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. He secured a $1.32-million mortgage from Northern Trust in Illinois.
The freshman Democratic senator received a discount. He locked in an interest rate of 5.625% on the 30-year fixed-rate mortgage at a time when such loans in Chicago averaged as much as 6%. 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 did 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.
Modest adjustments in mortgage rates are common among financial institutions as they compete for business or develop relationships with wealthy families. But amid a national housing crisis, news of discounts offered to Sens. Christopher J. Dodd (D-Conn.), chairman of the banking committee, and Kent Conrad (D-N.D.) by another lender, Countrywide Financial, had brought new scrutiny to the practice and resulted in a preliminary Senate ethics committee inquiry into the Dodd and Conrad loans.
Within Obama’s presidential campaign organization, former Fannie Mae Chairman James A. Johnson resigned abruptly as head of the vice presidential search committee after his favorable Countrywide loan became public.
Driving the recent debate is concern that public officials, knowingly or unknowingly, may receive special treatment from lenders and that the discounts could constitute illegal gifts.
Obama secured his final mortgage commitment on June 8, 2005. During that week, rates on similar loans for which information is available averaged 5.93%, according to HSH Associates, which surveys lenders. Another survey firm, Bankrate.com, placed the average at 6%.
“It’s certainly safe to say that this borrower did better than average,” said Keith Gumbinger, an HSH vice president, noting that consumer rates vary widely. The Obama campaign called the rate “consistent with Northern Trust policies.”
When the Obamas secured the loan, their income had risen dramatically. Obama assumed his Senate seat in January 2005, with an annual salary of $162,100. That month, Random House agreed to reissue an Obama memoir as part of a $2.27-million deal that included two future nonfiction books and a children’s book.
Around the same time, the University of Chicago Hospitals promoted Michelle Obama to vice president and more than doubled her pay, to $317,000.
The Obamas’ $1.32-million loan was so large that few comparisons are available. Mortgage specialists say that many high-end buyers pay cash.
Obama’s Republican opponent, Sen. John McCain of Arizona, has no mortgages on properties he owns with his wife, Cindy, who is a multimillionaire.
Northern Trust said it had no formal program to provide discounts to public officials. Loan officers may consider a borrower’s occupation when establishing an interest rate, the bank said.
“A person’s occupation and salary are two factors; I would expect those are two things we would take into consideration,” Northern Trust Vice President John O’Connell said. He added that the rates offered to Obama were “consistent with internal Northern Trust rates at that time.”
“The bottom line is, this was a business proposition for us,” he said. “Our business model is to service and pursue successful individuals, families and institutions.”
Obama’s house has been a source of controversy. In 2006, the Chicago Tribune reported that on the day of the closing, the wife of Obama’s longtime friend and fundraiser Antoin “Tony” Rezko closed on an adjoining lot that had been the estate’s side yard.
The Obamas bought the house for $300,000 less than the asking price of $1.95 million, while Rezko’s wife, Rita, bought the neighboring lot for the asking price of $625,000. Rita Rezko later sold a portion of the undeveloped lot to the Obamas, enlarging the senator’s yard.
Last month, Tony Rezko was convicted of 16 counts in an influence-peddling scheme that reached the highest levels of Illinois state government.