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:

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My Chase rep called this morning to tell me that Chase is pulling their 100% SISA (stated income/stated asset) loans at the end of the month.   I can’t say this is unexpected, since the noose had been slowly tightening.  The 100% SISAs for prime A paper borrowers had survived until now only in the rarified atmosphere of 740+ Fico scores.  

Chase was one of the few left with a low enough default rate to find buyers on Wall Street.  Apparently the numbers are in, and Chase got its butt kicked on 100% loans originated in 2006, particularly on the 2nds that are commonly piggybacked on 80% 1sts to reach 100% CLTV.

Expect the 100% SIVA (stated income/verified asset) loans to follow shortly.  The word on the street is that everyone else, National City,  CitiMortgage, Aurora, et. al. are also bailing.  Wall Street has completely lost its appetite for these and will no longer buy them.  

Protect your pipeline.  Sometimes we don’t get any warning. 

Today�s message from Wells Fargo on 100% stated income/stated asset loans.

Urgent notice: Wells Fargo Home Equity will continue to have SIVA (stated income/verified assets) to 100%, however, the Stated Income/Stated Asset to 100% will no longer be offered for loans locked/registered on or after Tuesday, April 17th. Monday, April 16th will be THE FINAL DAY to get your SISA 100% loans in our system (an earlier communication incorrectly approximated a final locking date of April 23). Mark your calendars now and make sure you don’t miss the final SISA 100% CLTV opportunity.