Controversial RAM Loan Comes To White House

Peter G. Miller
OurBroker®

If you've ever wondered how credit-impaired buyers are able to purchase real estate, take a lesson from the President and Mrs. Clinton and consider an interest-only balloon note with RAM financing -- but only if you have friends among the rich and famous.

It's been announced that the First Family has decided to locate in Chappaqua, N.Y., a small hamlet north of New York City,

The $1.7 million home, which had been listed on Realtor.com, is an 11-room colonial with five bedrooms and a library located on a little more than 1 acre.

But how can the Clintons, who reportedly owe some $5 million in legal fees, afford a property with initial payments for interest and property taxes of about $9,500 a month.

It appears that the Clintons will put up $350,000 in cash and finance $1,350,000. The financing looks like this:

First, they have obtained a five-year, interest-only balloon note for $1,350,000. Given an initial interest rate of about 6.5 percent, the monthly payment comes out to $7,335. Because the interest rate adjusts every six months, payments may rise or fall over the loan term. At the end of five years, the Clintons will owe the full loan amount, $1,350,000.

Second, current property taxes on the property total about $26,000 a year, or $2,167 a month. Combine tax payments with loan costs and the monthly bill for interest and taxes is about $9,500 -- or roughly $114,000 a year. Insurance is extra.

Third, while the Clintons are putting down a bit over 20 percent, their ability to borrow and get a low rate is greatly helped by the creation of a "reserve account mortgage," or RAM.

The Clinton RAM works this way: a friend, Terry McAuliffe, has deposited $1,350,000 in an escrow account held by the lender, Bankers Trust. If the Clinton's default on the mortgage, Bankers Trust may then use the money held in reserve to make up for any losses from a foreclosure. (Who gets the interest on the reserve account, and how much, is a matter between Mr. McAuliffe and the lender.)

Would the Clinton loan arrangements work for those not holding high public office?

The Clintons get good marks for putting down 20 percent and also for using RAM financing to reduce lender risk -- and thus their interest rate. Alternatively, a five-year, interest-only balloon note is a risky and unattractive choice for homebuyers without an assured means of repayment or refinancing. Since few homebuyers are able to predict their future financial capacity, a five-year, interest-only balloon note is a form of financing that most borrowers should avoid.

Not everyone is comforted by the notion of a sitting President getting a loan guarantee (effectively an extension of credit) from a private party, but the alternative is to only elect national office holders from the ranks of the well-to-do. Neither choice is especially attractive, but the Clinton approach is arguably better than an outright loan or gift from supporters or lobbyists.

The reality is that a sitting President today cannot retire to a suburban tract home given reasonable needs for privacy and security. Perhaps the best approach would be to include a home purchase allowance in presidential retirement packages, along with such current benefits as a pension, lifetime security, and office funding.

As to Mr. McAuliffe's money, don't worry. If the property must be foreclosed, there's a 20 percent gap between the purchase price and the loan amount, a safety margin that would be acceptable to most conventional lenders.

Question Of The Week

Q We have a one-year lease at $1,300 a month for a house and are now building a new home. Because of construction delays, we need to continue at the rental, but the owner wants to increase the rent $400 a month. Can this be done?

A In the usual case, rental agreements are year-to-year or month-to-month. Those which begin on an annual basis routinely transform into month-to-month arrangements once the initial lease term is completed.

At the end of the original term, the owner typically has a right to raise rents and a tenant has the right to move. If the owner is in a rent control area, or if the initial lease arrangement contains appropriate provisions, the ability of the owner to raise rents may be limited or denied.

It may seem as though $400 is a steep increase over $1,300, but it may also be true that the owner has a chance to rent the property at this time at a higher rate and for a long term to another tenant -- something not possible if you remain on the property. The good news, at least, is that you do not have to move to another rental for a month or so, and then move again, a process which no doubt would cost more than $400.

Weekly Resource

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Published: September 7, 1999

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Editor's Note: This article reflects the opinions of Peter G. Miller only and not necessarily the views of this or any other publication, organization or Website owner.

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