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Home equity regulations: The forgotten Texas miracle

August 29, 2013
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If you repeat a lie long enough, it becomes truth.

Such is the case in Texas, a state heralded as the only economy to weather the housing bubble without experiencing a steep drop in home values. Texas advocates would give the internal business structure all the credit, but that's not entirely true.

As for why Texas performed so well remains the subject of ongoing debate. But it seems the one thing the Lone Star State had going for it during the financial crisis is the one thing it’s known for rebelling against: Regulations.

So you thought the state got ahead by recoiling from all financial rules? Think again, economists say.

A new report from the Federal Reserve Bank of Dallas claims the Texas housing market stayed afloat during the recession because of an existing state law that limited home equity borrowing.

To be fair, this rumor circulated for a while, but the Dallas Fed set out to prove it.

It seems after the 1980s real estate crisis, Texas lawmakers and voters agreed on several housing/mortgage finance-related regulations. And if you remember the Dallas-Fort Worth market in the 1980s, lawmakers and state voters had plenty of evidence to support the creation of boundaries in lending.

At the time, neighborhoods with ghost-like qualities riddled the D-FW metroplex. It was a smaller region back then, surrounded by more empty fields and blessed with another amenity that would help Texas see exponential expansion for a while — an abundance of space and room to grow. Yet, none of this shielded the state from the banking and housing crisis that struck in the late 1980s.

 As a result of its troubles, Texas enacted a few rules to protect home equity.

Texas voters in 1997 passed a constitutional amendment allowing closed-end home equity loans, the Fed Bank of Dallas points out. The rule stipulated that a home equity loan plus the primary mortgage must be less than 80% of a home's total value.

The Dallas Fed study claims rules like this helped Texans shield themselves from the sensation of watching their homes dip underwater as prices fell.

Anil Kumar, a senior researcher and economist with the Dallas Fed, said the average 'underwater Texas homeowner' ended up with debts about 14% above actual home value, while the average underwater borrower in other parts of the country had a mortgage approximately 32% above home value.

In addition, the percentage of nonprime borrowers underwater peaked at 10% in Texas, compared to the 54% average recorded in other states back in 2011.   

“By extension, lower default rates and fewer underwater homeowners might have also helped Texas avoid the subsequent sharp drop in home prices other states experienced,” the Fed Bank authors wrote.

From peak to trough, Texas home prices didn’t plummet as much. From 2007 to 2011, home prices in Texas fell less than 1%, based on data from the Federal Housing Finance Agency. The same index fell 20% nationwide.

With more equity in their homes and smaller home price drops, Texans essentially faced a shorter path to recovery.

Despite the state economy also benefitting from jobs, the energy sector and affordable real estate (which is supported by an abundance of land), the true miracle of Texas is often lost in all the hyperbole about the state's well-tuned economic engine.

In reality, a local regulation kept the state from sliding into the abyss of the housing crisis, but that's not a popular story to tell.

Whether the Fed Bank of Dallas has more success in telling this true tale remains to be seen.

Click here to read the entire Dallas Fed study.

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