When UC Berkeley law school professor Mark Gergen was considering a move from Texas in 2007, the biggest factor in his decision was the quality of the institution.
But a low-interest home loan offered by the University of California, which helped him buy into the expensive Bay Area market, certainly helped.
“It was a material factor,” Gergen said. “It made it much easier to persuade my wife.”
Since 1984, more than 6,000 UC professors and nearly 200 executives have saved thousands of dollars a year through a university program to assist them in purchasing residences near the campuses where they work.
University officials and faculty say it has been an important recruiting and retention tool for bringing a world-class teaching staff to pricey areas, like Los Angeles, San Diego and Davis, on salaries lower than competing schools.
But the Mortgage Origination Program came under fire in a blistering state audit last week that questioned whether UC had done enough to reduce its costs before recruiting higher-paying out-of-state and international students to raise revenue.
The report suggested that the university conduct a cost-benefit analysis to determine whether hundreds of millions of dollars tied up in outstanding loan balances might be better used elsewhere. With an interest rate tied to short-term investment earnings, UC is bringing in about a quarter of what it could if those funds were invested in its intermediate-term portfolio instead – nearly $22 million over the past five years, according to the state auditor’s office.
“It needs to consider whether the low return on its investment is worth the cost,” the audit stated.
Nathan Brostrom, UC’s chief financial officer, said that represents a fundamental misunderstanding of the purpose of the program, which provides money from the university’s short-term investment pool – a highly liquid fund that primarily covers operating expenses like payroll and construction – to faculty and some administrators buying homes in their campus area for the first time.
As of March 31, it was servicing 2,808 active loans totaling about $1.27 billion. But all of them are sold to outside investors over time; UC currently owns only 496 loans worth about $293 million.
That money might generate better returns in other investments, but Brostrom said the risk does not outweigh providing a definite incentive for faculty, and the university earns some money on the loans.
“This one is truly baffling to me,” Brostrom said. “It’s a tremendous benefit that doesn’t cost us anything.”
Participants can secure loans of up to $1.3 million, with terms of up to 40 years and no private mortgage insurance, on just 10 percent down. Interest rates are adjusted for each loan annually, based on the investment pool’s average rate of return over the previous four quarters. A floor of 3 percent was instituted in 2010, and the rate has stayed there since.
Dan McIntire, a loan officer with Cherry Creek Mortgage Company in Roseville, said that’s a great deal for borrowers, especially those who don’t have the 20 percent down typically required to qualify for a large loan.
Mortgage insurance, for down payments of less than 20 percent, can cost hundreds of dollars more each month, depending on the size of the loan. An interest rate of 3 percent, which is about 1 percentage point lower than what is currently available on the commercial market, could also offer several hundred dollars per month in savings.
“I’d do it,” McIntire said, though he added that for someone who can make a 20 percent down payment, the more negligible cost difference and risk associated with an adjustable rate might make a commercial loan preferable.
Some faculty representatives say the program’s benefits suffered because of the 2010 change.
As co-chair of the Faculty Welfare Committee at Berkeley, Gergen said he has heard about more recent hires who passed on the UC loan.
“It’s not a very big benefit now,” he said. “It’s a program that I would like the university to strengthen.”
But with California’s housing prices skyrocketing, UC believes the assistance is still making a crucial difference. The average loan so far this fiscal year is $613,000, compared to $450,300 for all loans the program has funded. About half of new recruits participate, according to the university, a rate that has stayed fairly consistent over time.
It’s also a small way UC hopes to remain attractive for candidates who could earn a higher salary and other perks at wealthier universities, such as Stanford, which has its own home loan program for faculty and staff.
“We’re always looking for anything we can do to make ourselves competitive with privates that have more resources than we do,” Brostrom said.
Rachael Goodhue, a professor of agricultural economics at UC Davis, took out a home loan when she was hired in 1998 that allowed her to buy an acreage near Winters. She said it indicated to her that the university was invested in her being there and wanted her to stay.
“This is one way to level the playing field for people,” she said. “It was a signal that the university was committed to the faculty.”