If Bernanke Wants to Refinance, Maybe He Needs a Co-Signer?
By: Kristie D. Kully, Laurence E. Platt
While former Federal Reserve Chairman Ben Bernanke may be known for his loose monetary policy, unfortunately his mortgage lender is not. According to Bloomberg News, Mr. Bernanke complained (while addressing a conference of the National Investment Center for Seniors Housing and Care in Chicago on October 2) that he was recently unable to refinance his mortgage loan.
Although Mr. Bernanke reportedly remarked that “it’s entirely possible” that lenders “may have gone a little bit too far on mortgage credit conditions,” it’s hard to blame lenders. Mr. Bernanke may seem to be a good credit risk, but a lender that follows the underwriting standards mandated by the federal Qualified Mortgage (“QM”) regulations can’t make a loan to just anyone.
In response to the perception that irresponsible lending created the financial crisis, the Dodd Frank Act and the Consumer Financial Protection Bureau (“CFPB”) imposed an obligation on lenders to determine borrowers’ ability to repay. The Act and the CFPB essentially created an exception from that amorphous requirement for standard Qualified Mortgages (“QMs”) that satisfy certain specific criteria. Accordingly, since the QM regulations became effective in January 2014, it is legally riskier for mortgage lenders to make loans that fall outside that standard QM profile, because a regulatory agency or court could more easily determine that the lender did not properly make that ability-to-repay determination. A non-QM borrower may even be able to seek delays and offsetting damages if the lender or its investors ever tried to enforce the loan through foreclosure. Making QM loans offers lenders (and their investors) a presumption of compliance with the ability-to-repay requirement, and with that some relief from the risk of serious sanctions.
However, making QMs is no easy feat, as they must strictly comply with so-called Appendix Q of the CFPB’s ability-to-repay regulations. In spite of the fact that Mr. Bernanke reportedly can garner very high speaker fees, has a book deal, and recently joined the Brookings Institution as a distinguished fellow, Appendix Q much prefers W-2 employees with a stable employment history, and will only allow consideration of speaking fees, book deals, fellowships, or other sources of income if the income can be verified, is stable, and will continue.
Specifically, without regard to a consumer’s future prospects, Appendix Q requires a mortgage lender to verify a consumer’s employment history for the most recent two full years. Mr. Bernanke retired in January from his position as Chairman of the Board of Governors of the Federal Reserve System, a position he held for eight years. Prior to that Mr. Bernanke was a member of that Board, and also previously had a steady job at Princeton University. Nonetheless, now that he has been retired for all of nine months, the income from those positions is largely irrelevant in determining whether he can repay a loan (even a low-risk rate/term refinancing). While the lender can consider a consumer’s past employment record, it also must consider the consumer’s current and ongoing employment status. Those high-paying speaking engagements seem like a sure thing, but Mr. Bernanke would need to document that those gigs will continue, or else Appendix Q will not allow a lender to consider income from them. Appendix Q generally will not even allow a lender to consider part-time income unless the consumer held that job continuously for the past two years. Lenders may “favorably consider” a consumer that changes jobs frequently within the “same line of work” (so long as the income or benefits go up) – leaving the lender to ponder whether speaking gigs and a think tank position are considered the same line of work as conducting quantitative easing. (Do you suppose Mr. Bernanke will be receiving a W-2 for his new income? Or perhaps he is considered self-employed, in which case the lender will need to establish a two-year earnings trend through tax returns, profit-and-loss statements, and balance sheets.) While we can assume Mr. Bernanke’s future is bright, his “iffy” employment history simply may not suffice for Appendix Q purposes.
Of course, it is possible that Mr. Bernanke established a savings account or has other investments on which he could rely for repayment of the loan. If Mr. Bernanke can document income from those assets through two years of tax returns or account statements, the lender could rely on that income to underwrite the loan. However, beyond that, Appendix Q is a bit murky when it comes to assurances that a lender can rely on assets for repayment. Mr. Bernanke may need to rely on his spouse, or perhaps a co-signer, to provide documentation and verification of sufficient income to repay the loan, because on his own, from the limited information we have available, it is hard to see how a lender could make a QM to Mr. Bernanke.
Mr. Bernanke reportedly remarked that the tightness of mortgage credit is probably excessive. We understand Mr. Bernanke refinanced back in 2011 – if so, it’s a good thing he refinanced before he retired (and before Appendix Q).