by Calculated Risk on 4/04/2010 09:02:00 AM

From Alyssa Katz at the WaPo: How Texas escaped the real estate crisis

Only a dozen states have lower mortgage foreclosure and default rates [than Texas], and all of them are rural places such as Montana and South Dakota, where they couldn't have a real estate boom if they tried.

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.
...
[T]here is a ... secret to Texas's success ... 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. And when a borrower refinances a mortgage, it's illegal to get even a dollar back. Texas really means it: All these protections, and more, are in the state constitution. The Texas restrictions on mortgage borrowing date from the first days of statehood in 1845, when the constitution banned home loans.

"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."

Here is a graph based on the Q4 2009 MBA delinquency survey:

Click on graph for larger image in new window.

Sure enough the seriously delinquent rate in Texas is only higher than 12 other states. However the total delinquency rate is right in the middle.

The limits on home equity borrowing might have helped because fewer homeowners could get into situations with negative equity.

This graph is based on the First American CoreLogic Q4 negative equity report.

This graph shows the negative equity and near negative equity by state.

Once again Texas is in the bottom half, but the negative equity rate doesn't seem extremely low.

I think there are other factors too. Texas is part of Krugman's Flatland, and most areas with abundant land saw smaller price increases during the bubble. And there is a direct correlation between price increase and eventual price decrease - and therefore negative equity (all those people who bought near the top) - and the delinquency rate. I think Texas saw a minimal price increase because it is easy to build there.

Although I think limits on home equity borrowing make sense, and might have helped at the margin, I'm not convinced it is a "secret" to the lower rate in Texas.

Note: Nevada and Arizona have building limitations, and they also saw significant investor buying from Californians - many using their home equity to buy investment property.