The Lone Star Secret

Not everyone loves the state’s rules. Financial services companies have periodically lobbied to scale back the restrictions on home-equity borrowing, noting that the costs of compliance increase borrowers’ interest rates. But another reason the loans are more costly is that the Texas rules are unique in the nation, giving borrowers less opportunity to shop around.

As Texas is now discovering, increased costs are a small price to pay for one of the lowest foreclosure rates in the country. The home-equity restrictions have not only helped keep cash-out refinances a rare breed in Texas; other risky mortgages were scarce there, too. The home-equity borrowing restrictions helped keep home prices from overinflating, and homebuyers therefore didn’t need to turn to exotic mortgages with features like 2/28 ARMs, interest-only payments, or negative amortization in order to purchase a home. Even when they did, Texas law requires these risky features to be clearly disclosed. Fewer than 20 percent of Texas subprime mortgages included any of them.

That’s not to say that Texas borrowers didn’t get into bubble trouble. Plenty bought overpriced houses, which is why 1 in 8 Texans now owe more than their home is worth. And it was easy enough for lenders to get around the home-equity borrowing limits by using creative appraisals that pretend a home is worth more than it really is. But the casualties are orders of magnitude less than they would have been without the home-equity limits.

Despite these advantages, Texas-style brakes on home-equity withdrawals are not likely to get a welcome reception in Washington. For starters, they’re out of bounds for the proposed consumer agency now under consideration on the Hill. Both the House and Senate versions of the financial reform bill follow a ground rule straight out of the Obama administration’s financial reform blueprint: The agency can only take action on a product or practice when it determines that the harm the practice causes to consumers isn’t outweighed by benefits to consumers “or to competition.” This narrow lens allows lenders to argue, credibly, that their home-equity loans are a boon to consumers, who benefit from ready access to home equity. It’s only in the long term, and the big picture, that the terrible tradeoffs become clear.

Economists at the Fed and Treasury are no more likely than Congress to entertain cutting off the tap that until now has kept consumer spending flowing, just when the economy desperately needs that jolt. But the truth is that plummeting home prices have sucked the mortgage equity withdrawal well dry. Mimicking Texas would be the perfect opportunity to get our home-equity debt addiction under control and learn to live as an 80 percent nation.