How Did Vermont Avoid the Mortgage Meltdown?

If you want a preview at what might be the future of housing in this country then take a look at this story from the Wall Street Journal. They spotlight Vermont, a state with tough mortgage lending laws and coincidentally or not the one state that’s riding out the real estate bust better than any others.

From the Journal:

In plenty of other states, Andrea Todd would have been a homeowner years ago. Here, she bought just this month — a difference that helps explain how Vermont avoided the housing bust, and shows the possible pitfalls in President Barack Obama’s plan to tighten mortgage regulation.

For the past five years, as home loans went to even Americans with poor credit and no proof of steady work, Ms. Todd couldn’t get a mortgage in spite of her good credit and low debt. Vermont banks told the self-employed landscaper that her income stream was unreliable. The 32-year-old changed careers, taking a permanent job as a teacher, to boost her chances.

Vermont’s strict mortgage-lending laws largely prevented the state’s residents from signing the types of dubious home loans written in other markets across the country. Its 1990s legislation made mortgage lenders warn customers when their rates were relatively high, and put the brokers who arranged loans on the hook if their customers defaulted. Now, by at least one measure, the state has the lowest foreclosure rate in the U.S.

It came at a cost. The rules also kept some Vermonters like Ms. Todd from buying homes, keeping this rural corner of New England on the sidelines of the housing boom and the economic bonanza that came with it. Vermont’s 10-year growth trails the national average.

“We generally do often lag the national economy — both up and down,” said Republican Gov. James Douglas. “We don’t benefit from the boom times, but we don’t fall as deeply into the abyss when things get tough.”

Viewed from the rubble of the collapse of the bubble, this doesn’t look like too bad a strategy. Certainly, there are millions of Americans that probably wish someone had been around to tell them, no you can’t afford the house you just agreed to buy. Sounds good doesn’t it, but as always, be careful what you wish for.

When you’re bleeding you wish you hadn’t started the fight. When you’re not, you tend to be full of bravado. What might look good right now may look like a bad deal in a couple of years. Therein lies the problem. You can do a Vermont and avoid the crash but you have to accept deferral of instant gratification. Americans don’t do that well.

My guess is that there may be a move towards a Vermont type of approach to mortgage lending. I would also guess that while it might be successful initially, popular sentiment will force a retreat once things turn around and the memory of this current crash fades away.

Comments

[Tony Petroski:]

From the article: "Vermont banks told the self-employed landscaper that her income stream was unreliable. The 32-year-old changed careers, taking a permanent job as a teacher, to boost her chances."

Is this a sign of things to come? Entrepreneurs producing real goods and services turning to the public sector for employment? How many teachers and nurses can the economy support? Do we want to go the "Vermont Way?"

Aug 18 11:03 AM

[ain't no fo...:]

Tony, most of us here in VT really don't give a rat's ass what "way" idiots like you go. I live in Vermont 6 months out of the year. We're the most liberal state in the Union, and proudly so. But we're also practical, hard working people who survive in a harsh but beautiful environment, we favor family and personal decency and honesty over the accumulation of flat screen TV's and jet skis, and we are incredibly skeptical of the games and cons run by the flatlanders in Washington and New York... and most other places where business owns the government.

Vermonters own their government up here... and THAT is why we don't get taken in by the lies and scams of businesses and lobbyists that have taken over government at all levels in this country.

Aug 18 11:34 AM

[OptimizedPrime:]

Folks, if there is to ever be any return to normalcy ("new normal") then mortgage lending in this country will need to change significantly.

Start with Strategic Foreclosures ("strategics"): people walking away from their home because they don't feel like paying for it anymore even know they can. This is a phenomenon which will become widespread and essentially mainstream in the coming months and years.

In the future (and now, for non-government-backed loans) banks will need to price and structure this in to their investments. They will need to ASSUME the owner WILL walk away when the loan goes underwater (plus a little factor for inertia, etc.).

As such, you can start to see some of the rules that must emerge:

1. Down payments MUST cover the lender's ENTIRE downside.

2. Interest rates need to be LOCAL in their nature because real estate is LOCAL in its nature. You don't make the same bet for every hand in poker but that's exactly what lenders did by creating a national market for mortgages.

3. Putting these two together, lenders will need to increase interest rates and down payment requirements in volatile areas. More importantly, they will actually be required to KNOW WHAT THEY ARE DOING for a change when they are lending money to somebody.

There are probably a lot more changes coming, but this would be a good start.


OP

Aug 18 12:28 PM

[Alan Young:]

@ Petroski:
Good grief. You hate public service so much that you want to eliminate teaching and nursing? I can imagine an economy without building contractors--and bankers, for that matter. But an economy without teachers and nurses would be doomed.

These jobs are woefully underpaid as it is; that's the main reason there are jobs still available. And that's a good thing, because the "entrepreneurs" you love so much have a high rate of failure, and there are not many places these days for them to go find work after going bankrupt.

On Aug 18 11:03 AM Tony Petroski wrote:

> Is this a sign of things to come? Entrepreneurs producing real goods
> and services turning to the public sector for employment? How many
> teachers and nurses can the economy support? Do we want to go the
> "Vermont Way?"

Aug 18 12:29 PM

[mallarde:]

Tom, it is myopic to discuss differences between Vermont and places like California and Florida without recognizing the huge demographic and cultural differences. As the Vermont poster above pointed out, people are just plain different in Vermont, as they are in many other states.

In fact, in places like California immigrants -- even many illegals -- make up a very high proportion of the foreclosed homeowners. It is absurd to presume that a Vermont Yankee will behave anything like a Mexican drywaller.

Aug 18 01:23 PM

[Russ Wetherill:]

Good points. I agree that lender regulation changes are necessary to prevent another bubble. But, some regulation of the CDOs (collateralized debt obligations) and the CDSs (credit default swap) markets will also be required.

Absent the ability resell risky mortgages, lenders would have prudently sought higher downpayments in this speculative market. Problem is that the opposite occurred: downpayments and credit requirements decreased as risk increased. This is because the lenders passed the risk on to the buyers of the RMBSs (residential mortgage backed securities). These buyers assumed they were low-risk thanks to the rating agencies giving AAA ratings to mixed buckets of loans.

We should also consider regulating the regulators - The Congressional and Executive branches have clearly been, and continue to be, asleep at the switch.


On Aug 18 12:28 PM OptimizedPrime wrote:

> Folks, if there is to ever be any return to normalcy ("new normal")
> then mortgage lending in this country will need to change significantly.
>
>
> Start with Strategic Foreclosures ("strategics"): people walking
> away from their home because they don't feel like paying for it anymore
> even know they can. This is a phenomenon which will become widespread
> and essentially mainstream in the coming months and years.
>
> In the future (and now, for non-government-backed loans) banks will
> need to price and structure this in to their investments. They will
> need to ASSUME the owner WILL walk away when the loan goes underwater
> (plus a little factor for inertia, etc.).
>
> As such, you can start to see some of the rules that must emerge:
>
>
> 1. Down payments MUST cover the lender's ENTIRE downside.
>
> 2. Interest rates need to be LOCAL in their nature because real estate
> is LOCAL in its nature. You don't make the same bet for every hand
> in poker but that's exactly what lenders did by creating a national
> market for mortgages.
>
> 3. Putting these two together, lenders will need to increase interest
> rates and down payment requirements in volatile areas. More importantly,
> they will actually be required to KNOW WHAT THEY ARE DOING for a
> change when they are lending money to somebody.
>
> There are probably a lot more changes coming, but this would be a
> good start.
>
>
> OP

Aug 18 04:59 PM

[FloridaBoy2:]

"Start with Strategic Foreclosures ("strategics"): people walking away from their home because they don't feel like paying for it anymore even know they can. This is a phenomenon which will become widespread and essentially mainstream in the coming months and years."

Why not walk away? They put little down and have no equity. This would not have happened if the original lender had to service the loan for the full term.


"In fact, in places like California immigrants -- even many illegals -- make up a very high proportion of the foreclosed homeowners. It is absurd to presume that a Vermont Yankee will behave anything like a Mexican drywaller."

Brilliant statement. I am in Florida and many of the properties that are now foreclosures were bought by Yankee speculators. Unless you are an American Indian there is an immigrant in your woodpile.

Aug 19 05:45 AM

[balois:]

Got to chuckle: how far apart, yet how similar we all are!

The various posters here sound exactly the same as Continental Europeans vs. UK spendthrifts, French from the North vs. the happy-go-lucky Southerners (meaning: Saint Tropez, Cote d Azur and all); Germans vs Greeks; Norwegians vs Spaniards; Swiss "Natives" (meaning: at least a couple of generations or thereabouts since naturalization...) vs. newly immigrated folks from Eastern Europe and so on.

Agree with "aint no..." above. It is relatively simple in my simple mind:

You may not benefit from a credit bubble boom if you have to put down 20 % on your dwelling, keep a years income as "iron" reserve, buy second hand cars cash, save for college.
But you sure sleep better, keep your roof and wits together and no need to kick the dog, yell at the wife and kids. You have the luxury of time to plan your next move when things turn sour economically for you.

Have a nice day

Aug 19 06:44 AM

[enigmaman:]

As someone who worked in the industry for over 20 years starting early 1980s through 2004 the simple solution is to just roll back mortgage underwriting guidelines to 1999 before creative financing became mainstream. Home ownership must be based on what you can afford not what you qualify for!
the disenfranchised were the targeted customers, Cheap easy money was the drug of choice, politicians were the pushers, government was the enabler, Fannie and Freddie was the source

Aug 19 08:44 AM

[doubleguns:]

Floridaboy2: "Unless you are an American Indian there is an immigrant in your woodpile."

Must be 100% native american. Not many of those left.

Aug 19 08:55 AM

[finmah@yaho...:]

Vermont has about 700k population and that means very few housing structures to begin with. With it's scenic pastures it is 4 hours from 16 million people in both NYC and Boston. As a result there are many "retired" people on gentlemen's farms, outsourced migrant labor force for tourism and hobbyists. Being the Martha's Vineyard for winter escapes - (keep it beautiful and eradicate ugly business merchants) one can see how it can afford to keep it's unique bias. It has punitive taxes and major contributors to "special" causes all living and surronded in a Norman Rockwell setting.

Having said that of course if national policies were enacted along Vermont's policies this supposedly forward thinking prudent lot would probably have a field day suing the big banks for "redlining" , racial discrimination, unaffordable housing stock, disenfranchisement and ignoring govern lending agencies. The housing prices have a much lower beta. It is beautiful but similar to Martha's Vineyard in duplicity.

Aug 19 09:39 AM

[dixie:]

Good things to be said for those with a positive work ethic and living close to the earth and nature. There is then little want for materialism and the distractions that accompany it.

Aug 19 10:02 AM

[FloridaBoy2:]

On Aug 19 08:55 AM doubleguns wrote:

> Floridaboy2: "Unless you are an American Indian there is an immigrant
> in your woodpile."
>
> Must be 100% native american. Not many of those left.

Yes, you are right. :-)

Aug 19 10:35 AM

[Frohickey:]

This is the beauty of our current system, and one thing that 'liberals' in Congress should remember.

Vermont-style can co-exist, along with a California-style, in the same country. Unfortunately, the liberals in national government want to push their 'universal' plan-de-juer down onto everyone, and in this, both Vermont and California residents are to blame, for sending their liberals to Washington, DC.

Aug 19 10:43 AM

[finance_guy:]

There wouldn't be a school house for the teacher to teach in if someone didn't build it. And unless you want to get paid in goats and blankets, you need banks.


On Aug 18 12:29 PM Alan Young wrote:

>
>
> @ Petroski:
> Good grief. You hate public service so much that you want to eliminate
> teaching and nursing? I can imagine an economy without building contractors--and
> bankers, for that matter. But an economy without teachers and nurses
> would be doomed.
>
> These jobs are woefully underpaid as it is; that's the main reason
> there are jobs still available. And that's a good thing, because
> the "entrepreneurs" you love so much have a high rate of failure,
> and there are not many places these days for them to go find work
> after going bankrupt.
>
> On Aug 18 11:03 AM Tony Petroski wrote:

Aug 19 11:28 AM

[Buckoux:]

Conservative policy:
"Vermont’s strict mortgage-lending laws largely prevented the state’s residents from signing the types of dubious home loans written in other markets across the country."

Progressive policy.
"Viewed from the rubble of the collapse of the bubble, this doesn’t look like too bad a strategy. Certainly, there are millions of Americans that probably wish someone had been around to tell them, no you can’t afford the house you just agreed to buy."

Now let's see what progressive public policy can do to ruin health insurance and health care for the middle class and the poor.

Aug 19 12:18 PM

[levin70:]

Certainly, there are millions of Americans that probably wish someone had been around to tell them, no you can’t afford the house you just agreed to buy.

A number of years ago the banks in Illinois tried to put through a program where based on your income and financial wherewithal, it would require that you particpate in a series of classes on helping understand the basic finance principles behind purchasing a house with a mortgage if the mortgage product was anything other than a 30 yr fixed 80 LTV product. The banks used zip codes to target where to push the program. Of course the liberal chicago establishment couldn't have that as using zip codes to try to "educate" low income families was in their words code for racist discrimination against those borrowers.

Anyone wanna guess that maybe by doing this illinois and especially chicago areas could have saved themselves a whole lot of heartache?

I of course prefer this solution to outright banning of products. Properly educate people and let them decide. If they try and fail, so be it, but to completely ban those products is something I cannot ascribe to. And this is really important. When they fail, they fail. No bailouts. No matter how much you think its in everyones interest. They made an educated decision and it did not work out. Failure is the option.

Regards

Aug 19 05:15 PM

[mallarde:]

Floridaboy, you get a gold star for your display of tolerance. I do sometimes think impure thoughts. After all, illegal aliens are every bit as American as I am. Heck, people here on tourist visas are every bit as American as I am. And once their tourist visas expire and they work illegally, they are STILL as American as I am. (I wish it was like this in New Zealand.)

Makes you wonder when we can be like a real country. Is Australia allowed to keep out the billions of Asians that want to move there because the only "real" Australians are the thousands of Aboriginals that suffered invasion 150 years ago?

Floridaboy, you should visit L.A. County if you would like to see the destruction your attitude has wrought. Maybe the melting pot of South Florida is great, but So.Cal. has been destroyed. People that grew up here are heartbroken over the transformation.

As to my statement, how about this from the liberal Washington Post early on in the mortgage meltdown:

“Homeownership rates among immigrants surged in the first half of the decade, making their prosperity an economic success story. Now it is becoming apparent that many people managed to buy homes in an inflated real estate market by turning to unusual new mortgages only now receiving scrutiny from regulators and legislators. Many of these loans start with attractive low ‘teaser’ rates but feature payments that can increase suddenly.

“Unfamiliar with the U.S. mortgage market, unable to speak or read English well and vulnerable to the blandishments of real estate professionals who told them property values always rise, many immigrants are struggling to deal with high mortgage payments as their homes sag in value, making it harder to escape the loans by selling.” [Wave sinking immigrants first By Kirstin Downey, The Washington Post, March 30, 2007]

How about this from the Wall Street Journal?

"The Congressional Hispanic Caucus created Hogar in 2003 to work with industry and community groups to increase mortgage lending to Latinos. At that time, the national Latino homeownership rate was 47%, compared with 68% for the overall population. Hogar called the figure 'alarming,' and said a concerted effort was required to ensure that 'by the end of the decade Latinos will share equally in the American Dream of homeownership.'

Hogar's backers included many companies that ran into trouble in mortgage markets: Fannie Mae and Freddie Mac, both now under federal control; Countrywide Financial Corp., sold last year to Bank of America Corp.; Washington Mutual Inc., taken over by the government and sold to J.P. Morgan Chase & Co.; and New Century Financial Corp. and Ameriquest Mortgage Corp., both now defunct.

Hogar's ties to the subprime industry were substantial." [January 5, 2009 "Housing Push for Hispanics Spawns Wave of Foreclosures"]

And do you consider New Yorkers to be "Yankees"? I don't.

On Aug 19 05:45 AM FloridaBoy2 wrote:

> "Start with Strategic Foreclosures ("strategics"): people walking
> away from their home because they don't feel like paying for it anymore
> even know they can. This is a phenomenon which will become widespread
> and essentially mainstream in the coming months and years."
>
> Why not walk away? They put little down and have no equity. This
> would not have happened if the original lender had to service the
> loan for the full term.
>
>
> "In fact, in places like California immigrants -- even many illegals
> -- make up a very high proportion of the foreclosed homeowners. It
> is absurd to presume that a Vermont Yankee will behave anything like
> a Mexican drywaller."
>
> Brilliant statement. I am in Florida and many of the properties that
> are now foreclosures were bought by Yankee speculators. Unless you
> are an American Indian there is an immigrant in your woodpile.

Aug 20 12:22 AM