Ben Bernanke And The Bizarre World Of Mortgage Qualification

Ben Bernanke And The Bizarre World Of Mortgage Qualification

In case you missed the big mortgage news today Ben Bernanke, former head of the Federal Reserve Bank and the most powerful financial guy in the world, can’t refinance his home. And the story has become a symbol of the crazy mortgage qualification standards that are in place in the aftermath of the mortgage meltdown.

Now Ben Bernanke is quite wealthy and makes a lot of money. He gets paid $250,000 per speech and was worth at least $1.1 MM when he left his position as the Fed head. (And just look at the guy. Doesn’t he look highly respectable?) But there are any number of reasons for him not being able to refinance his home. For one, he’s no longer salaried and doesn’t have a two year history of making the kind of money that he has been making lately. It’s also possible that his house didn’t appraise.

However, given Ben’s comments on the situation, it seems like he was another victim of highly restrictive lending standards: “I think it’s entirely possible [that lenders] may have gone a little bit too far on mortgage credit conditions,” he said, according to Bloomberg. “The housing area is one area where regulation has not yet got it right.” Well when have regulators ever gotten it right?

Here is CNBC’s take on the story:

I discussed this story with Russ Martin of Perl Mortgage and he went on to point out that while Ben can’t refinance he can close an FHA loan with 3.5% down,  670 FICO score, 53% DTI for a borrower with a net worth of $5,000. Russ went on to explain the current mortgage market really well:

Lenders care more about stability than income.  If he had taken a salaried job, then he would probably qualify.  However, since his income appears to be coming from giving speeches, there is no way for the lender to document the stability of the income even though he is making a ton of money (assuming you put aside all common sense like underwriters have to and follow the guidelines as written).

Another example.  I had…a guy who wanted to purchase a $1.2 home.  Borrower just made partner [at an accounting firm].   So while his income increased dramatically, he went from salaried employee getting w2s to a Partner getting a K-1.  So he doesn’t qualify because his income will fluctuate based on corporate earnings / losses.  He actually would have qualified if he bought the home before the promotion, not after.  You need two years of k-1 earnings to use that income.

At the end of the day, it is analysis paralysis imho.  Pretty much 99% of mortgages that go bad do so due to curtailment of income related to divorces, medical, or job losses.  None of which can be predicted by underwriting.  Yet, lenders spend all this time over analyzing every aspect of a borrower instead of just accepting that shit happens.   Part of the problem is that when a loan does go bad, the lawyers come out trying to figure out how to put blame on other parties.  Fannie will kick back the loan to the bank.  The bank will then kick back the loan to the originator.  The originator will blame the underwriter.  Everyone is looking at CYA when at the end of the day, the borrower had a heart attack or lost his job and just can’t pay his mortgage.  It isn’t complicated.

What is ironic is that his situation was exactly what stated income type loans were designed for.  Unfortunately, because the loans were abused, the wealthier borrowers who would benefit from them can’t get them.

I know first hand what Russ is talking about. I’ve seen a high earning doctor with no debt and a nice down payment unable to get a mortgage because of a mixup over a pair of returned boots. And I’ve heard numerous stories of people with little income but plenty of net worth also unable to get a mortgage. Go figure.

There’s another crazy aspect to the mortgage game that I hope to post on in the near future. It’s the crazy mixed up world of appraisals.

#mortgages #mortgagequalification #benbernanke

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Filed under: Mortgages

Tags: Mortgages

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