A Lot More
Observations on housing's wreckage and recovery
My article for The Big Money on why Texas didn’t have a real estate bubble or bust has sparked some worthy responses, some proposing alternate explanations for the Texas miracle.
I owe a big debt to Mike Konczal, who pointed me to his initial posts and comments on his blog Rortybomb, where he first blogged about the Texas miracle a year ago. Here’s Mike’s take on my take over at Ezra Klein’s Washington Post blog.
As Mike did in his earlier post, at Mother Jones Kevin Drum notes that Texas has a bunch of other borrower protections on its books, including bans on prepayment penalties, negative amortization mortgages, and balloon payments.
Yes, these laws do exist in Texas. And they have had little impact, because of the way the statutes were written. Just as with the failed effort by Congress to rein in subprime lending in the 1990s via the Home Owner’s Equity Protection Act (HOEPA), these restrictions only apply to “high cost” mortgages, defined as having an APR at least 8 points above the Treasury rate. And that’s the initial rate, so a teaser rate that later sets upward doesn’t count.
Attorney S. David Smith of the law firm McGlinchey Stafford, who represents Texas mortgage lenders and has a handy guide to the high cost loan guidelines on the firm’s website, told me lenders simply set their interest rates beneath the threshold to avoid being covered. “I have not seen a single reported high cost mortgage under the Texas Finance Code,” he reported.
It’s possible the Texas restrictions on prepayment penalties scared off bottom-feeding mortgage-backed securities issuers from buying Texas loans, since losing the penalties increases investors’ uncertainty. But many states banned or restricted prepayment penalties for some or all borrowers, at least until the Office of the Comptroller of the Currency preempted state banking regulations. Illinois, which bans the penalties entirely, has a foreclosure rate nearly twice that of Texas, and saw plenty of subprime loans.
The failure of regulations pegged to “high cost home loans” has already been well documented at the national level: HOEPA, with its 8-points-above-Treasury threshold, ended up applying to just 1 percent of all subprime mortgages (sorry, no link, but it’s cited here by an all-star cast of housing and subprime experts – see page 140).
A couple of other good points:
At the Economist, R.A. (aka Ryan Avent) cautions against giving regulations too much credit, and suggests that Texas saw causality in the opposite direction: no Texas bubble meant less home equity to drain.
A commentator at The Big Money, Joseph Zona, points out that because Texas does not have a state income tax, property taxes are high. They’re indeed significantly higher than in, say, Florida, a bubble state that also has no income tax, and it’s an important factor to consider.
Writer/activist/hacker Aaron Swartz calls me out for saying that Texas, like most sun belt states, is “flat and generous in letting real estate developers sprawl where they will.” Swartz notes: “The cause of sprawl is not a lack of regulation against it, but instead zoning regulations that make dense development illegal.”