TAR Report

Texas Association of Realtors:An Assessment of Conservative

Lending Laws in Texas

October 31, 2014

Texas Association of Realtors | 2

Table of Contents

Executive Summary…………………………………………………………………………………………………. 3

Effects of the United States Housing Bubble…………….................................................. 7

Demographic Analysis……………………………………………………………………………………………… 13

Socioeconomic Benchmark Analysis……………................................................... 14

Housing Market Benchmark Analysis……………………………………………………......... 20

Did Conservative Lending Laws Help?......................................................................... 31

History of Texas Homestead Laws.................................................................... 32

Texas’ 80% Cap and Other Lending Laws………………………………………………………… 34

Texas’ Prime Loan Market................................................................................ 36

Predatory Lending Regulations…………………………………………............................. 48

Tighter Restriction on Investment Properties: Speculative Markets…............... 59

Conclusions………………………………………………………........................................................ 63

About AngelouEconomics……………………………………………............................................. 64


Executive SummaryIntroduction

In the 1800s, laws were passed in Texas that created a unique precedent in the state to protect homeowners against unscrupulous lending and foreclosure practices. When Texas voters passed amendments to allow closed-end home equity loans in 1997 and open-ended home equity loans in 2003, the laws further protected homeowners by placing an unprecedented 80% cap on the allowed debt-to-value ratio that a homeowner can borrow against. Although such laws limited access to capital, they also limited the burden of debt that homeowners could acquire.

AngelouEconomics has been hired by the Texas Association of Realtors to evaluate the relationship between the state’s conservative home equity laws and the lack of a housing bubble in Texas. This study will address whether such legal measures helped insulate Texas from the recession that followed the collapse of the 2008 housing bubble.

To understand what went well in Texas, this report will analyze the effects of the U.S. housing bubble at the state level. Then, Texas will be benchmarked against the states of Florida and California; two states which had a pronounced housing bubble.

The purpose is to understand how and why Texas performed more favorably during the recession. A more in-depth discussion of Texas’ conservative lending laws will then create a basis for which lending laws played a role and to what extent they may have helped bolster Texas’ economy through the downturn.

The conclusions of this report are more of a correlative nature, and do not necessarily speak to causation. The recession was caused by many factors, including issues beyond the housing bubble and its inevitable collapse. Even within the issue of the housing bubble, there are many reasons why states would have performed at differing levels of success. This study focuses solely on conservative lending laws and to what extent they played a role in Texas’ relative success through the recession.

• Effects of the U.S. Housing BubbleSECTION 1

• Demographic AnalysisSECTION 2

• Did Conservative Lending Laws Help?SECTION 3

• ConclusionsSECTION 4


Executive Summary

Key Findings

Effects of U.S. Housing Bubble

Utilizing GIS analysis, along with U.S. Census’ American Community Survey Data, and the U.S. Department of Housing and Urban Development’s Neighborhood Stabilization Program’s data, it is possible to view geographical effects that the bubble and the resulting recession had on the three states.

While California and Florida saw high rates of mortgage originations, foreclosures, unemployment, and price drops in 2008 and 2009, Texas trended in the opposite direction. A majority of mortgages in Texas occurred in urban areas, though high-cost loans were more common in the rural parts of the state where property was less expensive.

Texas saw virtually no decline in home prices in 2008 and unemployment kept to single digits in most counties. These factors likely contributed to the below 5% foreclosure rates in population dense areas. Rural parts of the state saw 5% to 10% foreclosure rates, with several counties having rates higher than 10%. California and Florida saw foreclose rates of 5% to 10%, but these rates are experienced throughout a majority of their respective counties.

Demographic Analysis

An analysis of historical data on unemployment, labor participation rate, income, home value, and median mortgage payments for the three states provides a background into the trends before and after the collapse.

Texas showed greater stability in these factors throughout the recession. Although labor participation dipped, it quickly stabilized, while those of Florida and California continued to decline. Median and mean income in Texas recovered to pre-recession levels.

Homes in Texas carried a much lower median value than their counterparts in Florida and California, and while those in the two states rose in value and sharply declined, Texas homes saw steady growth through the recession. The lack of a spike in home values, as well as stability in income, labor, and unemployment, helped cushion Texas from the hard hitting impact of the recession.

While such variables are more related to the aftermath of the housing bubble rather than the cause, the analysis of them is crucial in understanding the secondary effects of the bubble, primarily the damage done to the economy from the recession.


Executive Summary

Did Conservative Lending Laws Help?

The four aspects of Texas conservatism include:

1. Texas’ 80% Cap and Other Lending Laws

2. Texas’ Prime Loan Market

3. Predatory Lending Regulations

4. Tighter Restrictions on Investment Properties: Speculative Markets


The 80% cap on home equity loans likely played a role in curbing the volume of loans, as well as keeping overall levels of debt in Texas law. An argument could be made that Texas’ conservative lending laws helped in limiting house flipping in the state by disallowing short-term high interest rate loans used by speculators.


An analysis of the prime loan market in each state is constructed through descriptive statistics derived from the Freddie Mac’s data set of all home loans sold to the entity. Loan volume, specifically for cash-out loans, remained lower in Texas than California and Florida. The state did see higher loan-to-value ratios than the other two states, with loans averaging just below the 80% cap mark. Yet, the lower loan-to-income ratio coupled with a

lower volume of loans meant that the state of Texas was less burdened by a collapsing housing market.


The Home Ownership and Equity Protection Act, or HOEPA, was drafted in 1995 to create minimum protections for homeowners against unscrupulous lending practices. Each state has its own provisions under HOEPA, which lead to differing levels of conservatism for each state. In general, Texas ranks more conservatively for each of the provisions, which include:

• Covered Loans (1st)• Asset-based Lending (3-way tie)• Prepayment Penalties (1st)• Balloon Payments (1st – tied with FL)• Negative Amortization (1st)• Loan Flipping (2nd)• Credit Counseling (3rd)• Loan Packing (1st)• No Call (3rd)

* The number in parentheses is the ranking among the three benchmarked states, with 1 being the most conservative


Executive Summary

Texas experienced significant growth in population and housing developments. Housing developments in Texas were better protected from over-speculation. The housing market was not as prone to speculation as California and Florida for two reasons: natural and artificial building restrictions.

Natural restrictions arise from the ability to expand growth to surrounding regions. California and Florida experience more difficulty in building new homes, placing upward pressure on housing prices. This causes increased speculation because investors believe that housing prices will continue rising, creating opportunities for highly leveraged positions that pay off, but only when the economy, and the housing market, are performing healthily.

Artificial restrictions further compound the problem by restricting the ability to develop land, fashioned as “smart growth” strategies. Though smart growth policies do take environmental restrictions and other factors into account, economists on the right and left both agree that limiting the available land for development facilitates an environment of speculative investing.

Texas’ relative lack of land use regulations allow it to avoid artificial restrictions on build sites that are more prevalent in California and Florida. Texas’ cities did not employ large land use restrictions and did not see an artificial scarcity-driven spike in home prices, and thus, did not experience the deepened collapse after housing prices fell.

4. Tighter Restrictions on Investment Properties: Speculative Markets


Effects of the United States Housing Bubble

In order to understand what brought on the housing crisis, this study considers the condition of the state of Texas’ economy against the state of the economies of California and Florida after the housing bubble burst. This analysis will look at what regions of each state were impacted by the following:

• High-cost loans as a percentage of all mortgages

• High foreclosure rates

• Declining home prices

• Unemployment

• Vacancies

The U.S. Department of Housing and Urban Development’s Neighborhood Stabilization Program (NSP) is a crucial source for each of the lifted data points, on a county by county level. The program provides state and local governments with funding to purchase and redevelop foreclosed properties in distressed areas with the aim of stabilizing neighborhood housing markets. Data provided by the program covers values between 2007 and the first half of 2008. The time frame represented by this data set is suitable for this study, since it coincides with the collapse of the housing market.



Less than 20%

20% - 40%

40% - 60%

High-Cost Loan Rates

60% - 80%

80% or more

A larger proportion of counties in Texas have high percentages of high-cost loan rates than those in California and Florida. Of the three states, Texas is the only one to contain counties with high-cost loan rates greater than 60%.

• Counties in Texas with a prevalence of high-cost loans tended to be the rural counties of west and south Texas. This also charts with the higher rates of foreclosures.

• In Texas and Florida, high rates of high-cost loans appear to concentrate in less populous and less wealthy counties, with Miami-Dade County being the exception.

• With income and credit score serving as two crucial factors in evaluating prime loan qualification, the prevalence of subprime loans in lower income counties falls in line with common wisdom.



Less than 5%

5% - 10%

10% or more

Foreclosure Rates High foreclosure rates in Texas occurred in more rural parts of the state, in which homes had lower values.

• While California had the lowest concentration of high-cost loans across its counties, the state had surprisingly high foreclosure rates.

• In Texas, high foreclosure rates generally occurred in areas with low household counts, low median home value, and high rates of subprime loans.

• This was not the case with Florida and California. These two states showed no discernable pattern between the four variables.



10% or less

10% - 20%

20% - 30%

Decline in Home Value

30% - 40%

40% or more

Texas saw virtually no decline in home value after the housing bubble.

• Even though west and south Texas showed high foreclosure rates, counties throughout Texas showed less than 10% decline in housing prices. In fact, housing prices declined by less than 1% in every county in Texas.

• Homes on the Florida coastline, excluding the panhandle, had a 10% to 30% decline in pricing.

• Southern California as well as the counties of the San Joaquin Valley experienced fairly heavy price decline.

• A sharp decline in home prices likely played a more pivotal role in foreclosures than the origination of subprime loans in California and Florida.



4% or less

4% - 6%

6% - 8%

Unemployment Rate

8% - 10%

10% or more

California and Florida were burdened by heavier unemployment rates than Texas.

• With the exclusion of Maverick, Presidio, and Starr Counties, Texas counties had single digit unemployment rates; generally below 6%.

• Florida had two areas with unemployment rates well above average: in the counties surrounding Levy County and Hendry County.

• California has the most counties with very high unemployment rates, above 10%. High unemployment areas in California do not follow a discernable pattern.



5% or less

5% - 10%

10% - 15%

Vacancy Rate

15% - 20%

20% or more

Texas was hit harder by vacancies than Florida or California.

• Counties in Texas, primarily in more rural parts of the state, showed higher vacancy rates than counties in Florida and California.

• NSP data shows very few vacancies in California, with only five counties having rates higher than 5%.

• Counties in Florida with higher vacancy rates, 5% to 15%, are primarily located in the pan handle.


Demographic Analysis

AngelouEconomics has been tasked with evaluating Texas’ home equity laws to determine what role they played in preventing the occurrence of a housing bubble in the state. In order to accomplish this, Texas has been benchmarked against California and Florida; two states which were affected by the housing crisis to a much greater degree. The demographic analysis will evaluate the nature of the housing crisis by benchmarking the three states on socioeconomic and housing market data.

Maps depicting the number of households, median home value, median income, and percent of owner-occupied households with a mortgage are included in this analysis. These maps utilize 2009 5-year American Community Survey data and are designed to depict the aftermath of the housing bubble for each of the three states on a county by county basis.

Socioeconomic Benchmark Analysis

This section will utilize data collected through two government data sources. Figures on unemployment and labor force come from the Bureau of Labor Statistics. The American FactFinder is a government toolset that allows for querying data from past Censuses and American Community Surveys, allowing this study to look at population and household income changes.

Housing Market Benchmark Analysis

A comparison of the housing markets of each of the three states will be formed using housing data collected through the American FactFinder. This section will analyze historical trends in the supply of housing units, home value, and costs of ownership for individuals who have a mortgage. The Home Price Index, managed by the Federal Housing Finance Agency will also be used to evaluate volatility in the respective housing markets.





Texas exceeded California and Florida in labor force participation and had a more stable unemployment rate through the recession.

• Employment and labor force growth, at 21.3% and 23.9% respectively, showed steady continuous growth in Texas. Employment declined in California and Florida from 2008 to 2009. Labor force growth showed more pronounced stagnation in California and Florida.

• The 8% unemployment rate in Texas, reflecting a shorter recession and stronger job growth during the recovery, was somewhat subdued compared to those of California with 13% and Florida with 11%, in 2010.

• Similarly, the spike in long-term unemployment in Texas was well below that of California and Florida.

• Texas had a higher labor force participation rate. California lagged behind Texas from 2005 to 2007 and again from 2008 to 2013. While Florida had a lower rate than both states, some discrepancy could exist due to a higher percentage of retirees in the state.

0.0

5.0

10.0

15.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Unemployment Rate

California Florida Texas

7,000,000

10,000,000

13,000,000

16,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Employment


58.0%

63.0%

68.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Labor Force Participation




While California’s population greatly exceeds that of Florida and Texas, those two states are growing at a faster rate than California.

• From 2005-2012, the population growth rate was higher in Texas at 17%, compared to Florida and California at 11% and 8%, respectively. Of the three states, California was the only state to grow at a slower rate than the United States, which grew 8.9% in population from 2005 to 2012.

• California’s sizeable population, at 38 million in 2012, makes finding suitable benchmarks a challenge. Texas is the second most populous state in the U.S. and has a 2012 population of 26 million. Florida’s population for 2012 was 19 million, making it the fourth largest state.

7.8%

11.1%

17.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%


Population Growth from 2005 to 2012

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

2005 2006 2007 2008 2009 2010 2011 2012

Population




Less than 25,000

25,000 to 50,000

50,000 to 100,000

Number of Households

100,000 to 500,000

More than 500,000

Population clusters in Texas are more scattered than they are in California or Florida allowing population centers the necessary room to expand into more rural counties.

• Population clusters in Texas are peppered throughout the state with a clear majority of counties having less than 25,000 households.

• California and Florida both have lower household densities in the northern parts of their states. A majority of households in both states are located along the coast with some population centers in the center of the state as well.

• Both California and Florida are limited by their ability to grow due to having more areas of the state land-locked by major bodies of water



All three states show similar distributions for median and mean income historically with each value peaking at 2007 or 2008.

• Of the three states, Texas is the only state that had recovered to its peak values by 2012.

• California’s median income in 2012 was 4.4% less than its peak value in 2008. The mean income was 2.5% less in 2012 than it was in 2008.

• Florida’s median income peaked in 2007 and by 2012 was 5.8% short of the peak value. Mean income peaked in 2008 and was 3.4% less than that value in 2012.

• Texas’ mean and median values peaked in 2008 but recovered and grew to 1.4% and 2%, respectively, by 2012.

$20,000

$40,000

$60,000

$80,000

2005 2006 2007 2008 2009 2010 2011 2012

Household Income in Texas

Median household income (dollars) Mean household income (dollars)

$20,000

$40,000

$60,000

$80,000

2005 2006 2007 2008 2009 2010 2011 2012

Household Income in California


$20,000

$40,000

$60,000

$80,000

2005 2006 2007 2008 2009 2010 2011 2012

Household Income in Florida




Less than $20,000

$20,000 to $40,000

$40,000 to $60,000

Median Income

$60,000 to $80,000

More than $80,000

A greater diversity in income brackets exists in Texas than in California or Florida.

• In Texas, areas with median income in the top two brackets match up with higher population areas.

• The top two median income brackets in California are most prevalent in San Diego County, Orange County, Venture County, Placer County, El Dorado County, and the area in and around San Francisco and Santa Clara County.

• While most of the tip of Florida falls in the $40,000 to $60,000 median income bracket, the $60,000 to $80,000 bracket appears only in St. Johns and Clay County.





Homes in California and Florida have predominately

carried higher values than homes in Texas, which has

shown more stability in value than the other two

benchmarks.

• In 2005, over 80% of housing units in California were

worth more than $200,000. The proportion of housing

units in the top tier in California declined after 2007,

stabilizing at about 30% of all units. Meanwhile, the

percentage of housing units in the second highest tier

began to represent a majority of housing stock. The

proportion of housing units in the lowest two tiers

grew from 2008 to represent 25% of all housing stock.

• The upper two tiers of housing units in Florida show a

similar trajectory as California’s top housing units, with

the bulk of housing being reappraised in the third or

fourth tier following the housing bubble’s collapse in

2007.

• Texas, on the other hand, saw growth in the number

of its upper tiers of housing, making it the only state in

this study to see home values appreciate between

2005 and 2012.

6% 5% 5% 6% 7% 8% 9% 9%7% 5% 5% 7%

13% 14% 16% 16%

41%36% 37%

42%45% 44% 44% 44%

46% 54% 54% 45%35% 34% 32% 31%

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010 2011 2012

Housing Value in California

$500,000 or more

$200,000 to $499,999

$100,000 to $199,999

Less than $99,999

21% 15% 14% 16% 21% 26% 31% 33%

32%26% 27% 29%

34%36% 35% 34%

37%46% 47% 45%

37% 32% 28% 27%

10% 13% 13% 11% 8% 7% 6% 6%

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010 2011 2012

Housing Value in Florida

$500,000 or more

$200,000 to $499,999

$100,000 to $199,999

Less than $99,999

47% 43% 39% 37% 37% 37% 37% 36%

36% 38% 39% 39% 38% 38% 38% 38%

15% 17% 19% 21% 21% 21% 22% 22%

2% 3% 3% 4% 4% 4% 4% 4%

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010 2011 2012

Housing Value in Texas

$500,000 or more

$200,000 to $499,999

$100,000 to $199,999

Less than $99,999



$-

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

2005 2006 2007 2008 2009 2010 2011 2012

Median Value

California

Florida

Texas

In the long run, median home values in Texas have increased, while values in Florida and California have declined.

• In terms of median housing values, Texas showed almost continuous growth from 2005 to 2012, despite the recession.

• Texas’ median income has increased by 21.9% from 2005 to 2012.

• California’s and Florida’s median household income peaked in 2006 and has declined continuously since.

• Income in Florida declined over the 2005 to 2012 period by 21.8%.

• In California, the decline was 26.9% over the same time period.



Less than $100,000

$100,000 to $250,000

$250,000 to $500,000

Median Home Value

$500,000 to $750,000

More than $750,000

Properties in Texas, even in areas with high population density, are generally more affordable than those in California and Florida.

• Higher median home value counties for each of the three states are generally concentrated around large population areas in the state.

• Median home values in Texas only fall into the two lower brackets. The higher of the two, $100,000 to $250,000, extends between San Antonio, Houston, and Austin as well as the area surrounding Dallas and Fort Worth.

• California shows a concentration of high median home values along the coast, with the area around San Francisco, including Silicon Valley, falling in the highest home value bracket.

• The tip of Florida, also the area in the state with the highest household concentration, falls into the higher two income brackets in the state. The central portion of the state falls in the $100,000 to $250,000 range.



Homeownership in Texas declined but at a much lower rate than Florida and California.

• From 2005 to 2012, all three states saw a decline in the percentage of housing units that were owner occupied.

• Texas’ decline of 4% was much less than that of California’s 9% and Florida’s 12%.

• California and Texas saw an increase in renter-occupied households.

• The decline in home ownership in Florida, as a percentage of all housing units, is tied to the increase in vacant properties in the state. Vacancies in the state have risen from 15% in 2005 to 22% in 2010.

45%

50%

55%

60%

2005 2006 2007 2008 2009 2010 2011 2012

Owner-Occupied Housing Units as a Percentage of Total Housing Units

California

Florida

Texas

8,000,000

10,000,000

12,000,000

14,000,000

2005 2006 2007 2008 2009 2010 2011 2012

Total Housing Units

California

Florida

Texas

7% 8% 8% 9% 9% 9% 9% 8%

15%17%

19%20%

21% 22% 21% 20%

12% 12% 13% 12% 12% 13% 12% 12%

0%

5%

10%

15%

20%

25%

2005 2006 2007 2008 2009 2010 2011 2012

Vacancies as a Percentage of Total Housing Units

California

Florida

Texas

20%

25%

30%

35%

40%

2005 2006 2007 2008 2009 2010 2011 2012

Renter-Occupied Housing Units as a Percentage of Total Housing Units

California

Florida

Texas



The decline in homeownership in Texas can be attributed to less growth in owner occupancy compared to growth in the number of households.

• The housing markets in California and Florida show an inverse relationship between total number of housing units and the number of owner-occupied homes (OOH). With the number of OOH peaking in 2007 and dropping off by 2012.

• This may be the result of investment property owners claiming occupancy of investment properties for tax purposes as well as an increase in rental rates.

• Texas, on the other hand, shows consistent growth in both total households and OOH, which supports the idea that Texas does not have as many investment properties as California and Florida.

6,600,000.00

6,700,000.00

6,800,000.00

6,900,000.00

7,000,000.00

7,100,000.00

7,200,000.00

11,800,000

12,000,000

12,200,000

12,400,000

12,600,000

2005 2006 2007 2008 2009 2010 2011 2012

California

Total households Owner Occupied

4,500,000.00

4,600,000.00

4,700,000.00

4,800,000.00

4,900,000.00

5,000,000.00

5,100,000.00

6,800,000

6,900,000

7,000,000

7,100,000

7,200,000

7,300,000

2005 2006 2007 2008 2009 2010 2011 2012

Florida


4,800,000.00

5,000,000.00

5,200,000.00

5,400,000.00

5,600,000.00

5,800,000.00

7,200,000

7,600,000

8,000,000

8,400,000

8,800,000

9,200,000

2005 2006 2007 2008 2009 2010 2011 2012

Texas




Less than 20%

20% to 40%

40% to 60%

Percent of Owner-Occupied Households with a Mortgage

60% to 80%

More than 80%

In Texas, households with mortgages are concentrated around large population centers. This is not the case for Florida and California, where mortgages are much more prevalent throughout the state.

• In Texas, areas with over 60% of households mortgaged can be found near large population centers. Dallas and Tarrant County fell in the more than 80% category.

• Most counties in California had more than 60% of owner-occupied households with a mortgage. Solano County had more than 80% of households with a mortgage.

• Florida saw high percentages of home owners with a mortgage in counties near the eastern coastline and near Tampa.



Texas’ selected monthly owner costs (SMOC), including the cost of the mortgage, are not as top heavy as those in California and Florida.

• After 2007, over half of all housing units with a mortgage in California have had (SMOC) that were $2,000 or greater.

• SMOC has remained fairly stable in all three states between 2007 and 2012. Median mortgage costs for each of the three states have also remained fairly stable from 2005 to 2012.

3% 2% 2% 2% 3% 3% 3% 3%6% 5% 4% 5% 5% 5% 6% 6%

15%13% 11% 13% 14% 15% 16% 17%

17%15%

13% 17% 18% 18% 19% 20%

35%42% 46% 62% 60% 58% 56% 54%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012

Selected Monthly Owner Cost with Mortgage in California

$2,000 or more

$1,500 to $1,999

$1,000 to $1,499

$700 to $999

Less than $699

8% 6% 4% 6% 6% 7% 7% 8%

13%11% 9% 13% 13% 14% 15% 17%

21%

19%17% 26% 27% 29% 30% 30%

12%

13%14% 22% 22% 22% 21% 21%

12%17% 21% 33% 31% 29% 27% 25%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012

Selected Monthly Owner Cost with Mortgage in Florida

$2,000 or more

$1,500 to $1,999

$1,000 to $1,499

$700 to $999

Less than $699

8% 6% 5% 8% 8% 7% 7% 7%

14%12% 11% 17% 17% 16% 16% 17%

21%21% 22% 33% 33% 34% 34% 35%

11%13% 13% 22% 21% 22% 22% 21%

10% 12% 13% 21% 21% 22% 21% 21%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012

Selected Monthly Owner Cost with Mortgage in Texas

$2,000 or more

$1,500 to $1,999

$1,000 to $1,499

$700 to $999

Less than $699



19% 17% 17% 22% 22% 23% 24% 27%

11% 10% 10% 13% 13% 13% 14% 15%

10%9% 9% 12% 12% 12% 13% 13%

8%8% 8% 10% 10% 10% 10% 10%

28% 32% 33% 44% 42% 41% 39% 36%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012

Selected Monthly Owner Cost as a Percentage of Household Income with Mortgage in California

35.0 percent or more

30.0 to 34.9 percent



Less than 20.0 percent

21% 18% 17% 25% 25% 26% 27% 31%

10%10% 9% 14% 14% 14% 14% 15%

8%8%

8% 12% 12% 12% 12% 12%

6%6%

6% 10% 10% 10% 9% 9%

21% 23% 26% 40% 40% 39% 37% 35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012

Selected Monthly Owner Cost as a Percentage of Household Income with Mortgage in Florida






24% 23% 25% 40% 40% 39% 40% 43%

11% 11% 11% 17% 17% 17% 17%17%

8% 8% 8% 12% 12% 12% 11% 11%5% 5% 5% 8% 8% 8% 8% 7%

15% 16% 15% 23% 24% 25% 24% 22%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012

Selected Monthly Owner Cost as a Percentage of Household Income with Mortgage in Texas






When regional incomes are considered, Texas’ SMOCAPI still ranks favorably.

• A plurality of selected monthly owner cost as a percentage of household income (SMOCAPI) for households with a mortgage in Texas are less than 20% of household income.

• Despite having lower SMOC than California, Florida’s distribution of SMOCAPI percentage tiers is very similar to California. This suggests that although actual mortgage costs in Florida are not as high as ones in California, the income difference between the two states creates similar financial burdens on home owners with a mortgage.



The Home Price Index (HPI), generated by the Federal Housing Finance Agency, provides us with a measure of price fluctuation and volatility in the housing markets of California, Florida, and Texas. The index looks at repeat sales and refinances on single family homes. The HPI is used as a proxy for volatility and fluctuation in home prices.

The HPI showed a similar trend in both California’s and Florida’s housing markets. Both peaked in 2006 after a steep rise in the index and then saw a decline which proceeded until 2011. The bell shaped distribution of the HPI depicts a housing bubble trend; prices shot up rapidly and then declined until reaching a market equilibrium. Texas, on the other hand, showed steady growth in the years analyzed, except for a slight stagnation from 2007 to 2011, suggesting the lack of a housing bubble.

0

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Home Price Index

CA index FL index TX index



The lack of volatility in the HPI index in Texas can be attributed, in part, due to a more stable unemployment rate.

• In California and Florida, HPI is negatively correlated with unemployment rates, with the indices peaking during times of low unemployment.

• Texas does show a similar trend during, and immediately following, the peak years of the boom, but an overall correlation between HPI and unemployment is insignificant.

• The trend is most pronounced in California and Florida, as those states saw the highest rate of HPI increase and high unemployment following the housing bubble collapse. Texas’ unemployment rate is much more stable than the other two states, never reaching double digits.

0%

2%

4%

6%

8%

10%

12%

14%

0

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

California

CA index CA unemployment R2 = 21.9%

0%

2%

4%

6%

8%

10%

12%

14%

0

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Florida

FL index FL unemployment R2 = 30.8%

0%

2%

4%

6%

8%

10%

12%

14%

0

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Texas

TX index TX unemployment R2 = 6.7%


Did Conservative Lending Laws Help?

Lending laws in Texas have historically been more conservative than other states. Simply opening up the Texas housing market to these sorts of home loans has been an uphill battle, requiring constitutional amendments that only recently opened the door to home equity loans, while still maintaining strict protections for homeowners.

In order to assess whether or not the conservative lending laws helped Texas mitigate the majority of effects from the recession, this report has covered four aspects of lending laws that are more conservative in Texas.

The four aspects of Texas conservatism include:




4. Tighter Restriction on Investment Properties: Speculative Markets

Rules such as the 80% cap on home loans were designed to help protect homeowners from foreclosure in the event of an economic downturn, other regulations and prohibitions on lender activity were crafted to keep Texans from being pushed into impulsive decisions. This report will investigate whether these conservative laws were responsible for making Texas’ housing market more resilient than either California or Florida’s.

After that, this report will look at how Texas’ regulations on predatory lending practices stack up not only against California and Florida, but also against the Federal Home Owner Equity Protection Act (HOEPA) of 1995.

Before concluding, this project will explore Texas’ vulnerability to the speculative housing markets, which created the massive price surges that made the housing bubble as dangerous as it was.


History of Texas Homestead Laws


History of Texas Homestead Laws

The Texas Homestead Law is based on a concept of exempting a house from seizure by creditors, and it originated in Texas in the early 1800s. Texas’ ban on home equity lending excludes a portion of a property’s value from property taxes and aims to protect a primary residence from forced sale or seizure as long as mortgage tax payments are current. A Texas homestead is not, however, secure from seizure for a debt owed to the federal government.

Timeline of Texas Homestead Laws:

1839: The Republic of Texas passed a prohibition, which protected the home of a family from seizure by a creditor. The prohibition was a reaction to the Panic of 1837, when a number of people lost their homes and farms to foreclosures.

1845-76: The homestead principle was embodied in the first Texas Constitution of 1845 and all constitutions thereafter. Under the Constitution of 1876 the homestead is defined as the family home on up to 200 acres of rural land or urban land worth up to $5,000 (at the time of homestead designation) with its improvements and used as a family home or place of business.

1986: The Federal Tax Reform Act of 1986, commonly referred to as the second of two Reagan tax cuts, phased out the tax deductibility of interest paid on other, nonmortgage consumer loans. However, Texas’ homestead exemption laws preclude such home equity lending.

1997: Texas voters passed a constitutional amendment allowing closed-end home equity loans. According to the amendment, homeowners can't owe more than 80% of the market value of their home on combined mortgage loans and home equity vehicles.

1999: Another amendment was made for reverse mortgages consistent with those outlined in Federal law. In reverse mortgage, the borrower is usually not required to repay the money or interest on the money until the borrower dies, sells the home or permanently moves out of the home.

2003: A new amendment was passed allowing open-end home equity loans. Under the amendment, total debt secured by the home still cannot exceed 80% of a home’s value. Funds from a home equity credit line cannot exceed 50% of the value of the home at the time the home equity line of credit is made.

2007: Minor revisions in the home equity lending amendment were passed. According to the amendments, home equity loans can't be closed until 12 days after the borrower receives the lender's official "notice of rights.“ In addition, lenders aren't permitted to charge front-end fees of more than 3% on home equity loans. Front-end fees include prepaid interest payments but exclude "traditional" interest payments.




Texas’ 80% Cap and Other Lending Laws

As stated earlier, the loan-to-value ratio in Texas has historically been higher than in California and Florida. However, the volume of such loans has been significantly lower.

The cap of 80% equity on refinance options did a lot to help mitigate the effects of the housing bubble’s collapse on Texas’ homeowners. While there is correlation, it cannot be said that the 80% cap prevented the existence of a housing bubble. In short, other factors that contributed to the bubble in California and Florida were more responsible for creating the crisis, however Texas’ protections helped homeowners keep their homes after the fallout.

In addition, laws in Texas protected borrowers from being pushed into impulsive decisions by lenders. Laws require lenders to provide borrowers 12 days before closing the loan. Lenders were also required to provide borrowers a final itemized disclosure of the actual fees, points, interest, costs, and charges that will be accrued. Even after the loan closes, the borrower has three additional days to change his mind and cancel the transaction without any penalty or charges.

Further regulations on lenders include prohibiting unlicensed individuals form making loans, prohibiting lenders from charging non-interest fees greater than 3% of the principal, and requiring the borrower to apply the loan to repay debt unless the debt is secured by the homestead or is owed to another lender. Furthermore lenders are not allowed to require additional assets be used as collateral in the mortgage.

Other regulations against negative amortization mortgages, balloon payments, and prepayment penalties generally apply only to high-cost loans – those worth less than $200k with high interest rates. “Virtually no loans qualify under that standard, which means the rules against prepayment penalties and so forth were mostly meaningless.” (5)

It may be argued that regulations, such as the 80% rule, limit the number of home equity loans and the types of property that can be leveraged against, which prevents people from using their homes as leverage to speculate on the housing market. But as this study will show, Texas wasn’t a prime speculator’s market for other legal reasons and not necessarily these restrictions.

(5) “A Texas Mystery”




Texas’ Prime Loan Market

This study will evaluate the prime loan market in each of the three states. The dataset contains long-term mortgages that were originated in 1999 to 2012 and sold to Freddie Mac. The data has been divided by loan purpose, purchase, cash-out refinance, and no cash-out refinance, as well as by the state in which the property was located.

Prime loans made to homeowners were often designed with the intent to sell the loan to Freddie Mac, therefore, this dataset is useful in capturing the prime market in each state.

This section will compare prime loans made in each state through the use of Freddie Mac’s Single Family Loan-Level Datasets. Freddie Mac provides quarterly datasets, with each dataset including all loans sold to Freddie Mac during that quarter. Using Stata, this study examines summary statistics for each quarter and has calculated yearly figures for unpaid principal balance, loan-to-value ratio, debt-to-income ratio, property value, credit scores, equity, and volume of loans.



Texas’ relatively stable total loan volume reflects the lack of fluctuation in Texas’ housing market during the housing bubble and the recession.

• The data for California shows the volume of loans fluctuating with the overall market, starting with the dot-com bubble burst in 2000. With the housing market replacing the stock market as a means of investment, by 2001 California saw a dramatic rise in the number of total housing loans purchased. As the housing market weakened in 2004, loan volume declined until the passage of the economic stimulus in 2009. Following 2009, the market began to recover naturally.

• Although Florida has a much lower population than Texas, its total loan volume outpaces Texas up until 2007.

• Florida, like California, saw growth in the volume of home loans as home ownership became more accessible due to favorable interest rates. From 2004 to 2012, loan volume in Florida has shown a continuous decline, likely due to high vacancy rates in Florida.

• The volume of loans in Texas stayed relatively stable, even during the peak years of the housing bubble.

-

50,000

100,000

150,000

200,000

250,000

300,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Total Volume of Loans

California Total Florida Total Texas Total



Purchase loan volume in Texas peaked in 2006 and 2007, much later than that of California and Florida, which saw high purchase volume in 2001.

• From 1999 to 2007, the volume of Texas’ home purchase loans remained fairly stable. Loans of this type began to decline in volume with the start of the recession in 2007.

• Florida saw an increase in volume of purchase loans after the dot-com bubble. While the number of loans was fairly stable from 2001 to 2005, Florida has seen a decline in the number of loans since.

• The volume of home purchase loans fluctuated greatly over the 1999 to 2012 time period. Loan volume in California reached a peak in 2001. As home prices began to skyrocket in California, the volume of home purchases began to decline.

• In 2006, a year in which California saw the lowest volume of home purchase loans, the median value of homes in the state peaked. As the median value began stabilizing, the quantity of home purchase loans began to increase until reaching a second peak in 2009. Household income in California peaked in 2008, likely playing a crucial role in the decline in the volume of loans after 2009.

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Volume of Purchase Loans

California Purchase Florida Purchase Texas Purchase



Cash-out refinancing mania never reached Texas. The volume for such loans in Texas never reached those of California or Florida at the time of the housing bubble.

• Growth in home prices from 2000 to 2006 allowed individuals to pull equity out of their homes through cash-out refinancing. The volume of cash-out loans in California peaked in 2001, a year in which the volume was three times that of 1999. With home values in California declining in 2006, the volume of cash-out loans dropped significantly and tapered off to pre-2001 levels.

• Florida showed an increase in the volume of cash-out loans up until 2005. Since then, the volume declined until it leveled off at 2011. Florida greatly exceeded Texas’ cash-out loan volume from 1999 up until 2010, even though the number of households in Texas exceeded Florida by roughly one million.

• The volume of cash-out loans in Texas is marginal compared to Florida and California. Volume in Texas increased until 2009 and showed slight decline over the next couple of years.

(5,000)

5,000

15,000

25,000

35,000

45,000

55,000

65,000

75,000

85,000

95,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Volume of Cash-Out Loans

California Cash Out Florida Cash Out Texas Cash Out



California, Florida, and Texas all followed a similar pattern for the volume of refinance loans over the 1999 to 2012 time period. Florida and Texas had relatively comparable levels of loan volume.

• In 2002, the Federal Reserve lowered already reduced interest rates to cushion the economy from the fallout after 9/11. Although all three states had high volumes of refinanced mortgages in 2001 and 2002, the volume drastically increased due to the adjustment to the interest rate in 2003.

• After 2003, refinance loans saw a drastic decline as interest rates began to climb back once more.

• All three states saw a resurgence in 2009, although only California sustained the increase in volume from 2009 to 2012.

-

20,000

40,000

60,000

80,000

100,000

120,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Volume of Refinance Loans

California Not Cash Out Florida Not Cash Out Texas Not Cash Out



Although Texas had a 80% cap on cash-out refinancing, homeowners in the state, on average, had a much higher loan-to-value ratio for cash-out loans than Florida and California.

• While Texas had a higher loan-to-value ratios (LVR) for cash-out loans than the other two states, the volume of such loans in Texas was much less than the other two states.

• While California had lower LVR than either Texas or Florida, the sheer volume of mortgages taken in the state contributed to its housing bubble.

• Property values rose between 2002 and 2006 causing LVR to dip across the board in California.

0.50

0.55

0.60

0.65

0.70

0.75

1998 2000 2002 2004 2006 2008 2010 2012

Loan-to-Value Ratio and Volume for Cash-Out Loans


0.64

0.69

0.74

0.79

0.84

1998 2000 2002 2004 2006 2008 2010 2012

Loan-to-Value Ratio and Volume for Purchase Loans


0.50

0.55

0.60

0.65

0.70

0.75

0.80

1998 2000 2002 2004 2006 2008 2010 2012

Loan-to-Value Ratio and Volume for Refinance Loans




Across the board, when taking volume into consideration, total debt-to-income in Texas was much less than in California and Florida.

• California incurred a higher debt-to-income ratio (DIR) than the other states in all three categories and had a much higher volume of DIR when it came to cash-out and refinance loans.

• For purchase loans, Texas saw a lower DIR than the other two states in the years after 2004.

• Lower interest rates in 2008 allowed homeowners to refinance and decrease their DIR in the fallout of the 2008 financial crisis.

0.31

0.33

0.35

0.37

0.39

0.41

1998 2000 2002 2004 2006 2008 2010 2012

Debt-to-Income Ratio and Volume for Purchase Loans


0.32

0.33

0.34

0.35

0.36

0.37

0.38

0.39

0.4

1998 2000 2002 2004 2006 2008 2010 2012

Debt-to-Income Ratio and Volume for Cash-Out Loans


0.27

0.29

0.31

0.33

0.35

0.37

0.39

1998 2000 2002 2004 2006 2008 2010 2012

Debt-to-Income Ratio and Volume for Refinance Loans




Across the board, the unpaid principle balance (UPB) for all three loan types in all three states trends upwards until roughly 2008, after which it levels off.

• LVRs remained generally constant between 1999 and 2008 in Florida and Texas, suggesting that the UPB increased alongside property values, meaning homeowners were taking out larger loans in response to climbing housing prices.

• From 1999 to 2012, UPB in California for non-cash-out refinance loans grew by 133%. During the same time period UPB for home purchase loans grew by 94%, creating a gap between the two types of loans.

-

100,000

200,000

300,000

400,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unpaid Principle Balance for Purchase Loans


-

100,000

200,000

300,000

400,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unpaid Principle Balance for Cash-Out Loans


-

100,000

200,000

300,000

400,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unpaid Principle Balance for Refinancing Loans




Down payments for purchase loans in all three states follow a similar trajectory as home values with a peak in 2006, likely in accord with rising home values.

• The subsequent drop in down payments may indicate lower housing values caused by an excess of housing.

• In all three states, equity for refinance and cash-out loans peaked in 2009. However, only equity in cash-out loans began to regain value after dipping in 2010. This may be a result of the economic climate making it prohibitive for anyone but the wealthiest homeowners to refinance.

$-

$40,000

$80,000

$120,000

$160,000

$200,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Down Payment for Purchase Loans


$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Equity for Cash-Out Loans


$-

$100,000

$200,000

$300,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Equity for Refinance Loans




Home values in Texas showed steady appreciation.

• Home values for purchase loans generally followed a similar trajectory as housing prices overall in the years leading up to the housing bubble collapse with California and Florida peaking in 2006 and Texas continuing to appreciate slowly.

• Home values for cash-out and refinance loans in all three states peaked in 2009 and did not drop down to pre-bubble burst levels, perhaps indicating that only those with homes valuable enough could refinance given the economic climate.

$100,000

$200,000

$300,000

$400,000

$500,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Home Value for Purchase Loans


$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Home Value for Cash-Out Loans


$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Home Value for Refinance Loans



700

720

740

760

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Credit Scores for Purchase Loans



Texas homeowners who took out mortgages in the prime market, on average, had lower but relatively similar credit scores to home owners in California and Florida.

• Loans taken out in California have historically had a higher average credit score than those taken out in the other two states. The difference in average credit score between Florida and Texas has generally not been significant.

• The overall trajectory in average credit scores across all three types of loans trend upwards over the course of the years studied. This is most evidenced in purchase loans which do not see an credit score average dip.

• However when it comes to both types of refinancing, the years immediately preceding the housing bubble burst – 2003 and 2004 – see a dip in average credit scores. This may be due to a need to refinance as households see themselves overleveraged and want to take advantage of favorable interest rates.

• The years following the recession experienced a spike in average credit scores, most likely due to tightening of credit lines in reaction to the financial crisis that struck in 2008.

680

700

720

740

760

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Credit Scores for Cash-Out Refinancing


680

730

780

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Credit Scores for Refinancing Loans

California Not Cash Out Florida Not Cash Out

Texas Not Cash Out




Predatory Lending Regulations

The Home Ownership and Equity Protection Act, or HOEPA, was drafted in 1995 to create minimum protections for homeowners against unscrupulous lending practices and restrictions on certain high-cost loans. HOEPA does not cover loans to buy or build a home, reverse mortgages, or home equity lines of credit. HOEPA requires lenders selling HOEPA covered loans to give several disclosures at least three business days before closing on the loan, which include:

• A written notice stating that the loan does not need to be finalized.• The notice must also state that the existence of the mortgage could cause the homeowner to lose their home if the

payments are not met.• The APR, regular payment amount (including any balloon payment), and the loan amount if refinancing. If the amount

borrowed includes credit insurance premiums, that fact must be stated. In the case of variable rate loans, the lender must disclose that the rate and monthly payment may increase, as well as the maximum monthly payment.

HOEPA Restrictions (6)

BannedFeatures

Balloon payments on loans shorter than 5-years. Exceptions for bridge loans shorter than 1-year used to buy/build a home.

Negative Amortization, default interest rates higher than pre-default rates, default interest rebates calculated by methods less favorable than the actuarial method

Most prepayment penalties. There are certain exceptions, such as, if the lender verifies that one’s total monthly debt is ≤50% of monthly income, among others.

A due-on-demand clause, unless the borrower commits fraud, deliberately hides or falsifies facts, doesn’t repay according to the agreement terms, or takes actions that adversely affect the creditor’s security.

Lender Prohibitions

Making loans based on the collateral value of ahomeowner’s property without considering the borrower’s ability to pay.

Refinance a HOEPA loan into another HOEPA loan within the first 12 months of origination, unless it would be in the borrower’s best interest.

Wrongfully document a closed-end, high-cost loan as an open-end loan.

(6) “High-Rate, High-Fee Home Loans”



Covered Loans: A loan is covered if it crosses one of the statutory thresholds, of which there are generally two: one for the Annual Percentage Rate (APR) of the loan, and one for the total points and fees paid by the borrower in connection with the loan.

Regulation under HOEPA: Mortgages secured by consumer's principal dwelling where either 1) the APR will exceed by more than 10% the yield on Treasury securities with comparable periods of maturity; or 2) the total points and fees payable at or before closing exceed the greater of 8% of the total loan amount or $400.

Regulations in California: A mortgage or deed of trust crosses the APR threshold when the APR is more than 8% that of Treasury securities with comparable periods of maturity. Home loans cross the second threshold where the total points and fees exceeds 6% of the total loan amount.

Regulations in Florida: Mortgages covered under HOEPA.

Regulations in Texas: A purchase money mortgage is covered if the total loan amount is more than $20,000 and the APR or total points and fees exceed the applicable limits under HOEPA.

HOEPA Regulation

Stricter Regulation



Asset-Based lending: Lenders make loans based on the value of the borrower's assets, i.e., the home, without considering the lender's ability to repay the loan, thereby allowing the lenders to obtain borrower's houses through foreclosure.

Regulation under HOEPA: Prohibits extension of covered loans based on collateral without regard to the consumer's ability to repay.

Regulations in California: Lenders may not make a covered loan without a reasonable belief that the borrower will be able to make the schedule payments.

Regulations in Florida: Prohibits "engaging in a pattern or practice" of extending covered loans based on collateral without regard to the consumer's ability to repay.

Regulations in Texas: Prohibits "engaging in a pattern or practice" of extending covered loans based on collateral without regard to the consumer's ability to repay.

HOEPA Regulation

Stricter Regulation



Prepayment Penalties: Prepayment of loans often takes place as

a result of relocation or refinancing. It can sometimes hinder a

borrower's ability to refinance a high-cost loan, causing the

lender to be locked into the original loan.

Regulation under HOEPA: Prohibits prepayment penalties after

the first five years of the covered loan where the consumer has a

total monthly indebtedness greater than half the consumer's

monthly income.

Regulations in California: Lender may charge prepayment

penalties in the first 3 years of the covered loan if 1) the lender

has offered another product without prepayment fees; 2) the

lender has provided a written disclosure to the borrower on the

differences between products with prepayment fees and those

without; 3) the prepayment fees is equal to no more than six-

months, advance interest on the amount prepaid in any 12-

month period in excess of 20% of the original amount; 4) the loan

has not been accelerated due to default; and 5) the lender will

not finance a prepayment penalty with a new loan. .

Regulations in Florida: Within first 3 years, prepayment penalties

legal if the consumer has been offered another product without

prepayment penalties.

Regulations in Texas: Prohibits prepayment penalties in covered

loans.

HOEPA Regulation

Stricter Regulation



Balloon Payments: Balloon payments tied to high-cost loans with

short terms can be difficult for sub-prime borrowers to make,

forcing them to refinance with another high-cost loan. Most

statues prohibit payments that are more than twice as high as the

average of earlier payments.

Regulation under HOEPA: Covered loans of less than five years

may not include terms under which the aggregate amount of the

regular periodic payments would not fully amortize the

outstanding principal balance.

Regulations in California: Covered loans of less than 5 years may

not include terms under which regular periodic payments would

not fully amortize the principle. The total installments in any year

may not exceed the amount of one year's worth of payments on

the loan when the payment schedule is adjusted to account for

the borrower's seasonal income.

Regulations in Florida: Covered loans of less than 10 years may

not include terms under which regular periodic payments would

not fully amortize the principal, unless such terms reflect the

borrower's seasonal/irregular income or the loan is a bridge loan.

Regulations in Texas: Covered loans may not have any scheduled

payments twice as large as the average of earlier payments

during the first five years.

HOEPA Regulation

Stricter Regulation



Negative amortization: Payment schedules do not cover the full amount of interest due, causing the outstanding principal balance to increase. The borrower loses equity under such a payment scheme.

Regulation under HOEPA: Covered mortgages may not include terms under which the outstanding principal balance will increase at any time over the course of the loan because the regular periodic payments do not cover the full amount of interest due.

Regulations in California: Prohibits payment schedules for covered loans under which principal balance will increase, unless the loan is a first mortgage and the lender discloses to the borrower that the negative amortization provision may add to the principal.

Regulations in Florida: Identical to HOEPA.

Regulations in Texas: No covered loan may contain a payment schedule with regular periodic payments that causes the principal to increase, unless the schedule is the result of a temporary forbearance/restructure requested by the borrower, or the loan is a bridge loan.

HOEPA Regulation

Stricter Regulation



Loan Flipping: Loan flipping is the practice of refinancing one loan with a high-cost loan. The borrower may get a lower interest rate by refinancing, but the total points and fees associated with doing so actually make the refinancing a bad option for the borrower.

Regulation under HOEPA: No provision.

Regulations in California: No refinancing of consumer loans with covered loans for the purposes of refinancing, debt consolidation, or cash out, where the new loan does not provide an identifiable benefit to the borrower.

Regulations in Florida: No refinancing of a covered loan within the first 18 months when the refinancing does not have a reasonable benefit to the consumer.

Regulations in Texas: Lender may not consolidate or replace certain low rate loans issued by a governmental or non-profit in the first seven years unless the new loan has a lower interest rate and points and fees, or the loan is being restructured to avoid foreclosure.

HOEPA Regulation

Stricter Regulation



Credit Counseling: Borrowers who agree to sub-prime terms and conditions could quality for prime loans, but they don't realize it. To curb predatory lending, some advocates require borrowers before agreeing to a high-cost loan, to seek loan counseling.

Regulation under HOEPA: No requirement to encourage the consumer to get counseling.

Regulations in California: Required disclosure statements contains a recommendation that the borrower consider seeking loan counseling.

Regulations in Florida: Required disclosure statements contains a recommendation that the borrower consider seeking loan counseling.

Regulations in Texas: No provision.

HOEPA Regulation

Stricter Regulation



Loan Packing: With high-cost loans, the premiums for credit insurance coverage are folded into a single premium and financed all at once by the loan. This single premium becomes part of the principal, thereby increasing the finance charges due.


Regulations in California: No provision.

Regulations in Florida: No provision.

Regulations in Texas: For all home loans, lenders may not offer single premium credit disability, life, or unemployment insurance without providing a disclosure stating that the borrower also has the option to buy credit insurance on a monthly premium basis.

HOEPA Regulation

Stricter Regulation



No Call: Some sub-prime loans allow the lender to unilaterally accelerate the loan payments and the amount due which can cause chances of default to the borrower.


Regulations in California: Bars covered loans that allow a lender, in the lender's sole discretion, to accelerate the indebtedness.

Regulations in Florida: Prohibits the lender's sole discretion to accelerate the indebtedness.

Regulations in Texas: No provision.

HOEPA Regulation

Stricter Regulation


4. Tighter Restriction on Investment Properties: Speculative Markets


Tighter Restrictions of Investment Properties

A contributing factor to the growth of the housing bubble was speculation on investment properties, many of which were in the Sunbelt states of California and Florida, among others. (1)

Texas, like other Sunbelt states, saw large population growth and the construction of many housing developments. Its housing market was not as prone to speculation as areas like California and Florida for two reasons: natural and artificial building restrictions.

Natural Restrictions

Unlike California and Florida, Texas’ cities are in what economist Paul Krugman identified as “flatland.” Krugman argues that when demand for housing rises in in-land

metropolitan areas, those cities are able to sprawl more, which means housing prices are determined largely by construction costs.

California and Florida on the other hand are in what Krugman deems the “Zoned Zone”, areas along the coast with high population densities along with land-use restrictions. In essence, coastal cities like Los Angeles, Miami, and San Francisco which are restricted in their ability to sprawl by natural features like oceans and mountains in California, and swamps in the case of Florida. (3)

Those states have a harder time building new homes, placing upward pressure on housing prices. This in turn causes people to believe that housing prices will continue rising making them more likely to spend and leverage themselves more in hopes of amassing large capital gains which raises prices thus leading into a circle which creates a bubble. (3)

“In states that experienced the largest housing booms and busts, at the peak of the market almost

half of purchase mortgage originations were associated with investors. In part by apparently

misreporting their intentions to occupy the property, investors took on more leverage,

contributing to higher rates of default.”

Federal Reserve Bank of New York Staff Reports

“when the demand for houses rises, Flatland metropolitan areas…just sprawl some more. As a result, housing prices are basically determined by the cost of

construction.”

Paul Krugman

(1) “’Flip this House’: Investor Speculation and the Housing Bubble,”(3) “That Hissing Sound”



Artificial Restrictions

Further compounding this, are artificial restrictions on the ability to develop land, often found in the form of land use regulations that are aimed at promoting “smart growth.” Though smart growth policies do take environmental restrictions and other factors into account, economists on the right and left both agree that in limiting the available land for development, smart growth regulations contribute to the creation of an environment in which speculation can take root.

So not only is Texas a part of the “Flatland” region which allows for cities to continue growing outward, but its relative lack of land use regulations allowed it to avoid artificial restrictions on build sites that burdened other flatland regions affected by the housing bubble, such as Nevada and Arizona.

After all, Texas, like Florida, Nevada, and Arizona, saw large population growth in the years leading up to the housing crash. Unlike the latter states, however, Texas’ cities did not employ large land use restrictions and did not see an artificial scarcity-driven spike in home prices, and thus, did not see the subsequent collapse after housing prices fell.

“[S]peculators were not drawn to the metropolitan areas of Texas. This is because speculators or “flippers” are not drawn by plenty, but by perceived scarcity. In housing, a sure road to scarcity is to limit the supply of buildable land by outlawing development on much that might otherwise be available.”

Newgeography.com



Works Cited

1. “’Flip this House’: Investor Speculation and the Housing Bubble,” Liberty Street Economics, December 5, 2011

2. “Real Estate Investors, the Leverage Cycle, and the Housing Market Crisis,” Federal Reserve Bank of New York Staff Reports, September 2011

3. “That Hissing Sound,” New York Times, August 8, 2005

4. “How Texas Avoided the Great Recession” Newgeography.com, July 20, 2010

5. “A Texas Mystery,” Mother Jones, April 8, 2010

6. “High-Rate, High-Fee Home Loans” Federal Trade Commission, January 2013


Conclusion

Texas Conservatism

The Texas Homestead Laws were designed in 1839 to encourage home ownership. The homestead exemption protects homeowners from losing their houses to foreclosures due to debt, and therefore, exempts a house from seizure by creditors. Since Texas real estate laws have been designed to protect homeowners, home equity loans were not even legal in Texas until 1997.

In fact, many lending laws in Texas are more conservative that most other states. It is believed that that those conservative laws shielded Texas from the worst of the effects of the housing crisis.

Data analysis on key economic factors, such as socioeconomic demographics and housing market demographics, show that Texas did, indeed, weather the recession more successfully than other states. The economy in Texas wasn’t entirely immune to the downturn, but was able to rebound more quickly and with less volatility.

The purpose of this study has been to assess how much of Texas’ success can be attributed to conservative lending laws. To do that, this report analyzed which laws were more conservative than other states, and how those laws translated to actual lending practices by using data on different types of refinance loans.

There are four major aspects of Texas lending laws that are administered with greater regulatory oversight. Analysis for these four categories of lending laws provide the basis for the conclusions of this report. The four laws include: 1)Texas’ 80% Cap and Other Lending Laws, 2)Texas’ Prime Loan Market, 3)Predatory Lending Regulations, and 4)Tighter Restriction on Investment Properties in Speculative Markets.

Conclusions

Although no single factor is responsible for the housing market collapse, or the greater recession that followed, correlation does exist between conservative lending laws and Texas’ positive economic performance throughout the recession.

It is beyond the scope of this study to determine causation of such variables. However, there is strong evidence that shows the existence of such a relationship. With conservative laws in place, Texas performed with greater economic efficiency and mitigated housing volatility.

It can be said with confidence, that conservative lending laws in Texas played a significant role in the economic success that the state experienced throughout the recession.


About AE

AngelouEconomicsAngelouEconomics partners with client communities and regions across the United States and abroad to candidly assess current economic development realities and identify opportunities.

“Our goal is to leverage the unique strengths of each region to provide new, strategic direction for economic

development”

As a result, AngelouEconomics’ clients are able to diversify their economies, expand job opportunities and investment, foster entrepreneurial growth, better prepare their workforce, and attract ‘new economy’ companies.

To learn more, visit www.angeloueconomics.com

Project TeamAngelos AngelouPrincipal Executive Officer

William MellorDirector of Project Operations

William BeanResearch Analyst

Rahima HousainiResearch Analyst

Markose ButlerResearch Analyst

http://www.angeloueconomics.com/

Documents

TAR Report