Framing the News

The Washington Post today reports following a phone call from Senator Kent Conrad (D-N.D. and the Senate Budget Committee chairman), the chief executive of Countrywide Financial ordered that Conrad be granted a one point reduction in the mortgage rate on a $1.07 million mortgage on his vacation home in Bethany Beach, Del.

Lets think about that for a moment. The current interest rate for mortgages is about 6.25 percent. The monthly payment on a thirty year mortgage (principal plus interest) would be $6588.17. If the interest was instead 5.25 percent, the monthly interest would be $5908.58. Thus the one point break would generate a flow of benefits of $679.59 for thirty years.

The present value of that income for 30 years (assuming 6.25 percent interest rate) would be about $110 thousand.

Comment: Do you think the reader would have the same response to getting a one point break on a mortgage, or a donation of $110,000 in the form of an endowed 30 year annuity? As shown above, the two are essentially equivalent!

Moreover, that kind of "virtual income" would be worth considerably more that actual monetary payments in that it would not be taxed. (One hopes that the Internal Revenue Service does in fact impose taxes on Congressmen who are proven to have accepted such deals inappropriately comparable to the net present value of the discount they received.)

In fairness, the Washington Post acknowledges that Senator Conrad may in fact have paid more than the going rate for his mortgage, and recognizes that he and other legislators may in fact have done nothing wrong. JAD