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Thursday, July 03, 2008

Mortgages and Creditworthiness

Washington Post this morning published a breathless piece on the fact that the Obamas got a good deal on their home loan -- a 5.625% rate when the average rate was 5.93%. I live in NYC, and my home mortgage rate is . So what's the big deal.


Nate Silver at FiveThirtyEight delivers a smackdown:


So Obama's rate was 30 basis points better than the average. However, the amount of the loan and the nature of the property are not the only factors that determine a mortgage rate. Another major consideration is the creditworthiness of the borrower. According to current rate quotes from myFICO.com, a borrower with very good credit can expect a mortgage rate about 30 basis points better than someone with pretty good credit, and a borrower with excellent credit can expect about a 50 basis point discount.

Unless the Washington Post has access to Obama's FICO score -- and unless it has rented an apartment to him, it probably doesn't -- it is missing a pretty important piece of information on what Obama's mortgage rate ought to have been. What was Obama's FICO score? I don't know, but considering that...
* Obama had just gotten a $2.27 million book deal from Random House -- about $1 million more than the value of the mortgage.

* The Obamas each had exceptionally secure jobs that paid them a combined annual salary of about $500,000 per year.

* The Obamas had just sold their condo, on which they had realized a $137,500 profit.

* The Obamas were prominent public figures whose political futures depended in part on maintaining a reputation for responsibility and trustworthiness.

* The Obamas are known to be relatively thrifty and have no credit card debt but substantial savings.

...I would think that the Obamas were exceptionally creditworthy. So indeed, Obama received a "discount" -- the same discount that any borrower in his position would have received.

Media Matters points out:

"average" actually means something pertinent in this context (provided for the arithmetically challenged):

Indeed, the very concept of an "average" rate means that a substantial number of loans would have been at interest rates below the average level, as well as a substantial number above that level, and does not suggest that rates below average -- if in fact the Obamas received a below-average rate -- resulted from preferential treatment.

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