I am a little surprised to see myself write this, but perhaps all states should be more like Vermont -- when it comes to their banks' mortgage origination practices. A fascinating article in today's Wall Street Journal explains that in Vermont, the mortgage industry has felt no pain. But it also didn't see the kind of expansionary growth that now troubled states like California and Florida saw. Vermont's style for mortgage regulation might bother some, but the practices should be common sense for banks anyway.
The WSJ's explains:
Vermont's strict mortgage-lending laws largely prevented the state's residents from signing the types of dubious home loans written in other markets across the country. Its 1990s legislation made mortgage lenders warn customers when their rates were relatively high, and put the brokers who arranged loans on the hook if their customers defaulted. Now, by at least one measure, the state has the lowest foreclosure rate in the U.S.
I don't have much problem with the idea that mortgage brokers should have some skin in the game. This likely would have prevented their origination of so many wacky subprime mortgages in other states. I also don't see much harm in providing those who apply for mortgages with more information about how their rates compare to industry averages. The regulations described above seem pretty uncontroversial to me.
But the some lament the effect of these regulations:
It came at a cost. The rules also kept some Vermonters like Ms. Todd from buying homes, keeping this rural corner of New England on the sidelines of the housing boom and the economic bonanza that came with it. Vermont's 10-year growth trails the national average.
They began with Ms. Todd's story. She wanted a mortgage, but was self-employed. Banks weren't comfortable with her "unreliable" income stream. She also did not want to pony anything up for a down payment. While they portray her story as a problematic one throughout the article, in the very last sentence, she admits that conservative bank policies were right to force her to wait until she could more easily afford a mortgage. She eventually got one, when she could actually afford it:
"Five years ago if I'd gotten the loan," she said, "I would have been in over my head now."
I would point anyone annoyed with strict requirements for obtaining a mortgage to the fact that getting a mortgage is a privilege, not a right. This woman clearly did not need to live on the streets because she was self-employed; she was just forced to rent. Surely, there are worse fates than renting. After all, while renting, she saved up and eventually a bank was happy to give her a mortgage with a hefty down payment.
It's interesting to compare Vermont and Florida, because the two states have something in common: two of their major industries are agriculture and tourism. The two states also have a very significant difference: their attitude towards real estate. I explained all of Florida's problems yesterday. Vermont can't relate.