July 16, 2012

Who Gave Zuckerberg A 1% Mortgage?

July 16, 2012

Who Gave Zuckerberg A 1% Mortgage?

Wow, I’ve got to take a quick break from the low rate frenzy to offer a few comments on today’s big story, started by Bloomberg, about Mark Zuckerberg’s 1% mortgage. Gotta hand it to Bloomberg for the Class War approach to getting readers’ attention, but really Reuters’ Felix Salmon captured the important thread here.

Bloomberg’s opening line invoked an Occupy Wall Street rip on the rich:

Billionaire Mark Zuckerberg is giving new meaning to the term “the one percent.”

They go on to tell about how San Francisco lender First Republic Bank offered Zuckerberg a 1.05% rate to refinance the $5.95m loan on the 5 bed, 5.5 bath Palo Alto home he purchased for $7m in March 2011.

What they don’t do clearly enough is explain the loan. The lead (and TV coverage) calls it a “30-year adjustable rate loan” which most readers (and viewers) interpret as a 1% 30yr fixed because they don’t pay close enough attention to the story to realize that the loan adjusts every month—believe me, they don’t. I’ve been asked about “this 1% 30yr jumbo” on several client calls today.

The loan is calculated as 1-month LIBOR rate (currently at .246%) plus a base rate of 0.8%. So if LIBOR spikes, it’s whatever LIBOR is on any given month plus 0.8%, up to a cap of 9.95%.

This loan is appropriate only for people who can pay off that loan or refinance to a higher fixed rate loan if/when LIBOR rises—including early payoff fees First Republic charges on most loans.

So yes, it’s appropriate for one of the richest men in the world.

And it’s masterful of First Republic to get his mortgage business.

They’re a San Francisco bank which has stuck to the basics: savings, lending, investment advice.

They came up organically since 1985 as a conservative lender catering to wealthy clients, and then were acquired by Merrill Lynch in September 2007, which helped them build their investment advisory capabilities.

Then First Republic was temporarily lost in the muck when Merrill was taken over by BofA in crisis-peak January 2009.

First Republic quickly saw the writing on the wall and constructed a management buyout to regain their independence in July 2010.

Since then, they’ve remained true to their three basics.

Reuters’ Felix Salmon hit today’s story on the head: it’s not about Zuckerberg’s refi, it’s about First Republic doing what it needed to do to win basic banking business from an incredibly high profile client so they can expand the relationship on other ways—and take that business from their competitors.

Once again: the basics. Executed well. Right down to the First Republic spokesperson’s statement about the Zuckerberg deal:

“First Republic, like most banks, prices its credit products based on the strength and totality of the entire client relationship. This is our approach with all of our clients.”

This is what personal and business banking should be all about. It’s what my firm aspires to. We often refer to ourselves as a First Republic in our teenage years.

But they’re the big winner today, and they deserve the credit.
Zuckerberg’s Mortgage Gives New Meaning To “The 1%” (Bloomberg)

When Zuckerberg Fired Morgan Stanley, Mortgage Edition (Felix Salmon, Reuters)

The Facebook Effect On San Francisco Real Estate (TheBasisPoint)

Justin Bieber Hit By Jumbo Mortgage Shortage!! (TheBasisPoint)