A Texas Mystery

Last week Alyssa Katz wrote a piece for Big Money noting that Texas had mostly escaped the housing bubble. She attributed this primarily to a Texas rule that prohibits homeowners from taking out home equity loans that total more than 80% of a home's appraised value. I linked approvingly, but suggested that Texas's rule against prepayment penalties, negative amortization mortgages, and balloon payments had actually been more important.

As it turns out, I was wrong. In a followup, Katz explained that although Texas does indeed have these rules, they only apply to "high cost" loans — which means only loans that are less than $200,000 and have sky-high interest rates. Virtually no loans qualify under that standard, which means the rules against prepayment penalties and so forth were mostly meaningless.

So what's really going on? The restriction on HELOCs certainly helps explain why Texas had a lower delinquency rate than most of the country after the housing bubble burst. One of the sources of delinquency, after all, came from people who used their homes as ATM machines, figuring they could always refinance before the bills came due. When home prices started to fall, that option was closed and they were left with a ton of debt they couldn't pay off.

But although the HELOC rule explains Texas's lower delinquency rate after the bubble imploded, the really mysterious thing is that Texas somehow escaped the housing bubble in the first place. Why did housing prices in places like Dallas stay relatively sane even while prices in similar cities like Phoenix and Las Vegas were heading to the moon? HELOC restrictions don't really explain that. Via email, Katz pointed me to a paper by Anil Kumar, an economist at the Dallas Fed, that added some data — and some more mystery — to the picture.

Kumar notes that median household income in Texas is less than the national average and the use of subprime and Alt-A loans was higher. But take a look at the chart on the right for subprime loans. As Kumar says:

On average, Texas subprime borrowers have more equity in their homes than those in other states, providing larger cushions against default. The state relies less on exotic mortgages, such as interest-only or negative-amortization loans. Texans with subprime loans are also less likely to take out adjustable rate mortgages (ARMs), which are subject to sharply higher monthly payments when interest rates reset.

But why? Why did Texas largely avoid the "exotic mortgages" that fueled the subprime boom in the rest of the country? Why did Texas subprime borrowers — who were, on average, poorer than than rest of the country and had lower FICOs — apparently make bigger down payments?

According to Katz, Kumar attributes this to two other rules: (1) Texas has a 12-day waiting period following a mortgage application during which a borrower can back out without penalty, and (2) borrowers have to receive an itemized disclosure that includes points and fees. Kumar: "Lenders in the state are held to a higher level of transparency in their dealings....If regulation is lax they can be predators and slip exotic mortgages through the back door if a borrower doesn’t understand."

So does this explain how Texas avoided the housing bubble? There's no way to say for sure, but I'm skeptical. Can a 12-day waiting period really be enough to put the kibosh on exotic mortgages? It doesn't seem like enough — and anyway, my guess is that it was the bubble that drove the growth of exotic mortgages, not the other way around. So we're still left with a question: why didn't the housing boom ever take hold in Texas even though it seems to have all the usual sunbelt characteristics that drove the bubble in places like California, Arizona, Nevada, and Florida? It's still a bit of a mystery.

UPDATE: A possible answer here. Texas might not be the mystery at all. Maybe Phoenix and Las Vegas are.

Steve Benen summarizes the latest news about Sen. John Ensign starting to lose support within the GOP caucus and then sighs:

I've largely given up trying to figure out why major news outlets aren't taking this seriously. We're talking about a controversy featuring a sitting senator's adulterous affair, plus alleged ethics violations, hush money, and official corruption. An ongoing FBI investigation appears to be heating up, and by some accounts, expanding, and yet, no media frenzy.

It is sort of mysterious, isn't it? I sort of get the fact that Ensign is skating on his affair. That happens all the time. But then there's the fact that Ensign pretty clearly paid out hush money to his lover's husband, funneled through his parents in $12,000 chunks to avoid having to report it to the IRS. And the fact that he just as clearly tried to shake down some local businesses to provide a job for the guy. Plus the fact that apparently he's a total douchebag and everyone hates him. Seems like a great story!

But it goes to show the power of the news cycle. Basically, unless you're as agenda-driven as Fox News, it's hard to keep a feeding frenzy going unless you have something new to report. And there's just not enough new stuff to report on Ensign. He had an affair, he evaded IRS reporting rules, he tried to use his influence to get his lover's husband a job, and he's a douche. It's old news. What have you got for me that's fresh?

From Rep. Steve King (R–Iowa), explaining why he wants the GOP to support full-on repeal of healthcare reform rather than the wimpier "repeal and replace":

I didn't want to confuse the message on repeal by adding the word "replace" because there's a question mark that hangs on "replace," which is, "What would you replace it with?" and then the discussion gets drug down [sic] into something that all Republicans are not going to agree on.

Well, points for honesty, I guess. It's not often that congressmen just flatly admit that the reason they don't want to offer up a plan isn't because they think the status quo is hunky dory, but because an actual plan might piss off some people. Kudos to King for being willing to admit this.

Scott Payne is unhappy with my approach to regulating the financial sector:

Kevin Drum [] has chimed in on the idea that breaking up America's largest banks is unfathomable and that suggesting it as a course of action is the equivalent of arguing for the status quo. Like Kevin, I’m out of my league getting into the specifics of financial reform, but it is striking to me how much the arguments that are being proffered by mainstream liberals on this topic are beginning to mirror their approach to health care reform. It seems like you can’t swing a credit default swap without hitting some piece of writing where a respected liberal voice is saying,

Yes, of course we would all like A, but A is just not in the stars so we’ll aim for B. And while B is vastly inferior to A, if you demonstrate the audacity to criticize us for doing B instead of A because B won’t really work, then you are clearly not interested in any real reform in the first place.”

Meanwhile, there is polling available that demonstrates that the public is interested in A (be it breaking up the banks or instituting a public option) and that an honest effort at achieving A would actually bolster support for Democrats’ efforts overall. This is even more the case for financial reform than it was for health care reform.

I've heard this same criticism from a couple of different places, so it's worth explaining why I think this is 180 degrees wrong. It's roughly based on the idea that since people like Kevin Drum were willing to compromise on healthcare, their position on financial reform must be a sellout too. But it ain't so.

It's true that I think trying to break up big banks is politically unfeasible, but that's not the main reason I'm lukewarm on the idea. The main reason is that I think it's a second-best idea. By far the most fundamental issue in the 2008 meltdown was excessive leverage and inadequate capital. It wasn't the only problem, but it was absolutely the core one. And I want to focus my energy on facing up to the biggest, most fundamental problem, not a side issue.

I've talked about leverage enough that I don't think I have to repeat my arguments about it here. But what about bank size? Why do I think it's a side issue? There are two reasons, based on the two big arguments for limiting bank size.

First is the argument that big banks are dangerous and the federal government will always be on the hook to rescue them if they go bad. Which is true. But look at the U.S. institutions that caused the most trouble during the financial meltdown. Bear Stearns and Lehman Brothers were relatively small. They wouldn't have been affected by an asset cap. Mortgage specialists like Countrywide and IndyMac weren't very big either. Fannie Mae and Freddie Mac were GSEs. Reserve Primary was a money market fund. The monolines were relatively small, and AIG FP was a small branch of an otherwise garden variety insurance company.

Now, there were two big banks, Citi and Bank of America, that got in trouble and needed rescuing. But overall, size simply wasn't a leading indicator of systemic trouble. Leverage and interconnectedness were. That's what we should be focusing on.

The second argument is one of political economy: big banks have too much lobbying power. We'll never get the financial sector under control as long as gigantic financial firms are around. But this really doesn't hold water. The most common asset cap I've seen proposed is something on the order of $500 billion. How many banks would be affected by this? Basically, four: Citi, BofA, JPMorgan Chase, and Well Fargo. Depending on how the rule was written, maybe Goldman Sachs and Morgan Stanley would have to trim down a bit too. But that's it.

Now think about this: do you really think the power of Wall Street literally depends on these four firms? It doesn't. It depends on the size and profitability of the entire sector. If, instead of those four gigantic banks, we had a dozen big banks, would the sector have any less political clout? Would it have fewer lobbyists? Would it earn less money? Would its campaign contributions be any less? No, no, no, and no.

I don't want to take this argument too far. Breaking up big banks might be a useful thing to do. Even if it's not where the main risk of systemic damage resides, it's where some of it resides. And even if the political power of Wall Street is mainly based on the size of the financial sector as a whole, having a few gigantic players might magnify that power. On balance, limiting bank size might be a good idea.

But if you want to reduce systemic risk, limiting leverage is far more crucial. And if you want to reduce Wall Street's political power, limiting its astronomical earnings is key — and you do that by limiting leverage broadly and deeply. It's not the only thing you do, but it's the big one.

This is an important argument. I think that people who focus on bank size are mistakenly picking something that seems like a quick and easy solution instead of focusing on the one thing that the financial sector really fears: serious limits on their ability to make money via massive leverage. It's more complicated than "Break up the banks!" and it's harder to rally the troops around, but it's the big battleground. Breaking up Citigroup would be a consolation prize by comparison.

California will vote on an initiative this November to legalize marijuana. It might even pass. But it turns out that the pot growers of Humboldt County are having second thoughts about the whole thing:

Recently, "Keep Pot Illegal" bumper stickers have been seen on cars around the county. In chat rooms and on blogs, anonymous writers predict that tobacco companies will crush small farmers and take marijuana production to the Central Valley. With legalization, if residents don't act, "we're going to be ruined," said Anna Hamilton, a radio host on KMUD-FM (91.1) in southern Humboldt County.

....Legalization could take many forms. But the conventional wisdom here is that fully legal weed might fetch no more than a few hundred dollars a pound, as more people grow it and police no longer pull up millions of plants a year. Illegal marijuana "is the government's best agricultural price-support program ever," said Gerald Myers, a retired engineer and former volunteer fire chief who moved to the county in 1970. "If they ever want to help the wheat farmers, make wheat illegal."

I guess pot cultivation will be a little less fun when it becomes just another business. On the other hand, surely there's a benefit to being able to go to sleep each night not worried about DEA agents busting down your door and hauling you off to prison?

The End of an Era

"I’m no expert on American politics," says Tom Friedman, "but I do know something about holes." A Freudian slip? Who knows. But he's pretty much right about this:

If you step back far enough, you could argue that George W. Bush brought the Reagan Revolution — with its emphasis on tax cuts, deregulation and government-as-the-problem-not-the-solution — to its logical conclusion and then some. But with a soaring deficit and a banking crisis caused by an excess of deregulation, Reaganism has met its limit. Meanwhile, President Obama’s passage of health care reform has brought the New Deal-Franklin Roosevelt Revolution to its logical conclusion. There will be no more major entitlements for Americans. The bond market will make sure of that.

In other words, both major parties have now completed their primary 20th-century missions, first laid down by their iconic standard-bearers. The real question is which party is going to build America’s bridge to the 21st century — one that will strengthen our ability to compete in the global economy, while practicing much more fiscal discipline.

Actually, healthcare reform isn't done yet, but point taken. Instead of being a big battleground, it's now likely to evolve steadily into an Americanized version of European national healthcare, and that's basically the final big brick in the New Deal/Great Society wall. Likewise, communism has been defeated and tax cutting has been taken about as far as it can be, and conservatives have been flailing for years to come up with something new to add to that. Right now, they're still flailing.

The rest of Friedman's column is sort of an uninteresting mishmash, but at least it gets at an interesting topic. Conservatives ran out of relevant ideas several years ago and their response to that hasn't been pretty. Liberals aren't there yet, but they could be in a few years. It's worth some thought now and again about what the next chapter is going to look like.

Ah, the American public. God love 'em. The Economist asked if they'd rather tackle the federal deficit by cutting spending or raising taxes, and the runaway winner was cutting spending, by a margin of 62% to 5%. So what are we willing to cut? Answer: pretty much nothing.

As you can see, there wasn't one single area that even a third of the country wanted to cut back on. Except — hold on there! Down in the middle of the table. There is one area that everyone's willing to trim: foreign aid. Good 'ol foreign aid. A category that, as Roger McShane dryly points out, "makes up less than 1% of America's total spending."

Beyond that, there were only four areas that even a quarter of the population was willing to cut: mass transit, agriculture, housing, and the environment. At a rough guess, these areas account for about 3% of the federal budget. You could slash their budgets by a third and still barely make a dent in federal spending.

I suppose one of these days everyone's going to have to figure this out. Apparently no time soon, though.

Does yesterday's court ruling in Comcast v. FCC mean that net neutrality is dead unless Congress steps in with new legislation? After reviewing the details of the court's ruling, David Post weighs in:

So what does this portend for net neutrality rules? Can the Commission proceed with its rulemaking efforts along those lines, or does it need some additional statutory authorization from Congress before it can do so? That’s the million dollar question, and I’m not sure that anyone can say for sure at this point what the answer is. There are (at least) two good arguments the agency might rely on to support that rulemaking.

 First, it can change its mind about the classification of Internet services. If Internet service were classified as a “telecomm service,” there would be no doubts about the FCC’s regulatory authority. The Supreme Court has just recently endorsed the view that the agency can change its mind in matters such as this (FCC v. Fox), as long as it does so in a reasonable manner and explains why it has done so.

The other possibilities are discussed in part IV(B) of the Court’s opinion. There are a number of statutory provisions that might well have supported the FCC’s actions here: sec. 706 (which provides that the Commission “shall encourage the depoloyment on a reasonable and timely basis of advanced telecommunications capability to all Americans . . .”), sec. 201(b) (which allows the commission to regulate common carrier charges, which plausibly could have been affected by Comcast’s actions insofar as they might have shifted traffic to other carriers). But in both cases, the Court found that the FCC had waived those arguments by not presenting them in the Comcast Order itself. That, of course, may provide an opening, in any future proceeding, for the Commission to be a little more careful about finding, citing, and explaining its authority before acting, and might provide the agency a way out of this apparent jurisdictional conundrum.

This sounds like (relatively) good news. The first best option is for Congress to write net neutrality regulations into the law, but that's been shot down enough times over the past few years that it seems unlikely to happen anytime soon. The second best option, then, is for the FCC to figure out a different legal justification for imposing the rules itself. Post's read of the opinion seems to suggest that this is quite feasible.

People have making a lot of strong claims for the wonderfulness of the iPad over the past week, but nobody has yet claimed that it will help you live longer. That's kind of surprising, when you stop to think about it, but today Dave Munger finally fills this promotional void. Note, though, that there's more than just an iPad itself involved. There's also a couple of old two-by-fours and a bit of sawing and drilling. You can see Dave's life-extending iPad innovation here.

Crossing the Street

I thought this short CNN video was pretty interesting. I confess that I'm a little mystified that this cost $7.6 million, but apparently it was money well spent. It just goes to show that sometimes small (but expensive!) things can have a very big impact.