Even affluent, good-credit-risk Palo Altans are feeling spinoff effects of the national and international collapse of the subprime mortgage market.
Local experts said Friday that even the financially fortunate are not immune and that the subprime collapse may even affect the venture-capital market and hence start-up businesses.
"Even if you have great credit and make a lot of money, it's becoming more difficult to qualify for a loan," Chris Iverson, an agent with Keller Williams Realty in Palo Alto, said.
During the earlier real estate boom, the numbers of investors with poor credit financing mortgages with subprime loans, whose interest rates can skyrocket after a year or two, increased dramatically.
As the housing boom decelerated, many defaulted on now-high subprime payments, leaving the American subprime market damaged and European investors shaken.
On Thursday, France's largest bank stopped removal from funds exposed to the U.S. subprime market, while banks throughout Europe pumped money into their systems to prevent crisis.
And while the woes of typically poor-credit investors and Continental banking houses may seem far removed from Palo Alto, Iverson and others say the subprime crisis is having a clear impact.
"Some loans are going to be harder to get," Iverson said.
For example, residents with variable income, such as those who earn from market investments, salespeople who get paid on commission or consultants, typically opt for stated-income loans.
"Stated-income loans allow earners without a W2 tax form to simply say, 'This is how much money I make,' without going through a long, complex documentation process," Iverson said.
Since documentation of variable income is tricky and time-consuming, consultants and investors in Palo Alto have been drawn to such stated-income loans.
But the shattered subprime market has made lenders more cautious, Iverson said.
"People who have really good credit and really high cash flow -- your typical Palo Alto buyer -- are encountering more stringent requirements. Lenders are saying, 'I want to see stuff backing up what you're telling me,'" he said.
But the increasing reluctance of brokers to offer stated-income loans affects not just the affluent.
"If you do away with stated-income loans, you jeopardize an entire industry of people that are maybe getting paid in cash," said Julia Wei, a real estate and mortgage lawyer at the Law Offices of Peter N. Brewer in Palo Alto.
Cash earners in Palo Alto include waiters and waitresses, day laborers, migrant workers or any other undocumented workforce.
Wei also speculated that subprime troubles abroad could affect the local start-up venture-capital economy.
"We have a lot of venture funding here on Sand Hill Road," she said. "We don't really know where partners [backing the venture capital funds have holdings, but I can't imagine it's entirely local. And if there are international investors feeling the squeeze because generally the economy is affected by the subprime news, they might pull out funds," Wei said.
If investors pull funds out of venture capital, the start-up companies that rely on venture funding may falter. This could have a short-term negative impact on Palo Alto's economy, which is intricately linked to local start-ups, Wei suggested.
"We all know someone who works for a start-up."
And although the national default-and-foreclosure trend is less prevalent in communities with fewer subprime loans, Palo Alto is experiencing more foreclosures, Iverson said.
He cautioned against drawing dire conclusions from the rising numbers, however.
"Percentage-wise, you could say, 'Oh, foreclosures have gone up 200 percent,' but that's an increase from a very small number to a slightly larger one," he said.
Wei also pointed out that the rising number of local foreclosures and more common short sells, which indicate cash-flow problems, are part of a larger market cycle.
"We didn't get those calls for the last seven or eight years. ... I had the novel experience of dealing with a paralegal who didn't even know what a short sell was," she said.
"But as far as these problems [of short sells and foreclosure we've seen them a decade ago. And also in the savings and loan crisis of the early '80s and late '90s."