MORTGAGES

Ben Bernanke can afford to buy his house but gains with a mortgage

Former Fed chief says he wants to refinance his house with high-income Americans like him benefiting from healthy returns and subsidies

PUBLISHED : Wednesday, 08 October, 2014, 7:16am
UPDATED : Wednesday, 08 October, 2014, 7:16am

Ben Bernanke says he cannot refinance his house. With his book advance and speaking fees, why does the former Federal Reserve chairman even want a mortgage?

Even for the wealthiest Americans who can afford to buy their houses outright, mortgages come with a double benefit: interest rates low enough that returns on investments can beat them, and a tax subsidy that covers nearly half the interest cost.

A 15-year loan carries a 3.36 per cent interest rate this week, according to Freddie Mac. And at the top federal and Washington tax rates of 39.6 per cent and 8.95 per cent, the mortgage interest deduction reduces Bernanke's real cost of borrowing even further.

Bernanke's situation highlighted a flaw in the tax code, said Harry Stein, an associate director for fiscal policy at the Centre for American Progress.

"He can do better investing the speaking fees in the stock market than using them to pay his mortgage and own his house outright," Stein said. "I can't imagine the public policy case for subsidising leveraged investment for affluent people and there's just no world in which that makes sense."

Speaking at a conference in Chicago, Bernanke lamented tighter credit rules and said he had been unsuccessful in trying to refinance his own home loan. "I'm not making that up," he said when the audience reacted with laughter.

Bernanke, 60, did not explain why he wants a new mortgage.

A spokeswoman at the Brookings Institution, where Bernanke is now a fellow-in-residence, said he was travelling and unavailable for comment.

At the end of last year, Bernanke had a 30-year loan with a 4.25 per cent interest rate, according to a disclosure form he filed this year as he was leaving the central bank.

He and his wife, Anna, took out that US$672,000 loan in 2011 on their Capitol Hill home, which is assessed for tax purposes at US$906,490.

With a net worth of US$1.1 million to US$2.3 million, income of US$150,000 to US$1.1 million from textbook royalties last year, the speaking fees he has earned since leaving office and a book advance, Bernanke probably could pay off his mortgage and be debt-free.

Many of those assets, however, are held inside retirement accounts. At his age, Bernanke could withdraw them without penalty, although he would have to pay taxes and is not required to begin taking the money out until after age 701/2.

Because marginal tax rates increase with income, the benefits of tax deductions are focused on higher-income households.

According to the Congressional Budget Office, 73 per cent of the benefits of the mortgage interest deduction went to the top 20 per cent of taxpayers last year. And 15 per cent of the benefits went to the top 1 per cent.

President Barack Obama and House Ways and Means Committee chairman Dave Camp have offered proposals that would effectively cap the benefit of the mortgage deduction and other breaks for the highest-income taxpayers. Neither plan has advanced amid gridlock on tax policy in Congress.