Texas Does Not Have A Magic Anti-Bubble Bullet

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:

  • Banned its mortgage lenders from imposing prepayment penalties;
  • Banned balloon repayments;
  • Banned negative amortization mortgages;
  • Banned loans based only on collateral value without regard to the borrower’s ability to repay the loan;
  • Banned lenders from charging for services the borrower didn’t receive;

–and thereby 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 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:

No Balloons – a high-cost home loan may not provide for a payment that is more than twice as large as the average of earlier scheduled monthly payments within the first sixty months of the loan.
No Negative Amortization – a high-cost home loan may not provide for a payment schedule that may cause the principal balance to increase.
Borrower’s Payment Ability – the lender may not make high-cost home loans based on the collateral value of the property without regard for the borrower’s repayment ability, including current and expected income, current obligations, employment status, and other financial resources.
No Prepayment Penalty – a high-cost home loan may not contain a provision for a prepayment penalty.
No Charge for Service Not Received – a lender on a high-cost home loan may not charge a borrower for a service or product if the borrower does not receive it.

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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