Minnesota Overreacts to Mortgage Abuse (Oops, I Think the Baby Was in That Bucket)

Lending Clarity (mortgage industry website) ^ | 07/25/2007

[RockinRight]

In one of the biggest overreactions to mortgage lending problems, the State of Minnesota has passed legislation outlawing stated income mortgages. On April 20, the state legislature passed House File 1004 and Senate File 988 aimed at limiting abusive home lending practices. But did they go too far?

Oops, I Think the Baby Was in That Bucket

Requiring that borrowers must now document income and assets for all loans on primary residences and 2nd homes, the law prohibits the use of any Stated Income, No Ratio, No Doc, & No Income/No Asset loan. In other words, the only way a borrower can get a loan after August 1st is to show pay stubs, W-2’s, tax returns, and bank statements.

This would make it impossible for many self-employed people, not to mention those with income from unseasoned second jobs, notes or child support/alimony lasting less than three years, to secure a home loan. See my previous post on 4 Reasons to Keep the Wage Earner State Income Loan for a better understanding of this issue. Dumb idea? Yes, I think so.

And That Ain’t All

Minnesota’s bill also bans all negative amortization loans as well as prepayment penalties on loans of less than $75,000. It establishes an agency relationship for mortgage brokers with civil and criminal penalties to go along with it. Now, we can discuss the merits of suitability standards and penalties, but before you decide whether this legislation actually protects consumers or just covers legislators’ asses, read this:

“The agency duties above and the civil penalties specified below would not apply to mortgage originators employed by federally and state chartered banks and credit unions; since they have been exempted from these provisions in the proposed legislation.”

In other words, mortgage bankers are exempt. In grateful acknowedgement of the mortgage bankers’ lobbying efforts, huge campaign contributions, free trips, jet rides, massages, and you name it, Minnesota’s legislators once again exempted their corporate friends at BofA, Countrywide, Wells Fargo and the rest from any consequences of abusive lending practices.

Are You Kidding Me?

Sorry, no. This is a consistent theme over the years. Mortgage reform is invariably targeted at mortgage brokers. Why? Because they have more money, and we are taking away market share. Mortgage brokers have to disclose our fees and we can shop all the banks to find the best deal for our clients. The bank can’t shop and don’t have to tell you how much they’re making.

Kinda gives new meaning to the phrase, “No one can do what Countywide can.”

[RockinRight]

Not if you write off a lot and have an AGI that is very low. Look at post 27 for an example.

[Jaalle]

When a Lender is underwriting a real estate secured loan, all they are doing is “risk assessment”. If according to the credit report analysis, the Borrower has the necessary credit depth and the underwriter can clearly see the guy paid his bills since college on time every time, then the chance of him/her defaulting on the loan is low...therefore they can state their income. (we don’t and shouldn't’t care if the guy works as a male escort and cheats on his taxes...not our job} Why would a Mortgage Broker be in the business of enforcing tax laws by asking for income documentation unless it is nesseciated by Borrower’s weak credit standing. All we care about is Borrower’s ability to pay back the loan, and this can easy be established through the underwriting process and credit analysis. Whatever the case, nothing ever gets solved by more knee jerk regulations and bureaucracy.