Dallas Fed: Texas Weathered the Housing Crisis Well Because of Its Stringent Regulations

Does this family rest easier at night knowing that Texas state law prevents them from getting terribly underwater on their home mortgage?   Photo by Elizabeth Lavin
Does this family rest easier at night knowing that Texas state law prevents them from getting terribly underwater on their home mortgage? Photo by Elizabeth Lavin

The Federal Reserve Bank of Dallas yesterday released the conclusions of a study by two of its economists into the secrets of Texas’ relative success in weathering the housing crisis that precipitated the Great Recession. They focused on something that isn’t normally associated with our state: strong government regulations.

Specifically, Texas is the only state in the nation with a regulation limiting home equity borrowing. Homeowners can borrow only up to 80 percent of the value of their home with such a loan (and that percentage has to factor in the amount of the original mortgage as well). As a result, after the housing bubble and subsequent crash:

The proportion of nonprime borrowers underwater in the other 49 states reached a high of 54 percent in 2011, while in Texas it peaked at 10 percent. The depth of negative equity among underwater nonprime mortgages was also significantly lower in Texas. Mortgage debt among Texas’ underwater homeowners exceeded the home value by an average 14 percent in 2008 compared with 32 percent for the rest of the country.

The study mentions that the issues involved are so complex and interconnected that “it is difficult to precisely assess the impact of home equity restrictions on Texas’ relatively lower mortgage default rates.” Also, it’s possible that the stricter home-equity regulations might have limited consumer spending that might have helped the Texas economy as a whole, or may have driven consumers to other sources of credit, like credit cards. And yet, they conclude:

The data suggest that the tighter regulations in Texas helped keep underwater mortgages and default rates from rising by as much as they did elsewhere. By extension, lower default rates and fewer underwater homeowners might also have helped Texas avoid the subsequent sharp drop in home prices other states experienced.

And a smaller drop meant an easier recovery.