How Vermont Avoided 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.

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