Stanford Report Online

Stanford Report, November 15, 2000
Buying a Bay Area home on a faculty salary
Etchemendy announces major improvements to university programs


Provost John Etchemendy last week announced a significantly improved housing program for faculty -- one designed, for example, to get a $62,928-a-year assistant professor into a home costing as much as $724,000.

The entire program, projected to cost the university $85 million over the next five years, is a bold attempt to confront escalating Bay Area housing costs and their effects on the university's efforts at recruiting junior and senior faculty from elsewhere in the country. Housing costs here are rivaled only by Manhattan's.

In addition to the programs designed to help faculty purchase housing, Etchemendy announced a rent reduction for assistant professors moving into the new Stanford West complex. Those faculty will pay no more than 30 percent of their household income toward rent at the complex's standard apartments. And he announced a salary supplement program for which faculty are eligible after they receive tenure to buy a new house or substantially remodel an existing one.

While the complex home ownership program -- actually a menu of new and existing programs -- was announced at the Nov. 9 Faculty Senate meeting, it had already had some intended effects.

"Just having dealt with these issues in the last couple of days with a recruitment, I can say it works wonders," Craig Heller, biological sciences, said at the senate meeting. "It turns what looked like an impossible situation into an attractive one and probably did more to seal the recruitment than anything."

Etchemendy noted that a faculty task force assigned to examine the housing situation found last spring that housing in the Cambridge, Mass., area cost about half as much as housing around Stanford, while a well-known institution of higher education there offered salaries comparable to Stanford's. "Well, we're going to be doubling what they can purchase with that salary here," Etchemendy said.

The program is designed to enable faculty members to afford "target"- priced properties, and they may be able to exceed the targeted price tags. In the following scenarios (see chart), a faculty member is expected to have available an amount equivalent to 30 percent more of his or her annual salary from, for example, summer earnings or a spouse.

As a result, assuming a 10-percent down payment:

  • An assistant professor earning $62,928 should be able to afford a three-bedroom, two-and-a-half bath condo priced at $574,250, and even a property priced as high as $724,000.

  • An associate professor earning $85,077 should be able to afford a three-bedroom, two-and-a-half bath house priced at $829,000, and even a property priced as high as $935,000.

  • A full professor earning $121,095 should be able to afford a four-bedroom, two- to three-bath house priced at $975,000, and even a property priced as high as $1,210,000.

While the house prices may seem staggering -- and especially so to potential out-of-town recruits -- faculty members are not being asked to take on unrealistic debt loads. The programs and scenarios are based on housing costs amounting to no more than 38 percent of a faculty member's gross salary.

"I've observed that while the debt numbers are large, the ratios of debt to salary are not that different than they were 20 years ago when I first came here," President John Hennessy told the senate, recalling his $16,250 starting salary and $110,000 mortgage. "So those kinds of ratios are not that different than what they were many years ago."

At the same time, the panoply of alphabet-soup­like programs -- HAP, MAP, FARM and DIP -- allows for a degree of flexibility in financing so that prospective owners may pick and choose what works best for them to maximize their equity.

The newest element, called the Deferred Interest Program (DIP), will be available -- for buyers closing escrow after Jan. 1 -- to faculty who have not owned a home since receiving an offer of appointment at Stanford. A nonamortizing loan with zero percent current interest, it can fund up to 20 percent of the purchase price to a maximum of $175,000. No monthly payments are made on the loan. At the time of repayment, the borrower owes the original principal plus Stanford's prorata share of appreciation in the property. If there is no appreciation, the borrower owes only the original unpaid principal. The loan becomes due when the eligible faculty member moves out of his or her home, refinances or becomes ineligible, and the DIP is not transferable to a surviving spouse or domestic partner.

Given a hypothetical $500,000 purchase price, a junior faculty member could:

  • make a $50,000 down payment;
  • take out a conventional loan of $50,000;
  • and get a $100,000 DIP loan.

Such a scenario leaves $300,000 left to finance, which would be done through the Mortgage Assistance Program (MAP) and the Fixed Rate Amortizing Mortgage (officials decided that FARM has more of a ring to it than FRAM).

The MAP is an existing program that is a shared appreciation mortgage. It is a nonamortizing loan with a low current interest payment -- 3.5 percent a year -- with deferred interest due when the house is sold.

"The [deferred] interest that you owe when you sell the house is the lower of Stanford's share of the appreciation or a percent that is calculated by the applicable federal [interest] rate plus 2 percent, which is currently 8.5 percent. So it's capped," Etchemendy said. That is a major improvement over the MAP's precursor programs, such as the Lathrop program, which were capped at 25 percent. With a $100,000 loan, the MAP deferred interest at 8.5 percent over five years comes out to $6,929; at the previous, 25 percent cap, it would amount to $52,490 over a five-year period.

As opposed to the former COIN program, "The MAP program is in no way a coinvestment [between the university and the faculty member]. That is to say, this is actually a relatively costly program for the university, and we are now financing these directly," Etchemendy said.

The FARM loan capitalizes on the university's ability to borrow money at a rate lower than a homeowner can, and passes the savings on to faculty. It is a fixed-rate amortizing mortgage offered at a low market interest rate that is fixed for the duration of the loan term. It can be a 10-, 15-, or 30-year loan and can be mixed and matched with the MAP loans, depending on the borrower's wishes and needs. The advantage of the FARM loan is that the borrower gains more equity than with the MAP. Currently, the interest rate on a 30-year FARM loan is 6.74 percent.

"You can choose how much you want of MAP and how much you want of FARM, up to a total of 60 percent of the purchase price," Etchemendy said.

To help in making payments on the loans, the Housing Assistance Program (HAP) is still available. It is a taxable salary supplement that kicks in for a house purchase. The amount of the supplement is determined by a formula based on a faculty member's first year nine-month salary; the current formula is $8,500 plus 8.5 percent of the salary.

During the first year, home buyers get that full amount. For the next nine years, the salary supplement goes down yearly until it ends completely, but the lower amounts are more than offset by regular annual raises. "It has a leveling effect and allows you to afford a larger mortgage earlier on for those nine years," Etchemendy said.

In addition to HAP, a HAP II program is being created to help faculty move into new homes or substantially remodel their existing homes after they receive tenure. Its amount is identical to HAP, except that it is based on the faculty member's nine-month salary at the time he or she is promoted. HAP II must be used within 10 years of a faculty member's promotion.

HAP II is intended to help faculty members move into larger houses, which they often need around their time of promotion. Separately from HAP II, Etchemendy said, the administration is studying the possibility of offering some sort of program to help faculty remodel their houses. The faculty task force last spring recommended such a program.

A large number of staff -- mostly in the 1M4, 2P5, 3P5 and 4P5 or equivalent pay grades and higher -- are eligible for the MAP and FARM loans, and the university is considering expanding staff eligibility.

The programs are available for on- and off-campus house purchases. They are not available for refinancing homes already purchased.

Following Etchemendy's presentation, Alan Schatzberg, psychiatry, asked: "Are recruits really able to follow this? I'm glad I own a house. This is unbelievable."

Etchemendy said he expected such a question, and said he wondered if there were ways to come up with more understandable programs "comparable in power to these. And I think the answer really is no." But once a potential recruit sits down with the housing office staff and realizes what he or she can afford, the programs become more understandable, he said.

Judith Swain, medicine, lauded the new program. "We heard about it yesterday, and it was the last piece in quite likely securing a recruit we've been after for a long time," she said.