While homeowners in California and the rest of the “sand states” are continuing to struggle with unprecedented numbers of foreclosures and short sales, Texas seems to have all but escaped the nation’s real estate crisis. Why?
Texas ranks 13th on the list of lowest mortgage foreclosure and default rates in the entire US, only trailing rural places such as Montana and South Dakota, where real estate booms are nearly impossible. Texas boasts 3.1 million homeowners with mortgages, making them the only big state with big cities that has avoided the big real estate problems facing the majority of the nation. Fewer than 6% of Texas’s mortgagors are in or near foreclosure according to the Mortgage Bankers Association. This is well below its “sand sisters” Arizona and Nevada, with foreclosure rates at 13% and 19% respectively. The national average is nearly 10%. The 19% foreclosure rate among subprime borrowers in Texas is also the lowest of any state except Alaska. These numbers are especially surprising considering Texas was home to two of the nation’s largest homebuilders, Centex and DR Horton.
Part of the reason for this superior mortgage performance is that Texas did not experience the same rapid home value appreciation that other states did. On average, the home prices in the 20 major metro areas in the Case-Shiller Home Price Index more than doubled between 2000 and 2006. In Dallas, one of the 20 major metro areas, home prices rose only 25%, and have barely declined during the current economic recession.
When you take a step back, the reason becomes clear why Texas was able to protect homeowners from a real estate collapse. Since the early days of its statehood in 1845, Texas has maintained very strict guidelines regarding cash-out refinances and home equity loans. A cash-out refinance is a mortgage taken out for a higher balance than the one on an existing loan, net of fees. While skyrocketing home prices across the nation made it possible for homeowners to use their home equity like ATMs, Texas did not budge. There, cash-out refinances and home equity loans cannot exceed more than 80% of a home’s appraised value. There is also a 12-day cooling-off period after an application, during which the borrower can opt out of the transaction. And when a borrower refinances a mortgage, it’s illegal to pay off other debts with proceeds, or get even one dollar back.
The home equity borrowing restrictions in Texas helped keep home prices from overinflating, and helped keep other risky mortgages scarce there too. Homebuyers didn’t need to turn to exotic mortgages with such features as short fixed-period ARMs, interest-only payments, or negative amortization in order to buy a home. Perhaps the entire country could learn a lesson from Texas to avoid future real estate bubbles and keep household spending within its means.