” Many have established small businesses. Many bought homes years ago for a couple hundred thousand dollars that are now worth more than $1 million.

The credit union is in one of the nation’s most expensive housing markets, a county along the Pacific coast about 80 miles south of San Francisco and 30 miles south of San Jose, the heart of Silicon Valley.

Carr, who moved to the community from Ventura County in 2011 to lead the credit union, is still among about 80% of the staff who rent because they can’t afford to buy a home in the market.

The richest part of the county is Santa Cruz, the county seat and home to the University of California Santa Cruz. Residents have been debating ordinances to limit skyrocketing rents and provide greater protection against evictions.

The poorest part of the county is 20 miles down state Route 1 around Watsonville, home to many Hispanics and workers on farms growing strawberries, cauliflower, broccoli and lettuce.

In 1997 the credit union received a CDFI grant that allowed it to open an office in Watsonville. The area remains the focus of the credit union’s efforts. Many residents don’t have credit scores or a Social Security number, Jim Falls, the credit union’s chief lending officer, said.

“Most of our growth is trying to attract members from that area because they never had an opportunity to work with anybody at a financial institution,” Falls said. “The people who have high incomes are not going to come to us for a home loan. And they might not even come to us for a car loan.”

Santa Cruz Community’s latest CDFI grant was $686,000 and received in June to support loans made for businesses or affordable housing in Watsonville, and other low-income parts of the county over the next three years. The grant essentially funds the loan loss allowance to cover the extra risk the credit union takes in making loans to businesses or others.

“It allows you to go beyond your normal guidelines a little bit without risking the interest of the credit union or putting the borrower in a position that would create a problem for them down the road,” Falls said.

CDFIs like Santa Cruz Community are increasingly expanding their mission into home loans because so many residents get overlooked by banks.

Santa Cruz is the second-highest poverty county in California, largely because housing is so expensive. The Census Bureau estimates the county’s 2016 poverty rate was 15.1%, slightly above the U.S. rate of 12.7% that year. However, a study by The Public Policy Institute of California found 23.8% of Santa Cruz County residents from 2014 to 2016 were in poverty when accounting for differences in local costs of living.

To be above the poverty level in the county, the institute estimated a person needs to be making at least $33,953 a year, or about $17 per hour.

The biggest difference, Carr said, was housing costs. Like the rest of the nation, Census estimates show homeownership rates fell in Santa Cruz County in the wake of the Great Recession. Just over 60% of households were homeowners in 2009. By 2015 and 2016, the rate had fallen to 56%.

Nationally, homeownership fell from 67% in 2009 to about 64% from 2014 through 2017. The declines have been especially severe among people age 35 or younger. And the homeownership gap has widened between whites and minorities.

Among African Americans and Hispanics, homeownership reached a peak of nearly 50% in the six years leading up to the 2008 financial crisis, but the rates have dropped to about 43% for Hispanics and 41% for blacks by 2017. For non-Hispanic whites, homeownership fell from 75% in 2008 to about 72% in 2017.

One response by Santa Cruz Community has been to loan money for members to buy manufactured homes that sit on rented sites – something few credit unions do. In 2017, Santa Cruz Community made $3.4 million in first-lien purchase mortgages to owner occupants, all 18 of them for manufactured homes.

The average household income of the applicants was $100,167, compared with a median family income in the MSA of $85,000. The average loan was $187,000. Of the 18 mortgages, 11 were to minorities. Minority applicant households earned an average of $88,000 per year, and received mortgages averaging $175,000. Non-minority applicants had average incomes of $119,000, and average mortgages of $206,000.

Last year, credit unions originated 19,555 first-lien mortgages worth $1.6 billion for manufactured homes. They represented 4.7% of the number of first-lien loans to owner occupants in 2017, up from 4.2% in 2016.

The value was less, of course, but also showed an uptick: 1.8% of the value of originations, up from 1.6% in 2016. The average manufactured home loan was $84,000 in 2017, with the average borrower household earning $62,243.

Carr and Falls said manufactured housing is much costlier in Santa Cruz County than elsewhere in the nation because of the high demand for affordable homes. And while mortgages on manufactured homes are riskier than those on site-built homes, the credit union has not lost money in the few cases where it had to foreclose because the resale market is also strong.

“Banks and most credit unions won’t make these loans. We make them, and they work fine,” Falls said. “We don’t have losses and we don’t have delinquencies in this real estate portfolio.”

The credit union’s total real estate originations, including refinancing and home equity loans, have increased from about $300,000 per month three years ago to nearly to $2 million per month now, Falls said.

Every few months, the credit union sees an opportunity to create a significant benefit in the community by taking a high risk. Many of them are referrals from other lenders in the community who know they can’t make the loan, but know Santa Cruz Community might.

Falls, who has been working in credit unions about 20 years, said the credit union uses its expertise and persistence to find ways to say yes to loans, especially when the risk to the credit union can be balanced with the reward to the member.

For example, an extended family of Hispanic immigrants was about to lose their home after 15 years of living in one owned by a farmer. The credit union ended up arranging a mortgage with five different members of the extended family on the title.

“It took all five borrowers, none of whom made more than $25,000 a year, to qualify for this loan,” Falls said. “I don’t know anybody else in this community who would have touched that loan because it’s too complicated with that many borrowers.”

Even the property insurer balked at first. If the credit union hadn’t stepped in, each of the families would have had to sign leases for apartments for $1,500 to $2,000 per month.

“I know it was the right thing to do,” Carr said. “The property was worth it and the people were very earnest. They wanted to make good, own a piece of the property and live there.”