The WSJ had an interesting story on how Vermont’s strict lending laws have kept foreclosures down. But it goes off the rails when it tries to assert the same laws have impeded the state’s economic growth.
Vermont Mortgage Laws Shut the Door on Bust — and Boom
Maybe the lending laws themselves did dampen the state’s growth rate. The problem is, the story presents no evidence to support the claim. As we’ll see, it merely notes that Vermont has grown slower (though, as the story itself notes, only slightly slower over the long term) than the rest of the country and that it has strict lending laws. But that’s a long way from saying one caused or even contributed to the other.
This a problem because the mortgage industry would have us believe that there is some kind of price to be paid for shutting down the spigot of mortgage trash foisted on bamboozled borrowers via boiler rooms fueled by a culture that countenanced methamphetamine-taking, beer-keg-tapping, sex-trading and so much more. This juxtaposition of regulated lending on one hand and growth on the other is an exercise in false balance.
We can assume that too-tight lending laws would have a negative effect on a state’s economic growth. But we know that too-loose underwriting would also have a net negative effect. What we don’t know from this story is what effect Vermont’s lending laws had.
Let’s take it from the top:
The piece starts with an anecdote about a self-employed landscaper denied a mortgage during the boom years. It then notes that Vermont’s stricter laws left the state with one of the lower foreclosure rates in the country. But:
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.
I suppose if a loan is approved, the cash transfer plus the home purchase in themselves add to a state’s growth rate in the shortest possible term. But if Ms. Todd had defaulted on her loan, the net effect would be negative, thus a strict mortgage law might have actually added to growth. In any event, anecdotal stories of loans denied to individuals—and there are only two of them—aren’t by themselves evidence that the mortgage laws hampered growth.
Indeed, the story, to its credit, includes other, much more likely reasons for a slower growing Vermont—namely its anti-development laws and culture.
Vermont’s mortgage laws are just one reason it skirted a decade of housing boom and bust.
With a population of 620,000 that draws significant revenue from agriculture and tourism, Vermont has long sought to check development of its forested mountains and lush valleys. Its 1970 land-use law sets a high bar for big new projects or subdivisions. Local planning boards have a history of limiting speculative development. Fiscal conservatism runs deep, too, among its many small community banks.
A local developer supports this thesis:
Developer Jeff Davis, co-owner of J.L. Davis Realty near Burlington, says that in the three years it took him to get permits to begin work on a residential development on Lake Champlain, the market had already slowed. But he conceded that at least Vermont’s banks are healthy. “Credit is available,” he says, “because there’s not a lot of demand for it.”
It took him three years to get permits, the story says, not a loan for himself or his customers.
And the state has relatively slow population growth. I don’t know whether the slow-growing economy slowed population growth or vice verse. But I don’t see where mortgage lending fits in.
Vermont, with its fairly stable population, saw its economy grow relatively slowly — its aggregate state product up 2.2% in 2005, 1.3% in 2006 and 1.7% in 2007. By comparison, Arizona and Nevada, which enjoyed population explosions, had economic growth rates as high as 8% during those years. But by last year, those two boom states had both contracted while Vermont continued to grow, at 1.7%.