Monday, October 27, 2014

Big Ben gets cut down to size

I have often pointed out that the investment world is like a living entity. By that, I mean that it inhales and exhales, although on a much more irregular basis than humans.

The recent market downturn indicates that many investors seem to have forgotten about the inhaling part of the equation. Between the downturn, radical terrorism in Iraq, and the Ebola virus crisis, there are a lot of nervous households around the country.

And right in the midst of these worrisome issues, the politicians are trying to push everyone over the edge with their never-ending onslaught of political ads. Yet, every once in awhile, something happens in the investment world that adds a little levity and causes one to chuckle. Such an incident recently occurred in the world of finance that I just had to share with my readers.

Ben Bernanke served two terms as chairman of the Federal Reserve, the central bank of the United States. He served under both President Bush and President Obama, from 2006-14. In other words, he was gatekeeper of our nation’s money supply and instrumental in guiding the country through the financial crisis.

As Federal Reserve Chairman, his compensation was just under $200,000 per year. Since he left office, he has been on the speaking circuit where he commands more than $100,000 per appearance. He is intelligent, well educated, and widely known, not only in this country but also throughout the world.

He is obviously well off financially and apparently knows how to handle money. What brought a smile to my face was his recent attempt to refinance his mortgage to a lower rate. In spite of his credentials, and much to my amusement, he was initially turned down. Once the most powerful man in the financial world couldn’t get a mortgage a year later.

Of course, it was a happy ending for Ben. Details weren’t made available to the public, but many mortgage experts speculate that the initial denial was because he went from a making a steady income to one that was collected from time to time. Pretty strange since he was actually making much more.

I don’t necessarily want to be critical of the mortgage industry, but prior to the recession, just about anyone who could fog a mirror could get a mortgage.

Changes in the mortgage industry were most certainly in order, but, as with so many changes in laws and regulations, the needle moved from just being a problem all the way up to potential disaster. And somewhere along the way, common sense got lost in the shuffle.

As is the case in many industries, it appears mortgage companies were more focused on getting forms filled out correctly than on looking at circumstances and letting common sense prevail.

The banks blame the regulators and are fearful of additional litigation and fines. The regulators blame the banks for being too tight with their purse springs.

As a result, households with great credit ratings and strong personal balance sheets continue to have difficulty obtaining a mortgage. Just ask Ben Bernanke.

I’m fairly confident he was able to get his paperwork through underwriting with a simple phone call. But not everyone has his connections. Hopefully this incident will serve as a wake up call for bankers and regulators alike.

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