Friday, December 18, 2009

So I pulled Bernanke's mortgage...

First and foremost, before yesterday I didn't care one iota about Bernanke's mortgage. But when he said this publicly my interest was piqued:

Do you have a mortgage?
Oh, yes, we refinanced.

Oh, perfect. When?
About 5%. A couple of months ago.

Good time.
Yes. We had to do it because we had an adjustable rate mortgage and it exploded, so we had to.

So, did you get a fixed rate at 5%? I think this might be the most valuable piece of information.
(Laughter.) Thirty years fixed rate at a little over 5%.

Needless to say when the guy in charge of monetary policy says he has a exploding ARM it is news so I checked out the public records. While the details are certainly not juicy it leads me down another path of thought which I will get to.

Bernanke bought in May 2004 for $839,000. He had a 5/1 ARM for $671,200 at 4.125% that adjusted to 12 month Libor in June of each year after his fixed period ended. To calculate his rate you take 12 month Libor on that date and add 2.250%, it can't adjust more than 2% in any one year due to restrictions on the note. He also had a purchase money second $83,900 but for some reason I can't find the interest rate on that one, nor do I see an ARM rider for it so it could very well be fixed. Both notes indicate they are amortizing loans.

So what does this all mean? Well according to the terms I see for Bernanke's first and the little information on historic LIBOR I can find (here)... his rate actually went down. So if his rate went down on his first and his second is fixed (an assumption on my part since I see no ARM rider on the second) then ask yourself why refinance now? You would only do so if you expect rates to rise in the future or you don't think fixed rates will ever be this good again. Winter time is a low demand time for mortgages so rates drop to encourage activity, also the Fed is ending it's MBS purchases so rates are expected to rise.

Based on his actions I think Bernanke does not expect rates to get better than this at the very least. One can't read how much worse he might think rates might get based on his refinance but he clearly fixed his rates now so the risk for lower rates in the future based on his personal financial decision is low. I was a little doubtful that the Fed would actually end their MBS purchases since the housing market is only this "good" due to the artificially low rates caused by those purchases. But now I am much more convinced that the Fed will at least let the MBS portion of the market to stand on its own two feet in the near future. They could always jump back in if rates jump higher than they want.

17 comments:

Rob Dawg said...

Home run sir. Bravo. Now, about that La Loma doomerstead... ;-)

Stephen G said...

> Yes. We had to do it because we had an adjustable rate mortgage
> and it exploded

So he lied?

HelloKitty said...

Excellent example of 'Kremlinology' at work.

http://en.wikipedia.org/wiki/Kremlinology

Anonymous said...

the 12 month libor as of today is 1.0038, so if his margin was 2.250 that would have given him a new rate of 3.250 rounded to the nearest .125%.....where is the implosion???

eh said...

its MBS purchases

HelloKitty said...

Perhaps the explanation is simple indeed:
Maybe Ben's wife was on the internet and clicked the ad with the 'dancing mortgage people' then called them up.

No doubt the guy in the boiler room would have told her thier mortgage would explode soon so she betta refi asap.... so she did....

Maybe never bothers with his own household finance I mean he saves the world 3 times a day, how can he have time for that stuff?

Max said...

One detail that you missed: he refied into a 30 year loan after five years. Looks like he's playing his own game of extend and pretend.

Effective Demand said...

Rob,

If rates go up you'll be getting that doomstead for half price :-)

Stephen G,

I can't say 100% but his statement is certainly curious in light of the available information. I'd love for someone to follow up on it next time they are interviewing him.

Hello Kitty,

The dancing mortgage people theory explains a lot!

Max,

His original loan was 30 years ending in 2034, this one is to 2039. Not a huge difference. He has paid down 80k of the loan balance as well. They are giving out 30 yr loans cash out refinance to 70 year olds without batting an eye, so giving out a rate and term refinance to a 55 yr old isn't anything that is peculiar in this day and age.

Geoff said...

So the Fed chairman had an ARM linked to LIBOR? That's a huge conflict of interest (pun intended)! LIBOR is driven by the Fed Funds rate, so Bernanke isn't simply guessing that rates may rise; he actually has a quite significant say in whether, and when, they do!

Effective Demand said...

Geoff,

I dont think he is doing $1.75 trillion dollars in QE just to get a better mortgage. He could have just not asked to be reconfirmed as chairman and made infinitely more in the private sector. I do think the timing is interesting as far as inferring his views on future mortgage rates.

I'd love to know the exact details of the original loans and why he really refinanced now. The best I can come up with is he thinks LIBOR will be going up above 3% for an extended period of time and therefore he should lock in a lower rate.

Anonymous said...

This could be much simpler than it appears. Back in the day when I had an ARM, it had a "floor" rate - or the minimum after the initial fixed period of 5 years. This minimum could be higher than the initial "teaser" rate. So, I would guess his "floor" rate was between 5% and 6%.

Jack said...

Is there anyone out there who thinks rates will go down in the future? They are at or near historic lows. The mortgage party can't go on forever. Bernanke would be nuts not to lock in a 5% rate.

Anonymous said...

If we are in an Irving Fisher type debt deflation, then rates could still decline.

Rates in Japan remain extremely low despite a decade of monetary reflation.

The concensus view is that rates should increase. If the popular trade is wrong, rates could fall.

If the FED can continue to manipulate monetary factors, rates can remian low.

While nominal rates rates appear low, real rates are high (risk adjusted). Really, where is China gonna put that much money?

my $.02,

jimi

Effective Demand said...

Anon @ 1:41PM

His floor is 2.250%

short sale agent San Diego said...

I would just like to say to you... One detail that you missed. Think about it. lol

├╝li├Ápilane said...

May I ask where you looked this information up?

Effective Demand said...

ulio,

From the public records, it's all freely available information.