February 10th, 2009 · No Comments

Perhaps you’ve read about Christopher Dodd, senior Senator from Connecticut and Chairman of the Senate Banking Committee, and the questions about his mortgages with Countrywide Home Loans. 

In June of 2008, Conde Nast Portfolio reported that Senator Dodd was the beneficiary of special treatment when he refinanced two properties with Countrywide.  He is believed to have belonged to the erstwhile group called “FOA” or “Friends of Angelo”, referring to the founder and former chairman of Countrywide, Angelo Mozilo.

According to The New London (CT) Day on February 2, 2009. .  .”Senator Dodd has promised to refinance his mortgages. . . .”   The inference is that, after five and a half years, refinancing will do away with all the questions and offer the Senator a fresh start.  Much has been written about how the mortgages on the Dodds’ East Haddam, Connecticut property were dated July 3, 2003, but were not recorded until November 4, 2004, even after the release of the former mortgage, dated July 10, 2003, was recorded on July 25, 2003.  The Dodds have come forth with a report from a consultant stating that the interest rates on their mortgages were “slightly higher on average than the national average at the time. . . .”

Something caught my eye in The Day story and I decided to take another look.  It seems that the larger ($275,042) mortgage on the Connecticut property is an adjustable rate mortgage, or ARM.  I wondered, “In the ups and downs of the market in these five and a half years since that mortgage was signed, why would someone keep an ARM and not have refinanced by now, especially in today’s low interest rate environment?”  I also wondered, “If you had a great job, excellent credit scores and sufficient equity in the property, as the Dodds reportedly have, you could probably obtain a mortgage from virtually any lender nationwide.  Why would you go with Countrywide?”

I found my answer at the small white shuttered New England-style building above the  ice-covered Connecticut river that serves as the Clerk’s office for the Town of East Haddam, Connecticut.

It isn’t complicated.  You just have to know that the terms of an ARM are recorded with the Mortgage in the form of an “Adjustable Rate Rider,” or in this case a “Fixed/Adjustable Rate Rider.”  The terms of a standard fixed rate mortgage are not public record because they are spelled out only in the Note, which is not recorded.  For ARMs, the terms are recorded along with the Mortgage.

Knowing this, I searched for, and obtained, a copy of the Dodds’ Open-End Mortgage Deed dated July 3, 2003, and recorded November 4, 2004.  Recorded with the Mortgage is the above-mentioned Fixed/Adjustable Rate Rider.  It is also dated July 3, 2003.  The Rider provides for an initial interest rate of 4.5%, as has been reported.  The document makes a provision for the Index (LIBOR, which would have been typical) and the Margin, the amount added to the Index to arrive at the new rate when the loan is adjusted.  The Margin in the Rider is 2.25% — not atypical, though a little low compared to averages in the “Freddie Mac Historical Monthly Primary Mortgage Market Survey.” The Rider also provides for “caps” which limit the interest rate at each adjustment and over the life of the loan – all typical.

Where the terms of the loan deviate from the typical, is in the term, or length,  of the “initial fixed interest rate.”  The Rider provides that “The initial fixed interest rate I will pay will change to an adjustable interest rate on the first day of August, 2013. . . .”  This means that the Dodds’ interest rate would not change for 10 years.  It’s been reported  that the Dodds’ mortgage was a 5-year adjustable.  That is incorrect;  it’s a 10-year adjustable.  It’s as if they were given a 4.5% fixed rate loan for 10 years. 

It is unclear precisely what is meant by ”an independent firm’s report, apparently commissioned last summer, that concludes the couple paid mortgage rates that were slightly higher on average than the national average at the time, and available to the general public.”      Perhaps they were comparing the 4.5% rate to that of a typical 1-year ARM, which would adjust every year.  But it’s unlikely that a 10-year ARM with an initial rate of 4.5% was readily available in the summer of 2003, or at any time since.

Consider two charts which compare the Freddie Mac published rates for a 15-year fixed rate loan, to the Dodds’ rate, as well as a 5-year ARM compared to the Dodds’ rate.  (The 5/1 ARM rate has only been published since January, 2005.  (It should also be noted that Freddie Mac’s 5-year ARM uses a Treasury-indexed ARM, while the Dodds’ ARM uses LIBOR as an Index.

Freddie Mac does not publish historical rates for a 10-year ARM, but as of February 9, 2009, Bankrate’s average rates for 10/1 ARMs in the US range from 5.78% to 5.82.% depending on whether it’s a purchase or a refinance.

Did the Dodds obtain a rate lower than what was available in the market for adjustable rate mortgages in July of 2003?  No, not technically.  It’s possible a 4.5% adjustable rate mortgage was available at that time.  But the product it was tied to was likely a 1-year ARM, for which the interest rate (and the payment) adjust every year, rather than a 10/1 ARM, where the initial rate is fixed for 10 years.

Much has  been written about “float downs” and “junk fees” and whether the Dodds received concessions in these areas.  Any savvy mortgage applicant could negotiate these items in a competitive market.  The terms of the loan are not in question, nor is the interest rate.  It’s the duration of the interest rate that warrants a second look.

There was a time when these sorts of questions would have been a mosquito on the neck of the powerful Chairman of the Senate Banking Committee.  There was a time when being a “friend” of Angelo Mozilo was a distinction to which one aspired.  Times have changed.  No longer is it politically expedient, or even prudent, to be the recipient of favors from any quarter.

New London Day, Ted Mann,  New London Day, Dodd releases personal-mortgage files, February 3, 2009

April Smith is the owner of April Smith & Associates, Inc.

She has over three decades of multi-layered experience in the field of mortgage finance.  She founded the firm in 1988, and she continues to provide hands-on strategy and planning for both new and established clients.  She is an active speaker and educator to the industry.  April is a recognized authority on mortgage due diligence.  You may contact April via her website.

Tags: Commentary · Mortgage Market

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