NATNews Blog > October 2015 > ​Texas HELOC Laws May Have Blunted Recession Impact

    ​Texas HELOC Laws May Have Blunted Recession Impact

    10/27/2015 12:12:13 PM
    In Freddie Mac’s monthly Insight & Outlook for October, it examines whether a Texas limit on homeowner's ability to extract equity from their homes may have blunted the impact of the Great Recession on Texas.
    "The great state of Texas withstood the housing crisis far better than most states,” explained Sean Becketti, Freddie Mac Chief Economist. “To quote just one comparison, house prices nationally fell over 20 percent, while in Texas house prices fell less than 4 percent. Some of the credit goes to the resilient energy sector in Texas, where good-paying jobs were plentiful. However, factors other than the luck of the economic draw may also have insulated Texas from the worst of the recession, namely, the law that caps borrowers from extracting more than 80 percent of their home equity. However, while this may have helped to curb default rates for non-prime borrowers, our preliminary research shows it had little effect, if any, on prime borrowers."
    According to the report, the Texas law capping home equity extraction appears to have reduced non-prime default rates in Texas by about 25 to 30 percent compared to rest of the U.S., based on recent research by the Dallas Federal Reserve.  Analysis by Freddie Mac replicates these results using data from CoreLogic covering the same period. However according to the report this reduction is not apparent in the data on prime mortgages in Freddie Mac's portfolio.
    A limit on equity extraction seems to work through three complementary channels, according to Freddie Mac: first, by reducing the probability borrowers will be underwater in a downturn; second, by avoiding the creation of clusters of foreclosures that impact neighboring properties; and third, by limiting house price increases generally which prevents the creation of a house price bubble.
    While the report stated that it appears that a limit on equity extraction reduces mortgage defaults and may also insulate a state's economy from some of the ravages of a recession, it acknowledged that it remains difficult to pin down whether this type of cap on equity is more or less impactful than other economic factors.
    Interest rates
    A weaker September employment report appears to have stopped the Federal Reserve once again from raising rates. This is good news for housing, as low mortgage rates continues to feed a strong housing market, even as housing prices increase in many metro areas.
    "After the release of the September employment report, with its surprisingly-low increase of 142,000 in nonfarm payroll employment, the FOMC may well have breathed a sigh of relief about its decision to not raise short-term interest rates,” said Becketti. “In the wake of the employment report, the market appears to believe the Fed will not act until 2016. Judging by Fed funds futures prices, the market thinks there is only a 6 percent chance of a rate hike in October and a 39 percent chance in December. Therefore mortgage rates are likely to remain near four percent for the remainder of this year helping to support homebuyer affordability."
    TILA/RESPA Integrated Disclosure Rule
    Freddie Mac is keeping its eye on mortgage applications and closings, due to the implementation of the Consumer Financial Protection Bureau’s TILA/RESPA Integrated Disclosure rule, which went into effect on Oct. 3.
    Mortgage origination concentration
    Industry concentration is declining. In 2009, the peak year for concentration, the top five mortgage originators accounted for 62 percent of all mortgage loans. In 2014, the top five firms accounted for only 34 percent of the market.
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