Texas Doesn't Have the Magic Anti-Bubble Bullet

by: Tom Lindmark

Felix Salmon and Rortybomb have posts up that suggest Texas mortgage regulations protected the state’s homeowners from being ravaged by falling prices and foreclosures.

Here is what Salmon posted:

“Which nanny state ... avoided the worst effects of the housing bubble?

Mike at Rortybomb has the answer, which might surprise you.”

The answer, as you already know is Texas.

Here is some of Rortybomb’s analysis:

So what gives? I’ve thought about this a lot, and have come to a simple three word conclusion: “No prepayment penalties.” Right there in their state law:

§ 343.205. PREPAYMENT PENALTIES PROHIBITED. A lender may not make a high-cost home loan containing a provision for a prepayment penalty.

And, in general, a consumer’s bill of rights:

The problem is that the statute in question refers to “high cost loans” not mortgage loans in general. The concept of “high cost loans” began to be introduced in the late 1990’s as a means of regulating high interest rate loans that were being made primarily in the second trust deed market. Also known as Section 32 loans because they are governed by Section 32 of Regulation Z these loans are subject to a number of controls and disclosures. Most mortgage loans, including subprime loans, that were made during the bubble were not subject to Section 32 restrictions.

Here is a link to an explanation of the Texas restrictions on high cost loans and here is a link to a Federal Trade Commission site that lays out the Section 32 restrictions. Notice anything? The Texas restrictions are essentially the same as Reg Z’s. You’ve probably already figured out on your own that every state in the union has exactly the same restriction as Texas by virtue of the federal law. Texas just memorialized it in their state statutes.

We’re going to have to look somewhere else to explain why Texas didn’t suffer as badly as Arizona, Florida, Nevada and California. It wasn’t because of enlightened mortgage regulation.

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