Former Federal Reserve chairman Ben Bernanke got tongues wagging on October 2 when he admitted that he couldn't refinance his mortgage. "It's entirely possible" that lenders "may have gone a little bit too far on mortgage credit conditions," he claimed at a Chicago press conference, But how could a leading economist who's still active on the speaking circuit not qualify for refinancing? Take a closer look at the case which has everyone talking.
Mr. Bernanke is in a unique position because the bulk of his current income comes from 1099 sources, rather than W-2s. W-2 income is wages paid by a regular employer. 1099 income is freelance income paid from a variety of sources on a piecemeal basis. When you compare home loan providers you'll discover that most lenders want to see one to two years' worth of steady income from people with 1099s before they'll consider financing or refinancing a loan. As Bernanke only stepped down from the Federal Reserve in January, he wouldn't have that under his belt.
This caution makes sense in most cases because lenders want to feel confident that a freelancer's business is sustainable. There's no employer that can offer the assurance of regular pay checks, so the lender needs to see a pattern of profitability.
However, most freelancers don't rake in the big bucks that a figure like Ben Bernanke can command. Bloomberg reported that he makes at least $200,000 for every speech he gives. Bernanke's already given several speeches this year, and is booked for a few more, so he's raking in significantly more than he did when he worked for the Federal Reserve, where he made $200,000 per annum. But lenders have black and white guidelines that rarely count for the peculiarities of unique situations like Bernanke's.
Bernanke may have had a tougher time than he did when he refinanced the mortgage on his Washington townhouse in 2009, and again in 2011. He originally paid $839,000, but home prices have skyrocketed since he made the purchase in 2004. Bernanke owed $672,000 on the mortgage when he refinanced in 2011. That refinancing was granted days before the conforming loan limit for refinancing dropped to $625,500. That means that unless Bernanke has paid down the principal substantially since refinancing, he simply wouldn't qualify for the conforming loan.
If Bernanke didn't qualify for the conforming loan he would be looking for a jumbo loan, which is the type of loan that's too large for mortgage giants like Fannie Mae or Freddie Mac to fund. On the plus side, these types of loans have fewer regulations because the only people who apply for them for are incredibly wealthy. However, Joel Kan, the economic forecasting director for the Mortgage Bankers Association, added that "the underwriting process is still more thorough, more stringent than it used to be."
Credit has been harder to come by in recent years as lenders act more conservatively. Many banks have faced large fines through over-lending in the past, so they're more reluctant to take a gamble on guys like Bernanke. They've also been forced to buy back billions of dollars' worth of loans they sold to mortgage giants Freddie Mac and Fannie Mae. It's part of a "very broad, systematic shift," which Christopher Whalen of Kroll Bond Rating Agency says is hurting people like Bernanke.
The Ben Bernanke case proves that mortgage refinancing approval is a much more complex process than many Americans thought.