Legislation changes in MN for mortgages effective August 1st, 2007

Mortgage and Lending with Luminate Home Loans, Inc. - NMLS# 150953 NMLS# 274125

MNEffective August 1, 2007, three anti-predatory legislative bills (H.F. 1004, S.F. 988, and S.F. 2096) enact changes designed to curb home foreclosures and mortgage lending fraud.

Many Minnesota lenders are taking a conservative approach by choosing, at least for now, to purchase only full documentation loans.  Others are stating that "no income, verified assets" will be acceptable.  However, all lenders are wanting to see that we have established a borrower's "reasonable ability to repay the loan." 

As we move closer to the August 1 effective date, more investors are issuing statements describing their position on the effect of the legislation.  While most of the focus is on stated income loans, the legislation also affects ARMS, Option ARMS, temporary buydowns, and interest-only programs. 

Moving into the change, there is alot of confusion about what will work and what won't.  We will be receiving clarification from lenders as we get closer. 

How do we establish "reasonable ability to repay the loan?" 

  • Reserves - Are there substantial reserves sufficient to cover payments?
  • Payment Shock - Is the new payment less than or equal to the previous payment, or doesn't represent a substanial increase?
  • Debt consolidation - Is the borrower's overall debt payment reduced?
  • Credit Score
  • Job Stability
  • Loan-To-Value
  • Access to other "non-usable" sources of income that can be documented, but cannot be included in the file income:  Non-purchasing spousal income, roommate income, etc....

Net Tangible Benefit

The new legislation als requires that, on a refinance, there is a Net Tangible Benefit to the borrower.  There will be a Tangible Benefit Worksheet (Anti-Predatory Lending Disclosure) provided to determine the benefit of a refinance. 

Other pieces of the new legislation:

  1. 5% limit on financed "lender fees" for non-FHA and VA loans to include fees paid by the Lender to the Broker, including yield spread premiums and service release premiums.
  2. Prohibits negative amortization features in residential mortgage loans other than Reverse Mortgages.
  3. ARMS must be underwritten at fully indexed rate (index plus margin).  For Home Equity lines of credit, qualification will utilize the Prime Rate and the margin at the time the mortgage loan is underwritten with the borrower.
  4. All loans where there is an interest-only component must be underwritten using the full principal and interest payment.
  5. All loans with a temporary buydown feature must be underwritten at the note rate.

I'm sure there will be updates to this information as the law goes into effect.  I'll keep my eye out and make sure to report on it as soon as I can.

Information provided to you by Angie Gerhardson, Personal Mortgage Consultant with Homestead Mortgage Corporation.   To get mortgage information or view my mortgage calculator, please click here.


Comments (2)

Dennis Serra
Meridian Business Group - Schaumburg, IL

Angie, I feel sorry for those LOs in Minnesota.  This is another case of the government stepping in where it is not needed.  The market has already reacted to the changing markets and lenders have tightened guidelines. 

So exactly who are they serving by passing these ambiguous laws?

The borrower?  Not unless they consider denying borrowers of their equity as ‘helping.'

Of course Illinois is considering similar laws.

Jul 19, 2007 06:35 AM
Angie Gerhardson
Luminate Home Loans, Inc. - NMLS# 150953 - Isanti, MN
Helping YOU Realize your Dream of Homeownership!
  Dennis - Yeah, this is going to be a hard one to swallow, but we are just going to have to keep rolling with the punches.  I really think that they feel that they ARE helping the borrower because we won't be putting them into loans that they don't have reasonable ability to pay.  They are trying to stop the overabundance of foreclosures.  But, like you said, the lenders are tightening up on their own, so why does the government need to step in.  I'm sure other states are just waiting to see what happens after our law is passed and there will probably be talks around the country about the very same thing.  Yuck!
Jul 19, 2007 08:16 AM