Last year, we partnered with Redwood Credit Union to support their launch of a new type of construction loan that could make building an ADU more accessible to more people in Napa and Sonoma counties. As part of this effort, NVCF established a $100,000 loan-loss reserve fund to help RCU defray any actual monetary loss it might incur under the program’s new underwriting standards.
Our President & CEO, Terence Mulligan, recently sat down with Brett Martinez, President & CEO of Redwood Credit Union to check in on how this innovative partnership has been going.
Terence: Your new admin campus in Napa is a beauty. How are your staff settling in?
Brett: Our team members are really enjoying our 8.5-acre Napa campus. Our new building is a sustainable, solar-supported facility with plentiful parking and electric vehicle chargers. It has a community room able to seat 500 people and a public café opening soon with fresh and affordable food. Having two administrative sites also ensures uninterrupted service and support across all functions in the event of disaster.
In addition to the future café, the new site offers a spacious and comfortable break room, courtyard for relaxation, and places to walk so team members can connect at the office.
We’re extremely excited about our growth and partnerships in Napa. The location allows us to access talent from Napa and Solano counties and beyond. Our Members have full banking services at this new, second Napa branch, including a drive-up ATM, support for mortgage and other loans, insurance, investments, and auto buying with the trusted and individual service they’ve come to expect.
Terence: Can you share total ADU loan data, including closed loans, loans in-process and an estimate regarding inquiries?
Brett: We’ve had a lot of interest in this loan with great results. Since the ADU loans were made available:
- 111 applications have been received.
- 18 have been funded and 2 projects already completed.
- We’ve had roughly 500 inquiries related to ADU Construction. Approximately 20% of inquiries are turning into applications.
- 41 ADU Construction Loans are credit approved but are pending contractor documentation or permits.
We have found that it is not unusual for a year to pass between the time a Member inquires, and when they break ground on construction. It all depends on how far along they are when they reach out for information on the loan process. Some Members come to us with plans complete, a contractor chosen, even permits in hand, while others, are just getting started. On average, we find that Members are anywhere from 6-12 months out from being ready to get started when they first inquire with RCU. Then, depending on the type of ADU, it could take another 6-12 months to complete construction.
Terence: What can you tell us about the credit quality of the loans you’re seeing? Are there any challenges about this particular economic moment that are affecting uptake of the new ADU loan product?
Brett: With a rising interest rate environment, the number one non-qualifying issue is debt-to-income (DTI) ratio. Even with the expanded ADU loan qualifying guidelines and the use of future rent for income, a borrower may not meet the DTI requirements.
A secondary issue is the loan-to-value (LTV) ratio. Like DTI, there have been a few examples where even with the future value of the ADU included the appraised value doesn’t support the loan amount requested. In spite of those challenges, we’re often able to restructure and still find a solution for the member.
Terence: Do you see this initiative and partnership shaping the future of housing in our community or influencing other communities to do something similar?
Brett: There’s tremendous potential to encourage more ADUs in our community and other communities across the country. In fact, as we have gained momentum with inquiries, applications, and completed projects, we’ve been contacted by multiple municipalities and financial institutions all over the country wanting us to share the details of our program and this important, strategic partnership. Our collaboration has been featured in many articles, including the Credit Union Times. In addition to sharing our educational programs, we walk through our unique underwriting approach, which allows the use of the future value of the property after the ADU is complete, and the use of rent as income today. This enables borrowers to qualify who otherwise might not, due to strict secondary marketing guidelines.
Terence: It’s been about a year and a half since we teamed up to do something innovative in the ADU loan space. How have things been going?
Brett: We feel this first-of-a-kind partnership has worked very well. With the housing shortage, the research we did showed that the obstacles to moving forward with an ADU are often cost, financing, and the perception (and reality) that the planning, permitting, and building process is arduous. Partnering with Napa Valley Community Foundation allows us to collaborate to bring together education expertise in the permit/building process and financing to overcome some of the obstacles preventing homeowners from moving forward in building an ADU. We jointly developed online webinars covering the intricacies of building an ADU from beginning to end. These educational webinars generated many inquiries and interest and have ultimately led to more ADUs and more housing. As we continue to partner to remove barriers and increase awareness, we can help to alleviate housing challenges and create much-needed affordable housing.