Skip to comments.Minnesota Overreacts to Mortgage Abuse (Oops, I Think the Baby Was in That Bucket)
Posted on 07/27/2007 7:34:04 PM PDT by 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-2s, 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 Aint All
Minnesotas 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, Minnesotas 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 cant shop and dont have to tell you how much theyre making.
Kinda gives new meaning to the phrase, No one can do what Countywide can.
A positive spin.
Maybe something like this will constitute the tipping point demonstrating that government can't be everybody's mommy.
Wouldn't self employed people and other legal citizens with odd jobs be able to use bank statements and tax returns and be fine?
GD COMMUNISTS !!
What it is doing is regulating folks that are not otherwise regulated. The folks exempted would be regulated by the Federal Reserve, the FDIC, the NCUA, the OTS, perhaps the FCA, and/or a state regulatory agency.
The writer has an agenda and perhaps a lack of knowledge of the subject.
Ever met anyone self-employed who wrote off everything from dog food to toilet paper? They may have a realistic cash flow of $5000 a month, but their AGI is $19400 a year. An underwriter uses the $19400 (plus some depreciation) as their income.
Now, there are loan programs allowing for using the average amount of deposits into a bank account for 12 months (called "bank statements" programs) but generally only subprime lenders allow this.
A mini Taft Hartley. As this gets worse look for more dumb moves like this to magnify the problems.
Lack of knowledge my ass.
Mortgage brokers have three times the regulations banks do in this regard. It just said “banks are exempt” and there is no Federal law that says the same thing.
You mean people who lie about their real income to avoid paying taxes will now face consequences for it? That's really too bad.
No it isn't. It's a mortgage broker's advertising blog.
"Did I mention that I have a fabulous and talented team of people that help me serve our clients. We call ourselves Team1. Visit our website to meet us, or give us a call or email if we can help you clarify things or arrange financing. Its what we do.
Marc Brinitzer Big Valley Mortgage Team1"
Well, I’m exaggerating about dog food and toilet paper, but I haven’t met many people that will forego a legitimate write-off.
Yeah, it is advertising, you’re correct. Honestly before my friend linked the article to me I’d never seen that website before.
I believe as the legal agent of the borrower the loan broker will now have a duty to get them the best loan, not the one with the highest commission for them. Granted they will still have wiggle room. Only fools trusted their loan broker anyhow. Would you trust a car salesman?
Expecting the bank to act as the agent of the borrower is ridiculous. They are required to be at arms length and are obviously interested parties.
Watch what happens to that market over the next 24 months.
Virtually everyone I know who is self employed cheats on their taxes to one extent or other. Most of them consider themselves conservative and decry criminals.
And while they are at it, if they want to stop people from taking chances why don’t they outlaw those Indian Casinos?
Oh, that’s right, they can’t.
I would suggest you do a little research before levelling such charges at the backbone of (and largest employer(s) in this nation.
You may be a victim of class envy or socialist indoctrination and not know it.
Cheat is such a harsh word. Some of us have aggressive right off policies though. They wrote the rules, we just abide by them. (How many ft^2 is that home office again?)
It’s not like right offs aren’t subject to review in an audit. Being self-employed does bring tax advantages and disadvantages.
Well, it’s a good argument in favor of the FairTax...
I’m in this business.
I educate people enough that even if they don’t use me in the future, they’ll remember what I taught them.
Not really, the complications in the tax code are mostly about figuring out what net income is. You can’t tax a small business on gross, so that complication will continue.
Very early in my carrier I used computers to count beans for a regional loan originator.
I saw the week over week sales reports.
We fluctuated our commission structure based on market conditions and sometimes the execs gut instinct. We had price of money exposure during locks and origination. The big cheeses got daily reports from which they were supposed to hedge. They didn’t and got crushed (like the legendary commodity trader at ‘Barron’s Bank’ but much smaller.) They would have gotten themselves very big bonuses had the market moved the other way. Not their money. Place went belly up.
Anyhow, most brokers steer customers into the highest commission loans, not necessarily the best loans for them.
If you are as you say then being a legal agent for the borrower wouldn’t change the way you do business much.
IMHO always ‘Trust but Verify’.
Come to the People's Republic of Washington... We have a B&O tax which is a tax on GROSS receipts. It's 0.5% on manufacturing and sales. And it's 3 times as high for a service industry as for a manufacturing industry, meaning as a consultant I pay 1.5% tax on every dollar brought in, regardless of whether or not I actually make a profit.
When I got my refi mortgage, my brother in law was my broker. He did a great job, got me an extremely low rate. But because I was self employed and my income was all over the map (on tax returns, too), I had no choice but to do a stated income loan; having a tax return history of net income of $80K, $12K, $65K, and $9K for the previous 4 years was too chaotic. Never mind the taxable income was driven by business purchases and deductions, and cash flow was always great...
Minnesota just put a lot of self-employed people off the home buyer's rolls. Self-employed/small businesses just have a chaotic net income. That truck my neighbor the plumber just bought took his annual net income down to near-nothing. It is a legitimate business expense. But purchasing it for cash pretty much will wipe out most of his gross income this year, in terms of taxes. Which is one of the benefits of being self-employed. But this change would make it impossible for him to buy a house, never mind he lives a very high-middle-class/low-upper-class lifestyle.
I’m in more or less the same boat (minus the tax on gross).
My remaining mortgage is almost gone though. Got that while I was still a sucker working crazy hours on salary.
Actually yes, I worked for 2 small businesses and the owners of said businesses did exactly that.
The issue of self-employed individuals getting loans has always been complex. However, such people do get loans, and have gotten loans even before these "creative" mortgages came into existence.
>Well, Im exaggerating about dog food and toilet paper, but I havent met many people that will forego a legitimate write-off.<
Mo you’re not. Cattle ranchers write off the cost of their dogs because the dogs are a necessary tool. Anyone with an indoor office would write off the cleaning materials for the building and that includes toilet paper.
I have never once knowingly made a donation to the IRS that they didn’t have legal claim to.
Self Employed people are allowed to right off most expenses off there taxes! Its written in the tax code!
The first part in bunk. BANK STATEMENTS suffice, therefore people who are self-employed, receiving alimony, etc. can show what they’ve been depositing. But unfortunately, it does not cut illegals out, since many of them have bank accounts.
As for “Minnesotas bill also bans all negative amortization loans”, I sure hope they didn’t wipe out reverse mortgages with that provision. They are often critical to elderly retired people remaining in their homes with a decent standard of living, but they do indeed technically constitute “negative amortization loans”, because the homeowner is receiving regular loans secured by the value of the house, while their equity in the house is being gradually reduced.
Nope, see my post #32.
I didn't say, or mean, that they take advantage of legal write-offs. They cheat. They don't report accurately what their actual income is. Most of them deal in a lot of cash transactions and some are reported, some aren't. Their personal vehicles are always claimed as a business expense whether being used for business or not, etc. A simple review of their lifestyles would show that they don't report enough income to live like they do. The unreported, so called underground economy is huge.
You may not realize this but the IRS allows for this to happen.This is why the tax codes sway several ways on the same subject matter. I guarantee you and all of us can be looked at as a tax cheater.
I didn’t do it, nobody saw me do it, can’t prove anything!
“The unreported, so called underground economy is huge.”
“No tax for cash?” is a question that often brings a positive answer.
Most of them consider themselves conservative and decry criminals.
Richard Nixon (of all people) once said that people cannot pick and choose which laws to obey. The truth is that we all do it either knowingly or unknowingly because it is impossible to be totally law-abiding in the morass of current law. The biggest lawbreaker is the government itself! The majority of government activity today is in violation of the constitution. Many scholars have concluded that the income tax itself is a violation, at best it is a very bad idea!
Yes you can tax a business on gross income -—————>
if your business happens to be in wild wonderful West Virginia.
Why didn’t they pass this law ten years ago? With the current state of the market such a law isn’t necessary and will only make things worse.
Can anybody tell me, what is an “unseasoned” second job?
If you have a second job that is part-time, and haven’t been there at least a year, or prefarably two, they don’t count the income from it...as part time, by it’s very definition, is tenuous and hard to calculate an income from.
Bank Statements programs are 99.9% subprime only. Even with a credit score of 700.
Not much, and I'm not even in Minnesota anyway. However, completely eliminating such loans, which came into existence because of self-employed consumers being unable to purchase homes, is going too far. Plus, I shy away from any sort of blanket regulation of the market.
Thank you, PSS, for a sound and sensible post and a story from the consumer side as to why this is bad legislation.
Also think about someone who is doing the exact same work, but went from being a W2 employee, to being paid a 1099 (which is considered self-employed.)
Traditional loans require two years self employed, so even if the above example made a million dollars a month, couldn’t get financing for two years regardless, even on stated income. That’s where no doc comes in to play. Of course said person has to have good credit, and there’s a sense of personal responsibility on both the part of the borrower and the mortgage representative as to whether their new income source should be sufficient...but again, this person is also stuck.
And if all the vultures who have been making a living off of undocumented loans are crushed in the process, double good.
As with anything, such privileges were abused. Undocumented does NOT mean illegal immigrants in this case (it can, but that's a different problem)...and that's what I think half the posters here are not realizing.
What do you do for a living, if I may ask?