There is no specific definition about what exactly predatory lending entails, though most observers believe that the description applies when lenders take advantage of borrowers by charging high interest rates and consider only the value of a borrower’s assets, as opposed to what the borrower can afford to pay.
Without a clear definition, most legislation merely attacks that which the politicians feel is best to demonize. Here is what the Minnesota legislation did...
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?
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.
I don't know how this legislation played politically, however I would be willing to bet that its authors saw a politcal opportunity.
The problem with this political opportunism is that it has all sorts of unintended consequences. The mortgage market was already facing a shrinking product line. In other words, the market, on its own, eliminated non performing programs. Many of these programs were the ones that the legislators tried to eliminate themselves. By creating laws that also eliminated mortgage products, what the legislators did was limit the options to many homeowners that were struggling to pay their mortgage. Furthermore, they limited the options of potential homeowners. What this does is put downward pressure on real estate and it increases foreclosures. Foreclosures in Minnesota increased dramatically and immediately.
Home foreclosures in Minneapolis, St. Paul and other communities around the state are rising at a rate that is beginning to alarm some officials worried about destabilized neighborhoods.
The main cause appears to be homeowners who plunged into the housing boom of recent years are now struggling with mortgages they can't afford, and who in some cases may have fallen victim to risky financing arrangements."
There are more and more people who have purchased houses using mortgage products that they didn't fully understand," said Cliff Morse, a mortgage financial planner with American Home Mortgage in Chaska. "Now people are falling backwards."
What the article doesn't mention, and likely doesn't realize, is that these same homeowners now no longer qualify for any loan to try and salvage their situation. If borrowers got themselves into trouble using negative amortization, stated, etc., they aren't going to qualify for any traditional loan. The rub, as Shakespeare would say, is that the only product that may yet save them is the exact same one that got them into trouble. That's because that's the only product that they have available to them. If someone bought a home using stated income, it is because their real income wouldn't qualify them. If stated loans are outlawed, that same borrower is now stuck in an unworkable loan. Maybe another stated loan will save them and maybe it won't, but now that is no longer even an option in Minnesota. The reason that the end of 2007 became one of exploding foreclosures in Minnesota wasn't merely because folks got into loans they couldn't understand, it was because the legislature in a fell swoop eliminated any potential options these same folks had to try and save themselves.
This is the sort of duplicitous game that legislators around the country will try and play. They will promise to do all they can to save struggling homeowners and at the same time promise to remove all the demonized loans. Of course, the only way we can do all we can is to try and keep as many options open to these same struggling homeowners. Whether these politicians like it or not, if they are really trying to do all they can to save struggling homeowners, they will do all they can to keep as many loan products available as they can.
By removing No Doc loans, all struggling homeowners that are currently unemployed are left with no options. By removing all stated loans, all struggling business owners are left with few options. By removing all stated asset loans, all struggling homeowners with little or no money in the bank are also left with no options. By removing pre payment penalties, many struggling homeowners are left without a vital option to lower their interest rate to something affordable. (Since after all everything else being equal, a loan with a pre payment penalty will have a lower rate and subsequently payment) By removing negative amortization, the legislature may also have removed the only option that borrowers had to make their payments affordable. (Whatever demonization negative amortization loans have, they do create a situation where the payment is tiny)
This is the reality of the mortgage market, and furthermore the duplicitous legislation being offered. The very same politicians promising to do all they can to help troubled borrowers then turn around and limit the very products that will help these same troubled borrowers. Without these options available, these same troubled borrowers will have no options to refinance for a very long time. If someone bought a property using stated income, they aren't going to qualify if they are forced to prove their income. They used stated because their real income wouldn't qualify them. If these same borrowers are then bailed out, these bailouts will have to last a long time because it will be a long time before they can find a mortgage they can afford on their own.
Keep the case of Minnesota in mind as legislation is proposed to try and fix the mortgage crisis.
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