Posts Tagged ‘Texas’
Chicago Hearts Texas
Mary Umberger at the Chicago Tribune has written a kind and thoughtful article about my Texas prescription for avoiding future foreclosures: limit cash-out refinancing to 80 percent of a home’s value.
Expert/friends I’ve been talking to since my article ran in The Big Money/Slate/Washington Post note that constitutionally any legislation directly restricting cash-outs, Texas-style, would have to take place at the state level. So how about it, Illinois? Sure, it’ll be a tough sell politically, especially once the lobbyists and donors descend. I can already hear the cry: The politicians are stealing Americans’ freedom [to destroy their family finances]!
But as Umberger notes the real estate biz is more split on cash-outs than you might imagine. The Texas Realtors, for one, have vigorously defended the state’s cash-out limits. After all, they want selling a home to be the readiest way to tap home equity.
Georgia and the Flatland Myth
The New York Times’ Paul Krugman is the latest opinionator to pick up on my story for The Big Money about how Texas avoided the worst of the foreclosure crisis. He comes at the question from another and equally interesting angle: Why does Georgia have so many bank failures?
After all, Georgia, like Texas, is part of “Flatland,” Krugman’s coinage for the soft inner tissue of the U.S. — as opposed to the hard crusty coasts with all their development restrictions — where governments more readily permitted real estate development to sprawl where it pleased. Basic economic theory would suggest that in less regulated environments, supply is less constrained than it is in highly regulated building environments, and therefore housing prices would be less prone to inflate under speculative pressure. Hence California, Florida; Nevada and Arizona are a little harder to explain but spillover of investors from the California boom are supposed to explain it.
But I think Krugman’s Flatland theorette neglects how aggressively demand, put on steroids by the tsunami of debt that the securitization and derivatives markets unleashed, defeated the power of supply constraints in many markets, and Georgia is a perfect example of that. Those small, now failed banks that Krugman writes about today financed an unbelievable volume of real estate construction all over the Atlanta region, some 75,000 permits a year at its peak – condos, McMansions, loft conversions, anything, anywhere. And as I explain in Our Lot, those developers from very early on – we’re talking 2001 – engaged in elaborate mortgage fraud schemes to “sell” these units. Entire subdivisions and condo developments were sold this way so that developers could pay back their construction loans to local banks. But many of them couldn’t — hence Georgia’s distinction as the nation’s bank failure capital.
Red Herring in the Rio Grande
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.”
Don’t Mess With Texas
New from me in The Big Money: How Texas escaped the mortgage bust. A big part of the answer is that Texas tightly restricts refinancing, so homeowners can’t use their real estate as ATMs. They take this seriously in Texas – it’s in the state constitution. If the rest of the country had rules like Texas’, we’d be a whole lot safer from the threat of predatory lending, debt slavery and real estate bubbles.
How the homes we live in turned into the monsters that ate our economy and the United States became a nation obsessed with real estate.
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