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Consumer financial protection, Texas-style

By Mike Konczal
Why care about consumer financial protection? My interest in thinking about consumer financial protection laws started some time ago with this graph:

Those are the housing price levels for Phoenix and Dallas, two somewhat similar cities, and the United States as a whole. My thought at the time was, "How did Texas escape a housing bubble?" Texas gets all kinds of bubbles. My initial thought was that it had to do something
with its extensive state consumer protection laws.

Alyssa Katz has written what I think is the best piece on Texas and this topic for the Big Money: The Lone Star Secret: How Texas avoided the worst of the real estate meltdown.

It’s one of the great mysteries of the mortgage crisis: Why did Texas -- Texas, of all places! -- escape the real estate bust? ... But there is a broader secret to Texas’s success, and Washington reformers ought to be paying very close attention. If there’s one single thing that Congress can do now to help protect borrowers from the worst lending excesses that fueled the mortgage and financial crises, it’s to follow the Lone Star State’s lead and put the brakes on “cash-out” refinancing and home-equity lending. ...

As home values surged, the sales pitch was a slam-dunk: Borrowers could refinance their homes at extremely low interest rates, and based on newly reappraised property values get more cash in their hands than they might earn in a year. Sure, these were teaser rates that would adjust upward after two years, but brokers routinely assured borrowers they could just refinance again before that happened.

Subprime cash-out refinancings became a standard way for borrowers drowning in credit card debt to pay it off, boost their credit scores so they could qualify in a few months to refinance into a lower-rate prime mortgage, and get a big tax deduction in the bargain.

It's a great article, and it shows how simple breaks and simple rules for mortgage products done at the state level can make a world of difference both for the individual and the greater community.

Two additional points:

(1) Georgia also had a strong set of consumer financial protection laws which were preempted by the OCC. The OCC, with the backing of the ratings agencies, came in and made it harder to carry out their rules because it mucked up the securitization process. Georgia now has the seventh-highest foreclosure rate in the country.

(2) As Richard Green and others have noted these equity stripping financial "innovations" have put the boomers in a terrible position as they approach retirement. This crisis didn't increase homeownership, it increased home buyership and decreased homeownership in terms of real equity owned by households.

It takes time to increase equity and real wealth through housing, and housing wealth is one of the major mechanisms of transfer of wealth between generations in this country. As a result of this bubble and predatory lending there has been significantly more damage done to the building of a substantial middle class in a way that stocks could never do. Our policy through wealth creation through home ownership will need to adjust for the 21st century.

Mike Konczal is a fellow with the Roosevelt Institute and the author of the Rortybomb blog.

By Washington Post editor  |  April 1, 2010; 10:45 AM ET
Categories:  Economic Policy , Economy , Financial Regulation  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: Letting the government govern
Next: Are policy concessions worth it?


Hasn't Krugman argued that the sort of disparity shown between housing price trends in Phoenix and Dallas has a lot to do with disparate zoning laws?

Posted by: pneogy | April 1, 2010 11:08 AM | Report abuse

If you're right, then what we experienced wasn't just a housing bubble, but a bubble for our entire economy. All that shadow wealth being extracted through mortgage practices was being dumped back into the real economy... either through reinvestment in the base home stock, or less spendthrift ways. Either way, the question then becomes how much our economy was artificially propped up, which we shouldn't expect to now see recovered?

BTW, happy Thursday.

Posted by: Jaycal | April 1, 2010 11:37 AM | Report abuse

As someone who lives there, I propose the theory that its simply because Dallas really really sucks. Never been to Phoenix so it could be equally sucky for all I know.

But on a serious note, this is the first explanation I've read that makes sense.

PS. Change the scale and you'll see that Dallas too had a bit more of a bubble than what that plot implies.

Posted by: nylund | April 1, 2010 11:40 AM | Report abuse

Ironically, I think it's also partially due to sweetheart deals that title companies have here in Texas. When you refinance your home with a new lender, you end up needing to go through the entire closing process again. Texas law sets the price for mandatory title insurance artificially high, so it typically takes years for a refinance to pay for itself.

Posted by: yerfdogyrag | April 1, 2010 11:51 AM | Report abuse

isn't this another way of saying that limiting leverage can help prevent bubbles?

Posted by: brandow | April 1, 2010 11:59 AM | Report abuse

brandow with the winning post.

Posted by: jeffwacker | April 1, 2010 12:05 PM | Report abuse

You couldn't get a home equity lone in Texas at all until the late 90's.

Posted by: tl_houston | April 1, 2010 12:24 PM | Report abuse

A large part of the limitations may derive from Texas bankruptcy laws. Texas excludes 100% of the value of the primary residence from bankruptcy, regardless of price. This can include muti-million dollar ranches, allowing a person to declare bankruptcy and still walk away with a small fortune. Consequently, Texans may have been reluctant to allow a great deal of borrowing against that equity and the banks would have been reluctant to lend it, even if they could.

Posted by: WoodbridgeVa1 | April 1, 2010 12:57 PM | Report abuse

According to a prominent Dallas real estate lawyer I know, "As lore would have it, the constitutional aversions against home-secured lending and the protection of the homestead, and the once very restrictive usury laws, are in no small part related to the fact that Texas was largely founded by Tennesseans fleeing their creditors."

Posted by: DKB1 | April 1, 2010 1:56 PM | Report abuse

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