TAR Report

Texas Association of Realtors:
An Assessment of Conservative
Lending Laws in Texas
October 31, 2014

Texas Association of Realtors | 2
Table of Contents
Executive Summary…………………………………………………………………………………………………. 3
Effects of the United States Housing Bubble…………….................................................. 7
Demographic Analysis……………………………………………………………………………………………… 13
Socioeconomic Benchmark Analysis……………................................................... 14
Housing Market Benchmark Analysis……………………………………………………......... 20
Did Conservative Lending Laws Help?......................................................................... 31
History of Texas Homestead Laws.................................................................... 32
Texas’ 80% Cap and Other Lending Laws………………………………………………………… 34
Texas’ Prime Loan Market................................................................................ 36
Predatory Lending Regulations…………………………………………............................. 48
Tighter Restriction on Investment Properties: Speculative Markets…............... 59
Conclusions………………………………………………………........................................................ 63
About AngelouEconomics……………………………………………............................................. 64

Executive Summary
Introduction
In the 1800s, laws were passed in Texas that created a
unique precedent in the state to protect homeowners
against unscrupulous lending and foreclosure practices.
When Texas voters passed amendments to allow closed-
end home equity loans in 1997 and open-ended home
equity loans in 2003, the laws further protected
homeowners by placing an unprecedented 80% cap on
the allowed debt-to-value ratio that a homeowner can
borrow against. Although such laws limited access to
capital, they also limited the burden of debt that
homeowners could acquire.
AngelouEconomics has been hired by the Texas
Association of Realtors to evaluate the relationship
between the state’s conservative home equity laws and
the lack of a housing bubble in Texas. This study will
address whether such legal measures helped insulate
Texas from the recession that followed the collapse of
the 2008 housing bubble.
To understand what went well in Texas, this report will
analyze the effects of the U.S. housing bubble at the
state level. Then, Texas will be benchmarked against the
states of Florida and California; two states which had a
pronounced housing bubble.
The purpose is to understand how and why Texas
performed more favorably during the recession. A more
in-depth discussion of Texas’ conservative lending laws
will then create a basis for which lending laws played a
role and to what extent they may have helped bolster
Texas’ economy through the downturn.
The conclusions of this report are more of a correlative
nature, and do not necessarily speak to causation. The
recession was caused by many factors, including issues
beyond the housing bubble and its inevitable collapse.
Even within the issue of the housing bubble, there are
many reasons why states would have performed at
differing levels of success. This study focuses solely on
conservative lending laws and to what extent they
played a role in Texas’ relative success through the
recession.
• Effects of the U.S. Housing BubbleSECTION 1
• Demographic AnalysisSECTION 2
• Did Conservative Lending Laws Help?SECTION 3
• ConclusionsSECTION 4

Executive Summary
Key Findings
Effects of U.S. Housing Bubble
Utilizing GIS analysis, along with U.S. Census’ American
Community Survey Data, and the U.S. Department of
Housing and Urban Development’s Neighborhood
Stabilization Program’s data, it is possible to view
geographical effects that the bubble and the resulting
recession had on the three states.
While California and Florida saw high rates of mortgage
originations, foreclosures, unemployment, and price
drops in 2008 and 2009, Texas trended in the opposite
direction. A majority of mortgages in Texas occurred in
urban areas, though high-cost loans were more common
in the rural parts of the state where property was less
expensive.
Texas saw virtually no decline in home prices in 2008
and unemployment kept to single digits in most
counties. These factors likely contributed to the below
5% foreclosure rates in population dense areas. Rural
parts of the state saw 5% to 10% foreclosure rates, with
several counties having rates higher than 10%. California
and Florida saw foreclose rates of 5% to 10%, but these
rates are experienced throughout a majority of their
respective counties.
Demographic Analysis
An analysis of historical data on unemployment, labor
participation rate, income, home value, and median
mortgage payments for the three states provides a
background into the trends before and after the
collapse.
Texas showed greater stability in these factors
throughout the recession. Although labor participation
dipped, it quickly stabilized, while those of Florida and
California continued to decline. Median and mean
income in Texas recovered to pre-recession levels.
Homes in Texas carried a much lower median value than
their counterparts in Florida and California, and while
those in the two states rose in value and sharply
declined, Texas homes saw steady growth through the
recession. The lack of a spike in home values, as well as
stability in income, labor, and unemployment, helped
cushion Texas from the hard hitting impact of the
recession.
While such variables are more related to the aftermath
of the housing bubble rather than the cause, the
analysis of them is crucial in understanding the
secondary effects of the bubble, primarily the damage
done to the economy from the recession.

Executive Summary
Did Conservative Lending Laws Help?
The four aspects of Texas conservatism include:
1. Texas’ 80% Cap and Other Lending Laws
2. Texas’ Prime Loan Market
3. Predatory Lending Regulations
4. Tighter Restrictions on Investment Properties:
Speculative Markets
The 80% cap on home equity loans likely played a role in
curbing the volume of loans, as well as keeping overall
levels of debt in Texas law. An argument could be made
that Texas’ conservative lending laws helped in limiting
house flipping in the state by disallowing short-term
high interest rate loans used by speculators.
An analysis of the prime loan market in each state is
constructed through descriptive statistics derived from
the Freddie Mac’s data set of all home loans sold to the
entity. Loan volume, specifically for cash-out loans,
remained lower in Texas than California and Florida. The
state did see higher loan-to-value ratios than the other
two states, with loans averaging just below the 80% cap
mark. Yet, the lower loan-to-income ratio coupled with a
lower volume of loans meant that the state of Texas was
less burdened by a collapsing housing market.
The Home Ownership and Equity Protection Act, or
HOEPA, was drafted in 1995 to create minimum
protections for homeowners against unscrupulous
lending practices. Each state has its own provisions
under HOEPA, which lead to differing levels of
conservatism for each state. In general, Texas ranks
more conservatively for each of the provisions, which
include:
• Covered Loans (1st)
• Asset-based Lending (3-way tie)
• Prepayment Penalties (1st)
• Balloon Payments (1st – tied with FL)
• Negative Amortization (1st)
• Loan Flipping (2nd)
• Credit Counseling (3rd)
• Loan Packing (1st)
• No Call (3rd)
* The number in parentheses is the ranking among the three
benchmarked states, with 1 being the most conservative

Executive Summary
Texas experienced significant growth in population and
housing developments. Housing developments in Texas
were better protected from over-speculation. The
housing market was not as prone to speculation as
California and Florida for two reasons: natural and
artificial building restrictions.
Natural restrictions arise from the ability to expand
growth to surrounding regions. California and Florida
experience more difficulty in building new homes,
placing upward pressure on housing prices. This causes
increased speculation because investors believe that
housing prices will continue rising, creating
opportunities for highly leveraged positions that pay off,
but only when the economy, and the housing market,
are performing healthily.
Artificial restrictions further compound the problem by
restricting the ability to develop land, fashioned as
“smart growth” strategies. Though smart growth
policies do take environmental restrictions and other
factors into account, economists on the right and left
both agree that limiting the available land for
development facilitates an environment of speculative
investing.
Texas’ relative lack of land use regulations allow it to
avoid artificial restrictions on build sites that are more
prevalent in California and Florida. Texas’ cities did not
employ large land use restrictions and did not see an
artificial scarcity-driven spike in home prices, and thus,
did not experience the deepened collapse after housing
prices fell.
4. Tighter Restrictions on Investment Properties:
Speculative Markets

Effects of the United States Housing Bubble
In order to understand what brought on the housing
crisis, this study considers the condition of the state of
Texas’ economy against the state of the economies of
California and Florida after the housing bubble burst.
This analysis will look at what regions of each state were
impacted by the following:
• High-cost loans as a percentage of all mortgages
• High foreclosure rates
• Declining home prices
• Unemployment
• Vacancies
The U.S. Department of Housing and Urban
Development’s Neighborhood Stabilization Program
(NSP) is a crucial source for each of the lifted data
points, on a county by county level. The program
provides state and local governments with funding to
purchase and redevelop foreclosed properties in
distressed areas with the aim of stabilizing
neighborhood housing markets. Data provided by the
program covers values between 2007 and the first half
of 2008. The time frame represented by this data set is
suitable for this study, since it coincides with the
collapse of the housing market.

Less than 20%
20% - 40%
40% - 60%
High-Cost Loan Rates
60% - 80%
80% or more
A larger proportion of counties in Texas have high percentages of high-cost loan
rates than those in California and Florida. Of the three states, Texas is the only one
to contain counties with high-cost loan rates greater than 60%.
• Counties in Texas with a prevalence of high-cost loans tended to be the rural
counties of west and south Texas. This also charts with the higher rates of
foreclosures.
• In Texas and Florida, high rates of high-cost loans appear to concentrate in less
populous and less wealthy counties, with Miami-Dade County being the
exception.
• With income and credit score serving as two crucial factors in evaluating prime
loan qualification, the prevalence of subprime loans in lower income counties
falls in line with common wisdom.

Less than 5%
5% - 10%
10% or more
Foreclosure Rates High foreclosure rates in Texas occurred in more rural parts of the state, in which
homes had lower values.
• While California had the lowest concentration of high-cost loans across its
counties, the state had surprisingly high foreclosure rates.
• In Texas, high foreclosure rates generally occurred in areas with low household
counts, low median home value, and high rates of subprime loans.
• This was not the case with Florida and California. These two states showed no
discernable pattern between the four variables.

10% or less
10% - 20%
20% - 30%
Decline in Home Value
30% - 40%
40% or more
Texas saw virtually no decline in home value after the housing
bubble.
• Even though west and south Texas showed high foreclosure rates,
counties throughout Texas showed less than 10% decline in
housing prices. In fact, housing prices declined by less than 1% in
every county in Texas.
• Homes on the Florida coastline, excluding the panhandle, had a
10% to 30% decline in pricing.
• Southern California as well as the counties of the San Joaquin
Valley experienced fairly heavy price decline.
• A sharp decline in home prices likely played a more pivotal role in
foreclosures than the origination of subprime loans in California
and Florida.

4% or less
4% - 6%
6% - 8%
Unemployment Rate
8% - 10%
10% or more
California and Florida were burdened by heavier unemployment rates
than Texas.
• With the exclusion of Maverick, Presidio, and Starr Counties,
Texas counties had single digit unemployment rates; generally
below 6%.
• Florida had two areas with unemployment rates well above
average: in the counties surrounding Levy County and Hendry
County.
• California has the most counties with very high unemployment
rates, above 10%. High unemployment areas in California do not
follow a discernable pattern.

5% or less
5% - 10%
10% - 15%
Vacancy Rate
15% - 20%
20% or more
Texas was hit harder by vacancies than Florida or California.
• Counties in Texas, primarily in more rural parts of the state,
showed higher vacancy rates than counties in Florida and
California.
• NSP data shows very few vacancies in California, with only five
counties having rates higher than 5%.
• Counties in Florida with higher vacancy rates, 5% to 15%, are
primarily located in the pan handle.

Demographic Analysis
AngelouEconomics has been tasked with evaluating
Texas’ home equity laws to determine what role they
played in preventing the occurrence of a housing bubble
in the state. In order to accomplish this, Texas has been
benchmarked against California and Florida; two states
which were affected by the housing crisis to a much
greater degree. The demographic analysis will evaluate
the nature of the housing crisis by benchmarking the
three states on socioeconomic and housing market data.
Maps depicting the number of households, median
home value, median income, and percent of owner-
occupied households with a mortgage are included in
this analysis. These maps utilize 2009 5-year American
Community Survey data and are designed to depict the
aftermath of the housing bubble for each of the three
states on a county by county basis.
Socioeconomic Benchmark Analysis
This section will utilize data collected through two
government data sources. Figures on unemployment
and labor force come from the Bureau of Labor
Statistics. The American FactFinder is a government
toolset that allows for querying data from past Censuses
and American Community Surveys, allowing this study
to look at population and household income changes.
Housing Market Benchmark Analysis
A comparison of the housing markets of each of the
three states will be formed using housing data collected
through the American FactFinder. This section will
analyze historical trends in the supply of housing units,
home value, and costs of ownership for individuals who
have a mortgage. The Home Price Index, managed by
the Federal Housing Finance Agency will also be used to
evaluate volatility in the respective housing markets.

Texas exceeded California and Florida in labor
force participation and had a more stable
unemployment rate through the recession.
• Employment and labor force growth, at
21.3% and 23.9% respectively, showed
steady continuous growth in Texas.
Employment declined in California and
Florida from 2008 to 2009. Labor force
growth showed more pronounced
stagnation in California and Florida.
• The 8% unemployment rate in Texas,
reflecting a shorter recession and stronger
job growth during the recovery, was
somewhat subdued compared to those of
California with 13% and Florida with 11%, in
2010.
• Similarly, the spike in long-term
unemployment in Texas was well below that
of California and Florida.
• Texas had a higher labor force participation
rate. California lagged behind Texas from
2005 to 2007 and again from 2008 to 2013.
While Florida had a lower rate than both
states, some discrepancy could exist due to
a higher percentage of retirees in the state.
0.0
5.0
10.0
15.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Unemployment Rate
California Florida Texas
7,000,000
10,000,000
13,000,000
16,000,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Employment
58.0%
63.0%
68.0%
2005 2006 2007 2008 2009 2010 2011 2012 2013
Labor Force Participation

While California’s population greatly exceeds
that of Florida and Texas, those two states are
growing at a faster rate than California.
• From 2005-2012, the population growth
rate was higher in Texas at 17%, compared
to Florida and California at 11% and 8%,
respectively. Of the three states, California
was the only state to grow at a slower rate
than the United States, which grew 8.9% in
population from 2005 to 2012.
• California’s sizeable population, at 38
million in 2012, makes finding suitable
benchmarks a challenge. Texas is the
second most populous state in the U.S. and
has a 2012 population of 26 million.
Florida’s population for 2012 was 19
million, making it the fourth largest state.
7.8%
11.1%
17.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Population Growth from 2005 to 2012
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
2005 2006 2007 2008 2009 2010 2011 2012
Population

Less than 25,000
25,000 to 50,000
50,000 to 100,000
Number of Households
100,000 to 500,000
More than 500,000
Population clusters in Texas are more scattered than they are in California or
Florida allowing population centers the necessary room to expand into more
rural counties.
• Population clusters in Texas are peppered throughout the state with a clear
majority of counties having less than 25,000 households.
• California and Florida both have lower household densities in the northern
parts of their states. A majority of households in both states are located along
the coast with some population centers in the center of the state as well.
• Both California and Florida are limited by their ability to grow due to having
more areas of the state land-locked by major bodies of water

All three states show similar distributions for
median and mean income historically with each
value peaking at 2007 or 2008.
• Of the three states, Texas is the only state
that had recovered to its peak values by
2012.
• California’s median income in 2012 was 4.4%
less than its peak value in 2008. The mean
income was 2.5% less in 2012 than it was in
2008.
• Florida’s median income peaked in 2007 and
by 2012 was 5.8% short of the peak value.
Mean income peaked in 2008 and was 3.4%
less than that value in 2012.
• Texas’ mean and median values peaked in
2008 but recovered and grew to 1.4% and
2%, respectively, by 2012.
$20,000
$40,000
$60,000
$80,000
2005 2006 2007 2008 2009 2010 2011 2012
Household Income in Texas
Median household income (dollars) Mean household income (dollars)
$20,000
$40,000
$60,000
$80,000
2005 2006 2007 2008 2009 2010 2011 2012
Household Income in California
$20,000
$40,000
$60,000
$80,000
2005 2006 2007 2008 2009 2010 2011 2012
Household Income in Florida

Less than $20,000
$20,000 to $40,000
$40,000 to $60,000
Median Income
$60,000 to $80,000
More than $80,000
A greater diversity in income brackets exists in Texas than in California or
Florida.
• In Texas, areas with median income in the top two brackets match up with
higher population areas.
• The top two median income brackets in California are most prevalent in San
Diego County, Orange County, Venture County, Placer County, El Dorado
County, and the area in and around San Francisco and Santa Clara County.
• While most of the tip of Florida falls in the $40,000 to $60,000 median
income bracket, the $60,000 to $80,000 bracket appears only in St. Johns and
Clay County.

Homes in California and Florida have predominately
carried higher values than homes in Texas, which has
shown more stability in value than the other two
benchmarks.
• In 2005, over 80% of housing units in California were
worth more than $200,000. The proportion of housing
units in the top tier in California declined after 2007,
stabilizing at about 30% of all units. Meanwhile, the
percentage of housing units in the second highest tier
began to represent a majority of housing stock. The
proportion of housing units in the lowest two tiers
grew from 2008 to represent 25% of all housing stock.
• The upper two tiers of housing units in Florida show a
similar trajectory as California’s top housing units, with
the bulk of housing being reappraised in the third or
fourth tier following the housing bubble’s collapse in
2007.
• Texas, on the other hand, saw growth in the number
of its upper tiers of housing, making it the only state in
this study to see home values appreciate between
2005 and 2012.
6% 5% 5% 6% 7% 8% 9% 9%
7% 5% 5% 7%
13% 14% 16% 16%
41%
36% 37%
42%
45% 44% 44% 44%
46% 54% 54% 45%
35% 34% 32% 31%
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009 2010 2011 2012
Housing Value in California
$500,000 or more
$200,000 to $499,999
$100,000 to $199,999
Less than $99,999
21% 15% 14% 16% 21% 26% 31% 33%
32%
26% 27% 29%
34%
36% 35% 34%
37%
46% 47% 45%
37% 32% 28% 27%
10% 13% 13% 11% 8% 7% 6% 6%
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009 2010 2011 2012
Housing Value in Florida
$500,000 or more
$200,000 to $499,999
$100,000 to $199,999
Less than $99,999
47% 43% 39% 37% 37% 37% 37% 36%
36% 38% 39% 39% 38% 38% 38% 38%
15% 17% 19% 21% 21% 21% 22% 22%
2% 3% 3% 4% 4% 4% 4% 4%
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009 2010 2011 2012
Housing Value in Texas
$500,000 or more
$200,000 to $499,999
$100,000 to $199,999
Less than $99,999

$-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
2005 2006 2007 2008 2009 2010 2011 2012
Median Value
California
Florida
Texas
In the long run, median home values in Texas
have increased, while values in Florida and
California have declined.
• In terms of median housing values, Texas
showed almost continuous growth from
2005 to 2012, despite the recession.
• Texas’ median income has increased by
21.9% from 2005 to 2012.
• California’s and Florida’s median
household income peaked in 2006 and has
declined continuously since.
• Income in Florida declined over the 2005
to 2012 period by 21.8%.
• In California, the decline was 26.9% over
the same time period.

Less than $100,000
$100,000 to $250,000
$250,000 to $500,000
Median Home Value
$500,000 to $750,000
More than $750,000
Properties in Texas, even in areas with high population density, are generally more
affordable than those in California and Florida.
• Higher median home value counties for each of the three states are generally
concentrated around large population areas in the state.
• Median home values in Texas only fall into the two lower brackets. The higher of the
two, $100,000 to $250,000, extends between San Antonio, Houston, and Austin as
well as the area surrounding Dallas and Fort Worth.
• California shows a concentration of high median home values along the coast, with
the area around San Francisco, including Silicon Valley, falling in the highest home
value bracket.
• The tip of Florida, also the area in the state with the highest household
concentration, falls into the higher two income brackets in the state. The central
portion of the state falls in the $100,000 to $250,000 range.

Homeownership in Texas declined but at a
much lower rate than Florida and California.
• From 2005 to 2012, all three states saw a
decline in the percentage of housing units
that were owner occupied.
• Texas’ decline of 4% was much less than
that of California’s 9% and Florida’s 12%.
• California and Texas saw an increase in
renter-occupied households.
• The decline in home ownership in Florida,
as a percentage of all housing units, is tied
to the increase in vacant properties in the
state. Vacancies in the state have risen
from 15% in 2005 to 22% in 2010.
45%
50%
55%
60%
2005 2006 2007 2008 2009 2010 2011 2012
Owner-Occupied Housing Units as a
Percentage of Total Housing Units
California
Florida
Texas
8,000,000
10,000,000
12,000,000
14,000,000
2005 2006 2007 2008 2009 2010 2011 2012
Total Housing Units
California
Florida
Texas
7% 8% 8% 9% 9% 9% 9% 8%
15%
17%
19%
20%
21% 22% 21% 20%
12% 12% 13% 12% 12% 13% 12% 12%
0%
5%
10%
15%
20%
25%
2005 2006 2007 2008 2009 2010 2011 2012
Vacancies as a Percentage of Total Housing Units
California
Florida
Texas
20%
25%
30%
35%
40%
2005 2006 2007 2008 2009 2010 2011 2012
Renter-Occupied Housing Units as a Percentage of
Total Housing Units
California
Florida
Texas

The decline in homeownership in Texas can be attributed to
less growth in owner occupancy compared to growth in the
number of households.
• The housing markets in California and Florida show an
inverse relationship between total number of housing
units and the number of owner-occupied homes (OOH).
With the number of OOH peaking in 2007 and dropping
off by 2012.
• This may be the result of investment property owners
claiming occupancy of investment properties for tax
purposes as well as an increase in rental rates.
• Texas, on the other hand, shows consistent growth in
both total households and OOH, which supports the
idea that Texas does not have as many investment
properties as California and Florida.
6,600,000.00
6,700,000.00
6,800,000.00
6,900,000.00
7,000,000.00
7,100,000.00
7,200,000.00
11,800,000
12,000,000
12,200,000
12,400,000
12,600,000
2005 2006 2007 2008 2009 2010 2011 2012
California
Total households Owner Occupied
4,500,000.00
4,600,000.00
4,700,000.00
4,800,000.00
4,900,000.00
5,000,000.00
5,100,000.00
6,800,000
6,900,000
7,000,000
7,100,000
7,200,000
7,300,000
2005 2006 2007 2008 2009 2010 2011 2012
Florida
4,800,000.00
5,000,000.00
5,200,000.00
5,400,000.00
5,600,000.00
5,800,000.00
7,200,000
7,600,000
8,000,000
8,400,000
8,800,000
9,200,000
2005 2006 2007 2008 2009 2010 2011 2012
Texas

Less than 20%
20% to 40%
40% to 60%
Percent of Owner-Occupied
Households with a Mortgage
60% to 80%
More than 80%
In Texas, households with mortgages are concentrated around large
population centers. This is not the case for Florida and California,
where mortgages are much more prevalent throughout the state.
• In Texas, areas with over 60% of households mortgaged can be
found near large population centers. Dallas and Tarrant County
fell in the more than 80% category.
• Most counties in California had more than 60% of owner-
occupied households with a mortgage. Solano County had more
than 80% of households with a mortgage.
• Florida saw high percentages of home owners with a mortgage in
counties near the eastern coastline and near Tampa.

Texas’ selected monthly owner costs (SMOC), including the
cost of the mortgage, are not as top heavy as those in
California and Florida.
• After 2007, over half of all housing units with a
mortgage in California have had (SMOC) that were
$2,000 or greater.
• SMOC has remained fairly stable in all three states
between 2007 and 2012. Median mortgage costs for
each of the three states have also remained fairly stable
from 2005 to 2012.
3% 2% 2% 2% 3% 3% 3% 3%
6% 5% 4% 5% 5% 5% 6% 6%
15%
13% 11% 13% 14% 15% 16% 17%
17%
15%
13% 17% 18% 18% 19% 20%
35%
42% 46% 62% 60% 58% 56% 54%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011 2012
Selected Monthly Owner Cost with Mortgage in
California
$2,000 or more
$1,500 to $1,999
$1,000 to $1,499
$700 to $999
Less than $699
8% 6% 4% 6% 6% 7% 7% 8%
13%
11% 9% 13% 13% 14% 15% 17%
21%
19%
17% 26% 27% 29% 30% 30%
12%
13%
14% 22% 22% 22% 21% 21%
12%
17% 21% 33% 31% 29% 27% 25%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011 2012
Florida
$2,000 or more
$1,500 to $1,999
$1,000 to $1,499
$700 to $999
Less than $699
8% 6% 5% 8% 8% 7% 7% 7%
14%
12% 11% 17% 17% 16% 16% 17%
21%
21% 22% 33% 33% 34% 34% 35%
11%
13% 13% 22% 21% 22% 22% 21%
10% 12% 13% 21% 21% 22% 21% 21%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011 2012
Texas
$2,000 or more
$1,500 to $1,999
$1,000 to $1,499
$700 to $999
Less than $699

19% 17% 17% 22% 22% 23% 24% 27%
11% 10% 10% 13% 13% 13% 14% 15%
10%
9% 9% 12% 12% 12% 13% 13%
8%
8% 8% 10% 10% 10% 10% 10%
28% 32% 33% 44% 42% 41% 39% 36%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011 2012
Selected Monthly Owner Cost as a Percentage of
Household Income with Mortgage in California
35.0 percent or more
30.0 to 34.9 percent
Less than 20.0 percent
21% 18% 17% 25% 25% 26% 27% 31%
10%
10% 9% 14% 14% 14% 14% 15%
8%
8%
8% 12% 12% 12% 12% 12%
6%
6%
6% 10% 10% 10% 9% 9%
21% 23% 26% 40% 40% 39% 37% 35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011 2012
Household Income with Mortgage in Florida
24% 23% 25% 40% 40% 39% 40% 43%
11% 11% 11% 17% 17% 17% 17%
17%
8% 8% 8% 12% 12% 12% 11% 11%
5% 5% 5% 8% 8% 8% 8% 7%
15% 16% 15% 23% 24% 25% 24% 22%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011 2012
Household Income with Mortgage in Texas
When regional incomes are considered, Texas’
SMOCAPI still ranks favorably.
• A plurality of selected monthly owner cost as a
percentage of household income (SMOCAPI) for
households with a mortgage in Texas are less
than 20% of household income.
• Despite having lower SMOC than California,
Florida’s distribution of SMOCAPI percentage
tiers is very similar to California. This suggests
that although actual mortgage costs in Florida are
not as high as ones in California, the income
difference between the two states creates similar
financial burdens on home owners with a
mortgage.

The Home Price Index (HPI), generated by the
Federal Housing Finance Agency, provides us with a
measure of price fluctuation and volatility in the
housing markets of California, Florida, and Texas.
The index looks at repeat sales and refinances on
single family homes. The HPI is used as a proxy for
volatility and fluctuation in home prices.
The HPI showed a similar trend in both California’s
and Florida’s housing markets. Both peaked in 2006
after a steep rise in the index and then saw a decline
which proceeded until 2011. The bell shaped
distribution of the HPI depicts a housing bubble
trend; prices shot up rapidly and then declined until
reaching a market equilibrium. Texas, on the other
hand, showed steady growth in the years analyzed,
except for a slight stagnation from 2007 to 2011,
suggesting the lack of a housing bubble.
0
50
100
150
200
250
300
350
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Home Price Index
CA index FL index TX index

The lack of volatility in the HPI index in Texas can be
attributed, in part, due to a more stable unemployment
rate.
• In California and Florida, HPI is negatively correlated
with unemployment rates, with the indices peaking
during times of low unemployment.
• Texas does show a similar trend during, and
immediately following, the peak years of the boom, but
an overall correlation between HPI and unemployment
is insignificant.
• The trend is most pronounced in California and Florida,
as those states saw the highest rate of HPI increase and
high unemployment following the housing bubble
collapse. Texas’ unemployment rate is much more
stable than the other two states, never reaching double
digits.
0%
2%
4%
6%
8%
10%
12%
14%
0
50
100
150
200
250
300
350
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
California
CA index CA unemployment R2 = 21.9%
0%
2%
4%
6%
8%
10%
12%
14%
0
50
100
150
200
250
300
350
20002001200220032004200520062007200820092010201120122013
Florida
FL index FL unemployment R2 = 30.8%
0%
2%
4%
6%
8%
10%
12%
14%
0
50
100
150
200
250
300
350
20002001200220032004200520062007200820092010201120122013
Texas
TX index TX unemployment R2 = 6.7%

Did Conservative Lending Laws Help?
Lending laws in Texas have historically been more
conservative than other states. Simply opening up the
Texas housing market to these sorts of home loans has
been an uphill battle, requiring constitutional
amendments that only recently opened the door to
home equity loans, while still maintaining strict
protections for homeowners.
In order to assess whether or not the conservative
lending laws helped Texas mitigate the majority of
effects from the recession, this report has covered four
aspects of lending laws that are more conservative in
Texas.
The four aspects of Texas conservatism include:
4. Tighter Restriction on Investment Properties:
Speculative Markets
Rules such as the 80% cap on home loans were designed
to help protect homeowners from foreclosure in the
event of an economic downturn, other regulations and
prohibitions on lender activity were crafted to keep
Texans from being pushed into impulsive decisions. This
report will investigate whether these conservative laws
were responsible for making Texas’ housing market
more resilient than either California or Florida’s.
After that, this report will look at how Texas’ regulations
on predatory lending practices stack up not only against
California and Florida, but also against the Federal
Home Owner Equity Protection Act (HOEPA) of 1995.
Before concluding, this project will explore Texas’
vulnerability to the speculative housing markets, which
created the massive price surges that made the housing
bubble as dangerous as it was.

History of Texas Homestead Laws

History of Texas Homestead Laws
The Texas Homestead Law is based on a concept of
exempting a house from seizure by creditors, and it
originated in Texas in the early 1800s. Texas’ ban on
home equity lending excludes a portion of a property’s
value from property taxes and aims to protect a primary
residence from forced sale or seizure as long as
mortgage tax payments are current. A Texas homestead
is not, however, secure from seizure for a debt owed to
the federal government.
Timeline of Texas Homestead Laws:
1839: The Republic of Texas passed a prohibition, which
protected the home of a family from seizure by a
creditor. The prohibition was a reaction to the Panic of
1837, when a number of people lost their homes and
farms to foreclosures.
1845-76: The homestead principle was embodied in the
first Texas Constitution of 1845 and all constitutions
thereafter. Under the Constitution of 1876 the
homestead is defined as the family home on up to 200
acres of rural land or urban land worth up to $5,000 (at
the time of homestead designation) with its
improvements and used as a family home or place of
business.
1986: The Federal Tax Reform Act of 1986, commonly
referred to as the second of two Reagan tax cuts,
phased out the tax deductibility of interest paid on
other, nonmortgage consumer loans. However, Texas’
homestead exemption laws preclude such home equity
lending.
1997: Texas voters passed a constitutional amendment
allowing closed-end home equity loans. According to
the amendment, homeowners can't owe more than 80%
of the market value of their home on combined
mortgage loans and home equity vehicles.
1999: Another amendment was made for reverse
mortgages consistent with those outlined in Federal law.
In reverse mortgage, the borrower is usually not
required to repay the money or interest on the money
until the borrower dies, sells the home or permanently
moves out of the home.
2003: A new amendment was passed allowing open-end
home equity loans. Under the amendment, total debt
secured by the home still cannot exceed 80% of a
home’s value. Funds from a home equity credit line
cannot exceed 50% of the value of the home at the time
the home equity line of credit is made.
2007: Minor revisions in the home equity lending
amendment were passed. According to the
amendments, home equity loans can't be closed until 12
days after the borrower receives the lender's official
"notice of rights.“ In addition, lenders aren't permitted
to charge front-end fees of more than 3% on home
equity loans. Front-end fees include prepaid interest
payments but exclude "traditional" interest payments.

Texas’ 80% Cap and Other Lending Laws
As stated earlier, the loan-to-value ratio in Texas has
historically been higher than in California and Florida.
However, the volume of such loans has been
significantly lower.
The cap of 80% equity on refinance options did a lot to
help mitigate the effects of the housing bubble’s
collapse on Texas’ homeowners. While there is
correlation, it cannot be said that the 80% cap
prevented the existence of a housing bubble. In short,
other factors that contributed to the bubble in
California and Florida were more responsible for
creating the crisis, however Texas’ protections helped
homeowners keep their homes after the fallout.
In addition, laws in Texas protected borrowers from
being pushed into impulsive decisions by lenders. Laws
require lenders to provide borrowers 12 days before
closing the loan. Lenders were also required to provide
borrowers a final itemized disclosure of the actual fees,
points, interest, costs, and charges that will be accrued.
Even after the loan closes, the borrower has three
additional days to change his mind and cancel the
transaction without any penalty or charges.
Further regulations on lenders include prohibiting
unlicensed individuals form making loans, prohibiting
lenders from charging non-interest fees greater than
3% of the principal, and requiring the borrower to apply
the loan to repay debt unless the debt is secured by the
homestead or is owed to another lender. Furthermore
lenders are not allowed to require additional assets be
used as collateral in the mortgage.
Other regulations against negative amortization
mortgages, balloon payments, and prepayment
penalties generally apply only to high-cost loans – those
worth less than $200k with high interest rates.
“Virtually no loans qualify under that standard, which
means the rules against prepayment penalties and so
forth were mostly meaningless.” (5)
It may be argued that regulations, such as the 80% rule,
limit the number of home equity loans and the types of
property that can be leveraged against, which prevents
people from using their homes as leverage to speculate
on the housing market. But as this study will show,
Texas wasn’t a prime speculator’s market for other legal
reasons and not necessarily these restrictions.
(5) “A Texas Mystery”

Texas’ Prime Loan Market
This study will evaluate the prime loan market in each of
the three states. The dataset contains long-term
mortgages that were originated in 1999 to 2012 and
sold to Freddie Mac. The data has been divided by loan
purpose, purchase, cash-out refinance, and no cash-out
refinance, as well as by the state in which the property
was located.
Prime loans made to homeowners were often designed
with the intent to sell the loan to Freddie Mac,
therefore, this dataset is useful in capturing the prime
market in each state.
This section will compare prime loans made in each
state through the use of Freddie Mac’s Single Family
Loan-Level Datasets. Freddie Mac provides quarterly
datasets, with each dataset including all loans sold to
Freddie Mac during that quarter. Using Stata, this study
examines summary statistics for each quarter and has
calculated yearly figures for unpaid principal balance,
loan-to-value ratio, debt-to-income ratio, property
value, credit scores, equity, and volume of loans.

Texas’ relatively stable total loan volume
reflects the lack of fluctuation in Texas’ housing
market during the housing bubble and the
recession.
• The data for California shows the volume of
loans fluctuating with the overall market,
starting with the dot-com bubble burst in
2000. With the housing market replacing
the stock market as a means of investment,
by 2001 California saw a dramatic rise in
the number of total housing loans
purchased. As the housing market
weakened in 2004, loan volume declined
until the passage of the economic stimulus
in 2009. Following 2009, the market began
to recover naturally.
• Although Florida has a much lower
population than Texas, its total loan
volume outpaces Texas up until 2007.
• Florida, like California, saw growth in the
volume of home loans as home ownership
became more accessible due to favorable
interest rates. From 2004 to 2012, loan
volume in Florida has shown a continuous
decline, likely due to high vacancy rates in
Florida.
• The volume of loans in Texas stayed
relatively stable, even during the peak
years of the housing bubble.
-
50,000
100,000
150,000
200,000
250,000
300,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Total Volume of Loans
California Total Florida Total Texas Total

Purchase loan volume in Texas peaked in 2006
and 2007, much later than that of California
and Florida, which saw high purchase volume in
2001.
• From 1999 to 2007, the volume of Texas’
home purchase loans remained fairly
stable. Loans of this type began to decline
in volume with the start of the recession in
2007.
• Florida saw an increase in volume of
purchase loans after the dot-com bubble.
While the number of loans was fairly stable
from 2001 to 2005, Florida has seen a
decline in the number of loans since.
• The volume of home purchase loans
fluctuated greatly over the 1999 to 2012
time period. Loan volume in California
reached a peak in 2001. As home prices
began to skyrocket in California, the
volume of home purchases began to
decline.
• In 2006, a year in which California saw the
lowest volume of home purchase loans,
the median value of homes in the state
peaked. As the median value began
stabilizing, the quantity of home purchase
loans began to increase until reaching a
second peak in 2009. Household income in
California peaked in 2008, likely playing a
crucial role in the decline in the volume of
loans after 2009.
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Volume of Purchase Loans
California Purchase Florida Purchase Texas Purchase

Cash-out refinancing mania never reached
Texas. The volume for such loans in Texas never
reached those of California or Florida at the
time of the housing bubble.
• Growth in home prices from 2000 to 2006
allowed individuals to pull equity out of
their homes through cash-out refinancing.
The volume of cash-out loans in California
peaked in 2001, a year in which the volume
was three times that of 1999. With home
values in California declining in 2006, the
volume of cash-out loans dropped
significantly and tapered off to pre-2001
levels.
• Florida showed an increase in the volume
of cash-out loans up until 2005. Since then,
the volume declined until it leveled off at
2011. Florida greatly exceeded Texas’ cash-
out loan volume from 1999 up until 2010,
even though the number of households in
Texas exceeded Florida by roughly one
million.
• The volume of cash-out loans in Texas is
marginal compared to Florida and
California. Volume in Texas increased until
2009 and showed slight decline over the
next couple of years.
(5,000)
5,000
15,000
25,000
35,000
45,000
55,000
65,000
75,000
85,000
95,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Volume of Cash-Out Loans
California Cash Out Florida Cash Out Texas Cash Out

California, Florida, and Texas all followed a
similar pattern for the volume of refinance
loans over the 1999 to 2012 time period.
Florida and Texas had relatively comparable
levels of loan volume.
• In 2002, the Federal Reserve lowered
already reduced interest rates to cushion
the economy from the fallout after 9/11.
Although all three states had high volumes
of refinanced mortgages in 2001 and 2002,
the volume drastically increased due to the
adjustment to the interest rate in 2003.
• After 2003, refinance loans saw a drastic
decline as interest rates began to climb
back once more.
• All three states saw a resurgence in 2009,
although only California sustained the
increase in volume from 2009 to 2012.
-
20,000
40,000
60,000
80,000
100,000
120,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Volume of Refinance Loans
California Not Cash Out Florida Not Cash Out Texas Not Cash Out

Although Texas had a 80% cap on cash-out refinancing,
homeowners in the state, on average, had a much higher
loan-to-value ratio for cash-out loans than Florida and
California.
• While Texas had a higher loan-to-value ratios (LVR) for
cash-out loans than the other two states, the volume of
such loans in Texas was much less than the other two
states.
• While California had lower LVR than either Texas or
Florida, the sheer volume of mortgages taken in the
state contributed to its housing bubble.
• Property values rose between 2002 and 2006 causing
LVR to dip across the board in California.
0.50
0.55
0.60
0.65
0.70
0.75
1998 2000 2002 2004 2006 2008 2010 2012
Loan-to-Value Ratio and Volume for Cash-
Out Loans
0.64
0.69
0.74
0.79
0.84
1998 2000 2002 2004 2006 2008 2010 2012
Loan-to-Value Ratio and Volume for Purchase
Loans
0.50
0.55
0.60
0.65
0.70
0.75
0.80
1998 2000 2002 2004 2006 2008 2010 2012
Loan-to-Value Ratio and Volume for
Refinance Loans

Across the board, when taking volume into consideration,
total debt-to-income in Texas was much less than in
California and Florida.
• California incurred a higher debt-to-income ratio (DIR)
than the other states in all three categories and had a
much higher volume of DIR when it came to cash-out
and refinance loans.
• For purchase loans, Texas saw a lower DIR than the
other two states in the years after 2004.
• Lower interest rates in 2008 allowed homeowners to
refinance and decrease their DIR in the fallout of the
2008 financial crisis.
0.31
0.33
0.35
0.37
0.39
0.41
1998 2000 2002 2004 2006 2008 2010 2012
Debt-to-Income Ratio and Volume for
Purchase Loans
0.32
0.33
0.34
0.35
0.36
0.37
0.38
0.39
0.4
1998 2000 2002 2004 2006 2008 2010 2012
Debt-to-Income Ratio and Volume for Cash-
Out Loans
0.27
0.29
0.31
0.33
0.35
0.37
0.39
1998 2000 2002 2004 2006 2008 2010 2012
Debt-to-Income Ratio and Volume for
Refinance Loans

Across the board, the unpaid principle balance
(UPB) for all three loan types in all three states
trends upwards until roughly 2008, after which
it levels off.
• LVRs remained generally constant between
1999 and 2008 in Florida and Texas,
suggesting that the UPB increased alongside
property values, meaning homeowners were
taking out larger loans in response to
climbing housing prices.
• From 1999 to 2012, UPB in California for
non-cash-out refinance loans grew by 133%.
During the same time period UPB for home
purchase loans grew by 94%, creating a gap
between the two types of loans.
-
100,000
200,000
300,000
400,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unpaid Principle Balance for Purchase Loans
-
100,000
200,000
300,000
400,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unpaid Principle Balance for Cash-Out Loans
-
100,000
200,000
300,000
400,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unpaid Principle Balance for Refinancing Loans

Down payments for purchase loans in all three states follow
a similar trajectory as home values with a peak in 2006,
likely in accord with rising home values.
• The subsequent drop in down payments may indicate
lower housing values caused by an excess of housing.
• In all three states, equity for refinance and cash-out
loans peaked in 2009. However, only equity in cash-out
loans began to regain value after dipping in 2010. This
may be a result of the economic climate making it
prohibitive for anyone but the wealthiest homeowners
to refinance.
$-
$40,000
$80,000
$120,000
$160,000
$200,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Down Payment for Purchase Loans
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Equity for Cash-Out Loans
$-
$100,000
$200,000
$300,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Equity for Refinance Loans

Home values in Texas showed steady appreciation.
• Home values for purchase loans generally followed a
similar trajectory as housing prices overall in the years
leading up to the housing bubble collapse with
California and Florida peaking in 2006 and Texas
continuing to appreciate slowly.
• Home values for cash-out and refinance loans in all
three states peaked in 2009 and did not drop down to
pre-bubble burst levels, perhaps indicating that only
those with homes valuable enough could refinance
given the economic climate.
$100,000
$200,000
$300,000
$400,000
$500,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Home Value for Purchase Loans
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Home Value for Cash-Out Loans
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Home Value for Refinance Loans

700
720
740
760
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Credit Scores for Purchase Loans
Texas homeowners who took out mortgages in the prime
market, on average, had lower but relatively similar credit
scores to home owners in California and Florida.
• Loans taken out in California have historically had a
higher average credit score than those taken out in the
other two states. The difference in average credit score
between Florida and Texas has generally not been
significant.
• The overall trajectory in average credit scores across all
three types of loans trend upwards over the course of
the years studied. This is most evidenced in purchase
loans which do not see an credit score average dip.
• However when it comes to both types of refinancing,
the years immediately preceding the housing bubble
burst – 2003 and 2004 – see a dip in average credit
scores. This may be due to a need to refinance as
households see themselves overleveraged and want to
take advantage of favorable interest rates.
• The years following the recession experienced a spike in
average credit scores, most likely due to tightening of
credit lines in reaction to the financial crisis that struck
in 2008.
680
700
720
740
760
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Credit Scores for Cash-Out Refinancing
680
730
780
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Credit Scores for Refinancing Loans
California Not Cash Out Florida Not Cash Out
Texas Not Cash Out

Predatory Lending Regulations
The Home Ownership and Equity Protection Act, or HOEPA, was drafted in 1995 to create minimum protections for
homeowners against unscrupulous lending practices and restrictions on certain high-cost loans. HOEPA does not cover loans
to buy or build a home, reverse mortgages, or home equity lines of credit. HOEPA requires lenders selling HOEPA covered
loans to give several disclosures at least three business days before closing on the loan, which include:
• A written notice stating that the loan does not need to be finalized.
• The notice must also state that the existence of the mortgage could cause the homeowner to lose their home if the
payments are not met.
• The APR, regular payment amount (including any balloon payment), and the loan amount if refinancing. If the amount
borrowed includes credit insurance premiums, that fact must be stated. In the case of variable rate loans, the lender
must disclose that the rate and monthly payment may increase, as well as the maximum monthly payment.
HOEPA Restrictions (6)
Banned
Features
Balloon payments on loans
shorter than 5-years.
Exceptions for bridge loans
shorter than 1-year used to
buy/build a home.
Negative Amortization,
default interest rates
higher than pre-default
rates, default interest
rebates calculated by
methods less favorable
than the actuarial method
Most prepayment
penalties. There are
certain exceptions, such
as, if the lender verifies
that one’s total monthly
debt is ≤50% of monthly
income, among others.
A due-on-demand clause,
unless the borrower
commits fraud, deliberately
hides or falsifies facts,
doesn’t repay according to
the agreement terms, or
takes actions that adversely
affect the creditor’s security.
Lender
Prohibitions
Making loans based on the
collateral value of a
homeowner’s property without
considering the borrower’s
ability to pay.
Refinance a HOEPA loan
into another HOEPA loan
within the first 12 months
of origination, unless it
would be in the
borrower’s best interest.
Wrongfully document a
closed-end, high-cost loan
as an open-end loan.
(6) “High-Rate, High-Fee Home Loans”

Covered Loans: A loan is covered if it crosses one of the
statutory thresholds, of which there are generally two: one
for the Annual Percentage Rate (APR) of the loan, and one for
the total points and fees paid by the borrower in connection
with the loan.
Regulation under HOEPA: Mortgages secured by consumer's
principal dwelling where either 1) the APR will exceed by
more than 10% the yield on Treasury securities with
comparable periods of maturity; or 2) the total points and
fees payable at or before closing exceed the greater of 8% of
the total loan amount or $400.
Regulations in California: A mortgage or deed of trust
crosses the APR threshold when the APR is more than 8%
that of Treasury securities with comparable periods of
maturity. Home loans cross the second threshold where the
total points and fees exceeds 6% of the total loan amount.
Regulations in Florida: Mortgages covered under HOEPA.
Regulations in Texas: A purchase money mortgage is covered
if the total loan amount is more than $20,000 and the APR or
total points and fees exceed the applicable limits under
HOEPA.
HOEPA
Regulation
Stricter
Regulation

Asset-Based lending: Lenders make loans based on the value
of the borrower's assets, i.e., the home, without considering
the lender's ability to repay the loan, thereby allowing the
lenders to obtain borrower's houses through foreclosure.
Regulation under HOEPA: Prohibits extension of covered
loans based on collateral without regard to the consumer's
ability to repay.
Regulations in California: Lenders may not make a covered
loan without a reasonable belief that the borrower will be
able to make the schedule payments.
Regulations in Florida: Prohibits "engaging in a pattern or
practice" of extending covered loans based on collateral
without regard to the consumer's ability to repay.
Regulations in Texas: Prohibits "engaging in a pattern or
practice" of extending covered loans based on collateral
without regard to the consumer's ability to repay.
HOEPA
Regulation
Stricter
Regulation

Prepayment Penalties: Prepayment of loans often takes place as
a result of relocation or refinancing. It can sometimes hinder a
borrower's ability to refinance a high-cost loan, causing the
lender to be locked into the original loan.
Regulation under HOEPA: Prohibits prepayment penalties after
the first five years of the covered loan where the consumer has a
total monthly indebtedness greater than half the consumer's
monthly income.
Regulations in California: Lender may charge prepayment
penalties in the first 3 years of the covered loan if 1) the lender
has offered another product without prepayment fees; 2) the
lender has provided a written disclosure to the borrower on the
differences between products with prepayment fees and those
without; 3) the prepayment fees is equal to no more than six-
months, advance interest on the amount prepaid in any 12-
month period in excess of 20% of the original amount; 4) the loan
has not been accelerated due to default; and 5) the lender will
not finance a prepayment penalty with a new loan. .
Regulations in Florida: Within first 3 years, prepayment penalties
legal if the consumer has been offered another product without
prepayment penalties.
Regulations in Texas: Prohibits prepayment penalties in covered
loans.
HOEPA
Regulation
Stricter
Regulation

Balloon Payments: Balloon payments tied to high-cost loans with
short terms can be difficult for sub-prime borrowers to make,
forcing them to refinance with another high-cost loan. Most
statues prohibit payments that are more than twice as high as the
average of earlier payments.
Regulation under HOEPA: Covered loans of less than five years
may not include terms under which the aggregate amount of the
regular periodic payments would not fully amortize the
outstanding principal balance.
Regulations in California: Covered loans of less than 5 years may
not include terms under which regular periodic payments would
not fully amortize the principle. The total installments in any year
may not exceed the amount of one year's worth of payments on
the loan when the payment schedule is adjusted to account for
the borrower's seasonal income.
Regulations in Florida: Covered loans of less than 10 years may
not include terms under which regular periodic payments would
not fully amortize the principal, unless such terms reflect the
borrower's seasonal/irregular income or the loan is a bridge loan.
Regulations in Texas: Covered loans may not have any scheduled
payments twice as large as the average of earlier payments
during the first five years.
HOEPA
Regulation
Stricter
Regulation

Negative amortization: Payment schedules do not cover the
full amount of interest due, causing the outstanding principal
balance to increase. The borrower loses equity under such a
payment scheme.
Regulation under HOEPA: Covered mortgages may not
include terms under which the outstanding principal balance
will increase at any time over the course of the loan because
the regular periodic payments do not cover the full amount
of interest due.
Regulations in California: Prohibits payment schedules for
covered loans under which principal balance will increase,
unless the loan is a first mortgage and the lender discloses to
the borrower that the negative amortization provision may
add to the principal.
Regulations in Florida: Identical to HOEPA.
Regulations in Texas: No covered loan may contain a
payment schedule with regular periodic payments that
causes the principal to increase, unless the schedule is the
result of a temporary forbearance/restructure requested by
the borrower, or the loan is a bridge loan.
HOEPA
Regulation
Stricter
Regulation

Loan Flipping: Loan flipping is the practice of refinancing one
loan with a high-cost loan. The borrower may get a lower
interest rate by refinancing, but the total points and fees
associated with doing so actually make the refinancing a bad
option for the borrower.
Regulation under HOEPA: No provision.
Regulations in California: No refinancing of consumer loans
with covered loans for the purposes of refinancing, debt
consolidation, or cash out, where the new loan does not
provide an identifiable benefit to the borrower.
Regulations in Florida: No refinancing of a covered loan
within the first 18 months when the refinancing does not
have a reasonable benefit to the consumer.
Regulations in Texas: Lender may not consolidate or replace
certain low rate loans issued by a governmental or non-profit
in the first seven years unless the new loan has a lower
interest rate and points and fees, or the loan is being
restructured to avoid foreclosure.
HOEPA
Regulation
Stricter
Regulation

Credit Counseling: Borrowers who agree to sub-prime terms
and conditions could quality for prime loans, but they don't
realize it. To curb predatory lending, some advocates require
borrowers before agreeing to a high-cost loan, to seek loan
counseling.
Regulation under HOEPA: No requirement to encourage the
consumer to get counseling.
Regulations in California: Required disclosure statements
contains a recommendation that the borrower consider
seeking loan counseling.
Regulations in Florida: Required disclosure statements
contains a recommendation that the borrower consider
seeking loan counseling.
Regulations in Texas: No provision.
HOEPA
Regulation
Stricter
Regulation

Loan Packing: With high-cost loans, the premiums for credit
insurance coverage are folded into a single premium and
financed all at once by the loan. This single premium
becomes part of the principal, thereby increasing the finance
charges due.
Regulations in California: No provision.
Regulations in Florida: No provision.
Regulations in Texas: For all home loans, lenders may not
offer single premium credit disability, life, or unemployment
insurance without providing a disclosure stating that the
borrower also has the option to buy credit insurance on a
monthly premium basis.
HOEPA
Regulation
Stricter
Regulation

No Call: Some sub-prime loans allow the lender to
unilaterally accelerate the loan payments and the amount
due which can cause chances of default to the borrower.
Regulations in California: Bars covered loans that allow a
lender, in the lender's sole discretion, to accelerate the
indebtedness.
Regulations in Florida: Prohibits the lender's sole discretion
to accelerate the indebtedness.
Regulations in Texas: No provision.
HOEPA
Regulation
Stricter
Regulation

4. Tighter Restriction on Investment Properties: Speculative Markets

Tighter Restrictions of Investment Properties
A contributing factor to the growth of the housing bubble
was speculation on investment properties, many of which
were in the Sunbelt states of California and Florida, among
others. (1)
Texas, like other Sunbelt states, saw large population growth
and the construction of many housing developments. Its
housing market was not as prone to speculation as areas like
California and Florida for two reasons: natural and artificial
building restrictions.
Natural Restrictions
Unlike California and Florida, Texas’ cities are in what
economist Paul Krugman identified as “flatland.” Krugman
argues that when demand for housing rises in in-land
metropolitan areas, those cities are able to sprawl more,
which means housing prices are determined largely by
construction costs.
California and Florida on the other hand are in what
Krugman deems the “Zoned Zone”, areas along the coast
with high population densities along with land-use
restrictions. In essence, coastal cities like Los Angeles,
Miami, and San Francisco which are restricted in their ability
to sprawl by natural features like oceans and mountains in
California, and swamps in the case of Florida. (3)
Those states have a harder time building new homes, placing
upward pressure on housing prices. This in turn causes
people to believe that housing prices will continue rising
making them more likely to spend and leverage themselves
more in hopes of amassing large capital gains which raises
prices thus leading into a circle which creates a bubble. (3)
“In states that experienced the largest housing
booms and busts, at the peak of the market almost
half of purchase mortgage originations were
associated with investors. In part by apparently
misreporting their intentions to occupy the
property, investors took on more leverage,
contributing to higher rates of default.”
Federal Reserve Bank of New York
Staff Reports
“when the demand for houses rises, Flatland
metropolitan areas…just sprawl some more. As a result,
housing prices are basically determined by the cost of
construction.”
Paul Krugman
(1) “’Flip this House’: Investor Speculation and the Housing Bubble,”
(3) “That Hissing Sound”

Artificial Restrictions
Further compounding this, are artificial restrictions on the ability
to develop land, often found in the form of land use regulations
that are aimed at promoting “smart growth.” Though smart
growth policies do take environmental restrictions and other
factors into account, economists on the right and left both agree
that in limiting the available land for development, smart growth
regulations contribute to the creation of an environment in
which speculation can take root.
So not only is Texas a part of the “Flatland” region which allows
for cities to continue growing outward, but its relative lack of
land use regulations allowed it to avoid artificial restrictions on
build sites that burdened other flatland regions affected by the
housing bubble, such as Nevada and Arizona.
After all, Texas, like Florida, Nevada, and Arizona, saw large
population growth in the years leading up to the housing crash.
Unlike the latter states, however, Texas’ cities did not employ
large land use restrictions and did not see an artificial scarcity-
driven spike in home prices, and thus, did not see the
subsequent collapse after housing prices fell.
“[S]peculators were not drawn to the
metropolitan areas of Texas. This is
because speculators or “flippers” are not
drawn by plenty, but by perceived scarcity.
In housing, a sure road to scarcity is to
limit the supply of buildable land by
outlawing development on much that
might otherwise be available.”
Newgeography.com

Works Cited
1. “’Flip this House’: Investor Speculation and the Housing Bubble,” Liberty Street Economics, December 5, 2011
2. “Real Estate Investors, the Leverage Cycle, and the Housing Market Crisis,” Federal Reserve Bank of New York Staff
Reports, September 2011
3. “That Hissing Sound,” New York Times, August 8, 2005
4. “How Texas Avoided the Great Recession” Newgeography.com, July 20, 2010
5. “A Texas Mystery,” Mother Jones, April 8, 2010
6. “High-Rate, High-Fee Home Loans” Federal Trade Commission, January 2013

Conclusion
Texas Conservatism
The Texas Homestead Laws were designed in 1839 to
encourage home ownership. The homestead exemption
protects homeowners from losing their houses to
foreclosures due to debt, and therefore, exempts a
house from seizure by creditors. Since Texas real estate
laws have been designed to protect homeowners, home
equity loans were not even legal in Texas until 1997.
In fact, many lending laws in Texas are more
conservative that most other states. It is believed that
that those conservative laws shielded Texas from the
worst of the effects of the housing crisis.
Data analysis on key economic factors, such as
socioeconomic demographics and housing market
demographics, show that Texas did, indeed, weather the
recession more successfully than other states. The
economy in Texas wasn’t entirely immune to the
downturn, but was able to rebound more quickly and
with less volatility.
The purpose of this study has been to assess how much
of Texas’ success can be attributed to conservative
lending laws. To do that, this report analyzed which laws
were more conservative than other states, and how
those laws translated to actual lending practices by
using data on different types of refinance loans.
There are four major aspects of Texas lending laws that
are administered with greater regulatory oversight.
Analysis for these four categories of lending laws
provide the basis for the conclusions of this report. The
four laws include: 1)Texas’ 80% Cap and Other Lending
Laws, 2)Texas’ Prime Loan Market, 3)Predatory Lending
Regulations, and 4)Tighter Restriction on Investment
Properties in Speculative Markets.
Conclusions
Although no single factor is responsible for the housing
market collapse, or the greater recession that followed,
correlation does exist between conservative lending
laws and Texas’ positive economic performance
throughout the recession.
It is beyond the scope of this study to determine
causation of such variables. However, there is strong
evidence that shows the existence of such a
relationship. With conservative laws in place, Texas
performed with greater economic efficiency and
mitigated housing volatility.
It can be said with confidence, that conservative lending
laws in Texas played a significant role in the economic
success that the state experienced throughout the
recession.

About AE
AngelouEconomics
AngelouEconomics partners with client communities
and regions across the United States and abroad to
candidly assess current economic development realities
and identify opportunities.
“Our goal is to leverage the unique strengths of each
region to provide new, strategic direction for economic
development”
As a result, AngelouEconomics’ clients are able to
diversify their economies, expand job opportunities and
investment, foster entrepreneurial growth, better
prepare their workforce, and attract ‘new economy’
companies.
To learn more, visit www.angeloueconomics.com
Project Team
Angelos Angelou
Principal Executive Officer
William Mellor
Director of Project Operations
William Bean
Research Analyst
Rahima Housaini
Research Analyst
Markose Butler
Research Analyst

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