Minnesota Mortgage Blog - MN Mortgage and Real Estate News

Banned in Minnesota: Trigger Leads

One of the better pieces of legislation to come out the Capital this year is a law banning the sale of what are known as "trigger leads".

The new law prohibits consumer reporting agencies or any other business entity from selling or exchanging with a third party information that a person’s credit history was requested in connection with a mortgage loan application.

In other words, until today, any time you applied for a mortgage, or had a mortgage lender run your credit report, that information, along with whatever other data was available in your file (credit score, current address, telephone number, loan balances, etc.)  was immediately sold by the credit repositories - Experian, Equifax, Trans-Union, to all sorts of bad lenders from coast to coast. They would then use that data to solicit you for a loan, often using shady bait-and-switch tactics to trick you into doing business with them. 

The credit bureau's defend the practice by saying it gives more "choice" to the consumer.  The realtity is it was a money making(as if anyone would choose to be hounded by lenders who will try to trick them.)

It WAS a perfectly legal practice in Minnesota.  The good news is it no longer is here, and for the rest of the states, you can opt-out, so your name is not included in these trigger lists.

Though we have always recommended shopping for a mortgage lender to work with, this should be done on your terms, with a lender of YOUR choice, as opposed to someone who paid good money to get your name, then would say or do anything to recover their costs.

Trigger leads are a horrible practice, a breach of consumer privacy, and need to be ended nationwide as soon as possible. 

The Law

Sponsored by Rep. Kurt Zellers (R-Maple Grove) and Sen. Warren Limmer (R-Maple Grove), a new law prohibits consumer reporting agencies or any other business entity from selling or exchanging with a third party information that a person’s credit history was requested in connection with a mortgage loan application, unless the third party holds an existing mortgage loan on the property. Most of the law takes effect Aug. 1, 2007.

The law also contains provisions for:

• increasing the dollar amount and other aspects of the homestead exemption from creditors, and provides for inflation adjustments;

• prohibiting real property from being subject to execution under certain conditions involving the homestead or other property rights of non-debtors, such as the spouse of the debtor;

• modifying provisions relating to the sale of homestead property; and

• building contractors to bring action against subcontractors for contribution or indemnity. This provision is retroactive to June 30, 2006.

Liquidity and Its Importance in the Bond Market

In years passed a borrower would visit their bank to obtain a mortgage. The Loan Officer at the bank would approve the mortgage and fund it with cash reserves from the vault. This system worked well until the bank ran out of money to lend to the next guy

What the bank needed was a way to sell the loans they made freeing up the capital to lend to new borrowers. This way they could lend the “same” money over and over, earning an income from servicing the loans and assisting the community by offering a near limitless pool of money.

To address this issue, Fannie Mae (FNMA),  Ginnie Mae (GNMA), and Freddie Mac (FHLMC) were established. The goal was to provide cheap mortgage money to prospective homeowners and a high quality bond for the investment community. The bond or Mortgage Backed Security (MBS) takes mortgages with similar risk characteristics and pools them together. Investors in the MBS’s know ahead of time the return they are going to receive, much like a Certificate of Deposit. To ensure the performance of the bond, each mortgage is underwritten to specific guidelines. By ensuring the borrower is  capable or repaying the loan, willing to repay the debt, has the cash to close, and the value is in the property is OK, the loans and thus the bond will perform as expected.

During the recent real estate boom underwriting guidelines were relaxed giving way to a whole new menu of products such as the 100% financing to those with weak credit, and high risk exotic loans (Option ARM's). In addition, to streamline the influx of applications, income and asset verification took a back seat to a borrower with strong credit. With housing prices rising rapidly, the basis for the mortgage, the property, could be sold to cover the note and foreclosure costs if this occurred. This cycle worked well until the price of houses flattened out and moderated in 2006.

Once the housing market began to cool and prices moderated, foreclosed homes were being sold for less than the note. To add insult to injury, the loans underwritten to the looser guidelines are not performing as hoped. With the value of the collateral in question (falling home prices) and the future performance of the borrowers unknown, investors’ appetites for this risk has waned. To attract investors in this environment, rates had to increase substantially. Bruised credit loans that were in the mid 7% range just a few months ago are now in the 11-12% range.

"Conforming" loans sold to Ginnie, Fannie, and Freddie remain largely untouched in the recent credit rout because the investment qualities of the loans are well known. The foreclosure and delinquency rates are well within acceptable standards lending support to these products as their interest rates have fallen in the recent weeks.

The fact remains that a qualified borrower is a good investment from a bondholder perspective. Sanity will eventually return to the markets and non-conforming pricing will come in line with their risk characteristics. The depth and breadth of the current subprime issue will determine when that change occurs.

We are in for a ride... Stay tuned for more details.