Tuesday, July 08, 2008

They Didn't Raise This Bar

AK e-mails with the good news that Barack Obama was not one of those people who was "tricked" into buying a house he couldn't afford.

Just thought I'd give you my take as a mortgage banker on the Washington Post article about Mr. Obama's mortgage.

Leave alone for the moment the actual purchase of Barak "Barry" H. Obama's personal mansion, a $2.3 million dollar property he purchased for $1.65 million assisted by financier Tony Rezko, now a convicted felon. Forget even the unique financial circumstances under which Mrs. Rezko "qualified" to finance the purchase of the adjacent $625k vacant dirt lot on a salary of thirty-seven grand a year.

Rather, I am fascinated by the "in depth and detailed" story printed by the Washington Post (A3), regarding how the shrewd and astute Mr. B.H. Obama was in securing below market interest rate financing on his mortgage.

To me it appears that the "reporter" simply regurgitated the official position of the Obama campaign's "(Spare) Change You Can Believe In!" press release. I don't know what was actually researched, but my analysis raises several distinct issues.

After almost thirty years in the mortgage business, it's not the answers the client gives that matter, it's the questions those answers raise. With the proviso that current market conditions are skewed and severely distorted by the on-going credit-crisis/credit-crunch, here are some of the issues.

1. May, June and July of 2005 average Conforming (not Jumbo) mortgage rates ranged from 5.625%-5.875%. These rates ASSUME a 1.0% "origination fee" included in revenue stream. Eliminating (i.e. waiving) that revenue or fee, would result in at least a .25% higher rate.

2. Jumbo interest rates traditionally run about .25%-.375% above conforming rates. That would mean a 30yr fixed Jumbo from as low as 5.875%, and up to 6.25%. Again, this supposes origination fee revenue. Waiving 1% in fees would result in a rate between 6.125% and 6.375%. The expert(s) cited in the article claim 5.93-6.0% as comparable rates in that time-frame. No indication if those rates were available without origination fees, but the range is consistent with my hypothesis.

3. Jumbo and Super-Jumbo and Super-Super-Jumbo are names for categories of loan risk. Generally speaking, the higher the risk, the higher the price, or greater the down-payment, or a combination of both. Sen. Obama made a twenty-percent down-payment and borrowed 80%. More typical and appropriate down-payments would have been twenty-five to thirty percent, with 75% to 70% maximum loan-to-value. Even with the requisite larger down-payments, loans in excess of $1,000,000 will typically carry additional cost either in the form of discount points or slightly increased yield, suggesting a rate between 6.25% and 6.50%.

4. The standard 1% Origination fee is income to the lender, and a closing cost for the consumer. Under current tax code, origination fee is considered a finance charge and is 100% deductable on the purchase of your principal residence. Senator Barak appears to have passed on that $13,200.00 opportunity, preferring apparently to keep the extra cash in his pocket, in combination with a significantly reduced interest rate.

In summation: the Honorable Barak Hussein Obama - junior Senator from Illinois, using his God-given talents and negotiating skills secured mortgage financing at least one-half percent below, and maybe as much as seven-eights below market-rate. That's not $300 per month, that's up to $30,000+ during his first six-year term. Moreover, permanently "buying-down" an interest rate 1/2% would typically cost about 1.5-2.0% discount points (also tax deductible. 1 point = 1 percent of loan).

At 5.625% on a super-jumbo, 80% loan-to-value loan with no points and no origination fees, Illinois'' fiscally conservative representative saved somewhere between $13,200 and $39,600 on lender charges, another $100,000-$200,000 in cash up-front on reduced down-payment requirements, and $422 each and every month on his mortgage payment. Anyway you slice it, that's up to $250,000 "savings" for the up and coming Senator.

Now none of this proves wrong-doing, or favoritism. It is perfectly legal for a lender to originate a loan for no income, or even at a loss depending on the circumstances of the loan or the characteristics of the borrower and property. That would be a straight forward business decision to deliver a higher level of customer service and client benefit in the interests of a future business opportunity or future relationship.

One thing is for sure. He did get one hell of a deal! It's not the type of deal you or I could get, unless you had ACORN and Barney Frank on your side. And it directly contradicts Senator Barak's cover story about "competing offers". Nobody in my business competes to lose money, or pay to fund a loan. That's what appears to have happened in this instance, and the beneficiary appears to be the Democrat nominee for President of the United States.

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