The first unusual thing about this article is that the Washington Post would write an article that was in the least bit complementary of Texas. Somebody’s probably going to be out of a job in D.C. on Monday. (Just kidding.)
Her thesis is that Texas was spared the worst of the housing bust because of their unusual mortgage regulations, especially the one that says that when a Texas homeowner does a cash out refinancing of their home they must keep at least 20% of their equity in the home.
Texas’s 3.1 million mortgage borrowers are a breed of their own among big states with big cities. Fewer than 6 percent of them are in or near foreclosure, according to the Mortgage Bankers Association; the national average is nearly 10 percent. The land in Texas might look an awful lot like its Sun Belt sisters Arizona (with 13 percent of its borrowers in foreclosure) or Nevada (19 percent)
A cash-out refinance is a mortgage taken out for a higher balance than the one on an existing loan, net of fees. Across the nation, cash-outs became ubiquitous during the mortgage boom, as skyrocketing house prices made it possible for homeowners, even those with bad credit, to use their home equity like an ATM. But not in Texas. There, cash-outs and home-equity loans cannot total more than 80 percent of a home’s appraised value. There’s a 12-day cooling-off period after an application, during which the borrower can pull out.
That’s a bit of a consumer protection measure, homeowners are less likely to get into financial trouble, at least with their mortgages anyway, if they can’t cash out most or all of their home equity. Although it seems to be a big brother measure, it would lower the number of people who lose their homes, for whatever reason, after a cash out refi.
The 80% Loan-to-Value Limit for Refis
I think I like this 80% loan-to-value limit. Homeowners can’t go too crazy and sell nearly all their equity just to pay off their other bills. It would perhaps force them to address their overspending problems earlier. The cash out refis allowed them to ignore their overspending for a while longer.
And if such a rule existed in Arizona during the boom, it certainly would have caused home prices to peak at a lower level, possibly at a much lower level. And during the bust, the number of foreclosures would have been lower and the number of devastated families would have been fewer.
The 80% loan-to-value limit would have stabilized prices to some degree both on the way up but also on the way down.
Those homeowners who were over-extended hurt the responsible homeowners with their ensuing foreclosures which brought down neighborhood home prices. So the 80% loan-to-value limit, to a degree, protects responsible homeowners from the effects of those less responsible homeowners who would have ended up in foreclosure if they had done a larger cash out refi.
“Delinquency and foreclosure rates are significantly lower in Texas,” says Scott Norman of the Texas Mortgage Bankers Association. “The 80 percent loan-to-value limit — that’s the catalyst for a lot of this.”
Texas Property Taxes Crazy High
I appreciate that the writer brought up the 80% loan-to-value limit in Texas but she missed another important factor. The writer article didn’t mention it and probably doesn’t know it (she writes for the Washington Post after all) but a big reason Texas didn’t see a big real estate boom is that property taxes in Texas are crazy high.
Those high property taxes eat up a lot of rental income so residential real estate investors didn’t warm up to Texas like they did to California, Nevada and Arizona. Texas home prices look cheap but when you include the crazy high property taxes the total cost of ownership of Texas residential real estate is not cheap. Here is a 2007 post about property taxes in Texas from this website on Texas property taxes.