Barack Obama's New Housing Problem

This past weekend I commented on a report from the Boston Globe regarding a story from Barack Obama's days as a State Senator. This report revealed that Obama landed several lucrative contracts for real estate developer power players like Tony Rezko to build private low income housing. It turns out that Obama did a horrendous job of "watching the money" and most of these projects are now unlivable.

Now, comes a report that Barack Obama received his own VIP loan from Northern Trust.

Shortly after joining the U.S. Senate and while enjoying a surge in income, Barack Obama bought a $1.65 million restored Georgian mansion in an upscale Chicago neighborhood. To finance the purchase, he secured a $1.32 million loan from Northern Trust in Illinois.

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The freshman Democratic senator received a discount. He locked in an interest rate of 5.625 percent on the 30-year fixed-rate mortgage, below the average for such loans at the time in Chicago. The loan was unusually large, known in banker lingo as a "super super jumbo." Obama paid no origination fee or discount points, as some consumers do to reduce their interest rates. Compared with the average terms offered at the time in Chicago, Obama's rate could have saved him more than $300 per month.

Obama spokesman Ben LaBolt said the rate was adjusted to account for a competing offer from another lender and other factors. "The Obamas have since had as much as $3 million invested through Northern Trust," he said in a statement.

I am going to travel fairly far back in interest rate time, however the market for a loan of $1.3 million dollars, thirty years fixed, 80% Loan to Value, owner occupied, full documentation (I am taking the best case scenario here) was nowhere near 5.625%. Obama's claim that another bank offered such a rate and that is why Northern Trust matched it is ridiculous. These rates are determined by a market. The rate for such a loan was significantly higher. The Washington Post estimates that he saved $300 a month. I think this number is way off. On a loan amount of this size, each quarter of a percent in savings is just over $200 per month. This story is then assuming a savings of about .375%. If that is the case, there is no story. .375% in savings could have happened by merely timing it right.

The reality is that the market for a loan, in my estimation, the size of Obama's was nowhere near 5.625%. If memory serves me right, such a loan would have gone for nearly 7%. Obama is right in saying that banks often match rates. He is also right in saying that banks offer discounts to customers that hold multiple accounts with said bank. He is wildly overstating the degree to such a discount for a normal customer. A customer might save up to a quarter of a percent by having multiple accounts with the bank they do their mortgage with. I believe he saved a full percentage point or more.

Here is how the story explains it.

In Obama's case, he received a lower rate than the average offered at the time in Chicago for similarly structured jumbo loans. He secured his final mortgage commitment on June 8, 2005, and during that week, rates on similar loans for which information is available averaged 5.93 percent, according to HSH Associates, which surveys lenders. Another survey firm, Bankrate.com, placed the average at 6percent.

However, the story then reveals a huge caveat on the numbers they use.

The Obamas had no prior relationship with Northern Trust when they applied for the loan. They received an oral commitment on Feb. 4, 2005, and locked in the rate of 5.625 percent, the campaign said. On that date, HSH data show, the average rate in Chicago for a 30-year fixed-rate jumbo loan with no points was about 5.94 percent.

Jumbo loans are for amounts up to $650,000, but the Obamas' $1.32 million loan was so large that few comparables are available. Mortgage specialists say that many high-end buyers pay cash.

When the story says that the average rate was 6%, that is on a loan amount of 417k to 650k. Obama's loan amount was 1.32 million dollars. There is a massive price adjustment for such a loan amount. Banks take an enormous risk loaning such a large loan amount to one borrower. 1.32 million dollars is the equivalent of six or seven regular sized loans. If Obama went bad, that would be an enormous hit to the balance sheet of Northern Trust. I suspect that if the normal jumbo loan was going for 6%, this so called super jumbo was 6.5% minimum. As such, if he received a rate of 5.625%, he would have enjoyed an enormous savings.

Barack Obama received the same rate that an individual that was taking a loan amount less than 417k would have received at the time. As such, he received enormous cosideration and not the sort of consideration he would have received merely for doing a lot of banking business with Northern Trust. The sort of discount he received he only got because of his position in the Senate.

For an updated summary of all the corruption and hypocrisy that Barack Obama has committed in real estate and mortgages, please click this link.