Yesterday in a report on Bloomberg News and picked up by other services, it was reported that Ben Bernanke, while speaking at an investment conference, stated he recently tried to refinance his mortgage and his application was denied. Huh? The former Fed Chair can’t get a mortgage? Is this a joke? It is not. Upon reading the story, I instantly knew why. His problem is the same problem facing many of my clients. Earlier this year, one of my clients had to withdraw from the housing market for what I believe is the same reason.
Here is what we know about Ben Bernanke:
A. He is the former Federal Reserve chairman and made $200,000 a year. As the chair, he could have no outside income from consulting, book deals or any other activity that presented a potential conflict of interest. It is safe to assume that his his only income was w-2 income and income from his investments.
B. His financial disclosure statement indicated he had between 1 and 2 million in investments.
C. The home he wanted to refinance is valued in the $900,000 range so one can assume the mortgage he wanted to pull out would be no more than $700,000 +/-. At today’s rates, that type of mortgage could be covered with about $175,000 in salary.
Here is what has been reported but can not be verified.
A.) He now makes $200,000+ per speech and does 5 or so a year
b.) He has a million dollar book deal.
Does this look like a credit risk?
LOAN OFFICER MAKES PHONE CALL DENYING LOAN –
I’m making that part up. But how would you like to be the loan officer who made that call? I imagine the call from the loan officer went like this:
Loan officer, “Mr. Bernanke, you don’t qualify for the refinance.”
After laughing, (hope he responded with laughter and not anger) Mr. Bernanke said, “Well, what do I qualify for?”
Long hesitation before the loan officer says, “Actually you don’t qualify for any mortgage loans at this time.”
WHY DOES A GUY WITH A MILLION DOLLAR INCOME AND MILLION DOLLAR ASSETS NOT QUALIFY FOR A MORTGAGE.
Simply because his income is 1099 income and self employed income. At this time, he can not provide 2 years of tax returns with a self employment income history. At least that is what I think is the reason he was denied. (I assume his credit was fine, don’t you?) Fannie and Freddie rules are very clear on this. Until you can produce 2 years of tax returns with self employed income, you are ineligible for a mortgage regardless of the compensating factors.
Common sense has been regulated out of the industry.
When you apply for a loan, the lender puts your application through an “automated underwriting” approval process that follows Freddie and Fannie guidelines. Whether you are little Joe Facenda or big Ben Bernanke, the program applies the same rules and it is easy for me to see why the computer conclusion was denial. I hope common sense did eventually prevail and his bank found a way to override the rejection. Automation has it’s pluses but if we totally rely on algorithms , we are denying a wide swath of people the opportunity to become homeowners.
Earlier this year, I had a client who stayed with the same company doing the same work but for internal company reasons was switched from being a salaried employee to a contract employee. The pay as a contractor was greater than the pay as a salaried employee. Same company. Same line of work. Greater pay. No loan. First time home ownership dream derailed for 2 years.
If you read reports of Mr Bernanke’s reaction, you will find he was shocked at how tight lending guidelines have become. Perhaps he can influence change in the system now that he had a dose of reality.