Oct 072014
 

Difficult to Refinance

You know the credit market is tight when the former Chair of the Federal Reserve can’t even refinance his mortgage. 😛 If that’s of interest to you, you’re not a loan. 😀 Ben Bernanke graduated with a Bachelor of Arts in economics in 1975 from Harvard University. He later received his Ph.D. in economics at The Massachusetts Institute of Technology (MIT.) Bernanke once even taught as a professor at Princeton University. He was also the chairman of the Department of Economics there from 1996 to 2002. But perhaps he is most notably known as serving 2 full terms as chairman of the central bank of the United States. He had control over the monetary policy of the world’s largest reserve currency. In other words he was arguably the most powerful and financially influential person on the planet.

So imagine everyone’s surprise when his request to refinance his mortgage was denied. 😯 As the Chair of the FOMC his salary was nearly $200,000 a year. However since he no longer has an impressive W-2 (T4 slip in Canada) he does not meet the requirements anymore of someone with a “stable income.” Nevermind he now makes $200,000 each time he presents a speech. Or that he currently has a $1 million book contract. Or that his net worth is over $2 million. All the bank sees is a person who was working over the last 11 years, and is now unemployed. The metrics by which financial institutions decide who to give loans to is flawed to say the least. Anyway the balance on Ben Bernanke’s mortgage back in 2011 was $672,000. It was a 30 year fixed-rate loan at 4.25% interest rate.

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Many financial news sites have already discussed this story. However hardly anyone is talking about the most important question. Does it seem strange that a multi millionaire, who has always made a lot of money, still have a $672,000 mortgage at age 61???

Perhaps it shouldn’t. 🙂

The reason why Ben Bernanke likes to stay in debt

My investment strategy has always been to follow what the top 1% of the richest are doing with their money. Ben Bernanke’s behaviour of using leverage is perfectly in line with other like minded individuals.

Here’s why it makes sense to take on debt, even when he could pay off his mortgage at any time if he wanted to. It’s because interest rates are at rock bottom. 🙂 He printed a lot of money during his position of power that insured rates will continue to stay low for years to come. Every dollar that the Fed creates out of thin air becomes a dollar of DEBT that the United States people have to bear. The only reason the economy is still holding itself together is because the cost to service debt (the interest rate) is low. Rates have been so low for so long that people and government alike have become addicted to cheap money. With a record amount of debt the country simply can’t afford the cost of those debts to increase any time soon.

Ben Bernanke bought his house on Capital Hill in 2004. Today his home has appreciated in value by $126,468, and the stock market has gone up by nearly 100%. This means by using the bank’s money to buy a property he was able to free up his own savings to invest in the profitable stock market.

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Plus, by flooding the banks with so much money, Ben Bernanke made sure that the U.S. will have positive inflation. Most people don’t like inflation because it eats away at the value of their savings. But this same reason is precisely why it helps those who have debt. Inflation in the U.S. is currently at 2% a year. This means 2% of Ben’s mortgage balance of $672,000 will be paid off automatically by this time next year. That’s $13,400 of real wealth gain, created passively and discreetly thanks to the monetary policy that he purposefully designed, which is an environment of low interest rates with modest inflation. Inflation is created to help the U.S. government pay down its massive $17.8 Trillion national debt. However it benefits personal debts as well.

Printing money also has the effect of propping up the financial markets because: a.) it creates more financial transactions and activities. And b.) the market needs to build in future inflationary pressure. And using leverage in a rising stock market can multiply the returns! Furthermore. borrowing money to invest means the interest that one pays on the loan is tax deductible. 🙂

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If Ben had paid for his house in cash (used no debt) then he probably couldn’t have bought one nearly as expensive. A smaller, cheaper home would not have appreciated as much as his actual, larger home did. So he would have missed out on part of that $126,468 tax free gain from his appreciating residence. Not to mention all the stock market gains he would have missed out on too.

In other words Ben has brilliantly engineered the financial system to reward those who use leverage and debt to build up their financial assets. His successor to the Fed, Janet Yellen, is most likely going to continue the monetary policy that Ben had put in place. So far Yellen has done nothing but print even more money on top of the balance sheet that Ben left behind.

Following in the footsteps of Ben Bernanke 

Despite popular beliefs saving up for a large down payment, paying down debt, and having a large savings account are not great ways to build wealth. So how can we become rich like Mr. Bernanke? It’s pretty simple. Just do what Ben and all his rich friends are doing. 🙂 Step 1. Borrow money at cheap rates. Step 2. Invest in a diversified portfolio to minimize risk but can still expect 6% to 8% return in the long run. Step 3: Wait and profit! 😀

I started this blog and my net worth updates in 2010. Back then I only had about $200,000 of debt. My net worth grew by $32,000 in 2010. But a couple years later in 2012 my debt grew to $350,000. My net worth increased $40,000 that year. And today in 2014, during the lowest interest rate period, my debt has ballooned to over $500,000. So far this year my net worth has grown by about $100,000. The pattern is as clear as sapphire glass. More leverage equals higher net worth growth. Keep in mind my salary has been relatively unchanged throughout these last 4 years at between $40K to $50K per year pre-tax. Which means the changes to the growth rate of my net worth can only be explained by leverage, monetary policy, and the asset bubbles that cheap money creates thanks to the Fed. 🙂

Here in Canada we have even more reason to use Ben’s strategy because our housing market is arguably more resilient with less mortgage defaults. And we hardly have any sub-prime lending. Our borrowing rates against real estate is also cheaper. A mortgage is typically under 3% today and a HELOC is 3.5%. Which are both lower compared to Ben’s U.S. mortgage rate of 4.25%. Currently commodity prices are in the middle of a bear market causing weakness in the resource and mining sectors, which means it’s a great time to be buying the S&P/TSX Composite at a discount. 🙂 I plan to continue using leverage to expand my asset column, write off investment loan interest, and let inflation slowly take care of my debt balances. 😉

Some people think leverage is risky. But Ben Bernanke, with his impressive background, chooses to finance a hefty mortgage, at least for now, rather than become debt free. Betting against his financial strategy would involve undermining his vast wealth of knowledge and experience, which requires a claim to understand money better than he does. And I personally think there is more risk in doing that than using leverage in a controlled and balanced approach. I have been suggesting for years to carry a mortgage for as long as possible. Now I’m even more confident that I’m doing the right thing. 🙂 So the next time someone asks you when you plan to pay off your mortgage you can tell them “maybe never!” thanks to Ben Bernanke. 🙂

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Random Useless Fact:

The continent with the highest average education level is Antarctica.
Reason: Because most of the people there are scientists 😀

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Phil
Guest

To each his own, leverage can be a dangerous game, unless of course it works out for you ;). Also note, the American system provides more incentives to use one’s mortgage as borrowing leverage, whereas in Canada there is more borrowing through non-mortgage loans… In Canada it is “more” difficult to use ones mortgage as a tax write-off, unless of course you know the game. Based on his cash flow you’d think he might have a higher net worth… Ah but wait, he’s an academic, maybe that’s why he’s not doing as well… theories don’t always pan out… I still believe one must keep debt in check, and under Bernankes’s watch, well I think he traded in long-term benefits to solve some short term problems that poor government policy created, and arguable still continues to create… We are still in a long-term bear market, 8+ years to go, and lots more global financial policies will change before we reach the otherside. – Cheers.

roadmap2retire
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roadmap2retire

Great article, F35. Youve captured my (and almost everyone else’s) train of thought and explained things well. First thing that came to my mind was – why the hell does he even have a mortgage, esp when hes making $200K per speech. Of course, debt is good if invested in appreciating entities.

Thanks for delving deeper and sharing the findings about his personal wealth and home details.

cheers
R2R

AssetGrinder (@AssetGrinder)
Guest

As long as interest rates remain low it seems like a good idea. When interest rates rise it would be a good idea to pay off dent asap!. Till then I will use cheap money to invest!

Lance @ HealthyWealthyIncome
Guest

Probably needs the write off as well. Main reason we keep ours around…but I thought the same thing…why does he still have a mortgage and a large one at this point. I doubt he needs the extra couple grand a month to invest. He already has money.

Mark Seed (@myownadvisor)
Guest

He can work the system because he rigged the system 🙂

I don’t think leverage is a good thing, although you can ‘get away with it’ in today’s uber-low and prolonged rates. As long as you know when to get out!

Mark

Name goes here
Guest
Name goes here

Do you realize the risk that you’re taking? I’m not sure if you do.

Buffett suggests getting a long-term mortgage to short interests rates (with the expectation of an interest rate increase). He emphasized 30-year fixed rate mortgages.

If you have a boat load of variable interest debt, which you appear to, you are heavily exposed to an interest rate increase on two ends:
1) Higher debt servicing costs (interest payments)
2) Lower asset prices (higher risk-free rate reduces the present value of future cash flows)

You’ll be wiped out if interest rates jump. Maybe that isn’t likely, but it certainly isn’t impossible.

Messy Money
Guest

I am not an economist or financial advisor …. but I believe the people that make that most from investing are those that use leverage (margin and/or options). I also believe that those that lose the most when investing leverage. (or have really bad luck LOL) Risk-Reward. Leverage is a very powerful tool. As long as the investor understands and can handle the risk- no problem. The biggest danger (IMO) is a market correction and not being able to cover margin calls and being forced to sell at a loss. I saw a chart a few months ago – can’t remember the source – showing a huge jump in margin volume with retail traders. That will lead to some interesting action if there is a market correction. I do know of people that poured borrowed money into the market and then borrowed against it again and ended up in the negative – still owing on a loan but having nothing to show for it. I can see that maybe happening in a really bad economic scenario with people that borrowed against their Helocs and then bought stock on margin and then both real estate and market corrects. Yikes that would… Read more »

Financial independence
Guest

The statement about inflation is really true if your income keeps pace with the it. The other important assumption is that property prices are ahead of the inflation. Historically this have been at or even below it. Perhaps DC is the exemption.

Admittedly banks still do make money, so there must some economic sense to lend money to the people.

JR
Guest
JR

I think you did not correctly explain inflation. You called Ben Bernanke’s 2% of inflation on his house as a “$13,400 of real wealth gain”. Inflation is not a real wealth gain, his standard of living did not increase by having his house inflate 2%. If he sold his house, and wanted to purchase other goods, he will find that those other goods also inflated 2%: therefore he would be no more ahead.

Real wealth gains come from production that increases the standard of living of the general population. A house does not spit out sheds every month.

Money is just a commodity, much like the paper it is printed on.

agentfang
Guest

When I saw the name Ben Bernanke, I thought he was the one who bilked investors out of millions of dollars. That’s the first thing that popped into my mind… but I guess I was thinking of Bernard Madoff. Guess, I’m don’t follow US politics much.

ONLY reason why banks don’t want to lend him anymore money is that he’s 65. He can croak anytime. Dealing with collection from an estate is harder than just collecting a set schedule mortgage payment with interest over time. Make sense right?

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[…] had a smirk on my face when I read this article on Freedom Thirty Five Blog, why the former Chair of the Federal Reserve (Ben Bernanke) can’t even refinance his mortgage.   The way I see it, Bernanke is now living in the financial mess system he created; folks using […]

as
Guest
as

sure, fair argument. But before one gets too influenced by this post and starts piling on debt, one might want to consider these questions: – If due to any reason, Ben Bernanke’s mortgage does not get renewed, he can always sell his assets and pay it off. Are you in a position to do that? – If the stock market and housing market both crash at the same time (which is a quite likely scenario), Ben Bernake can raise enough capital not only to stay afloat but also to pay off a part of his mortgage when the renewal comes (if renewal comes because in US they don’t even have renewals). In Canada you might not want to be in that position. – Sure ben Bernanke has leveraged himself to invest. But I feel he is in a much better position than an average Joe to have a pretty good assessment of his risks. Do you have same confidence in your investments? – For canadians the general advise is to max out RRSPs and then use the balance to pay off mortgages. Which I still feel is pretty good because as you keep getting closer to retirement, you want to… Read more »

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[…] a 30-year mortgage over 30 years, because mathematically that is correct. Heck, even Ben Bernanke still has a mortgage (explained by Freedom 35 Blog) despite his healthy income. Should we question […]

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[…] appreciated in value by $126,468, and the stock market has gone up by nearly 100%. This means by continuously borrowing money from the bank he has been able to free up his own savings to get a better return on his […]