Now We’re Blaming Lending Laws?

The WSJ tries—and fails—to tie strict laws to slow growth

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%.

The story turns to Vermont’s slower growth in homeownership rates, but runs into the problem that Vermont’s rate is already sky-high. Growth in homeownership would naturally be slower. There’s a limit to how many people can own homes, as we’ve learned.

Vermonters didn’t see the same sharp rise in home ownership that swept much of America in recent decades, which, despite the bust, buoyed economic growth. And while part of the increase in U.S. home ownership reflected excesses in lending and borrowing, some of it represented real progress in the form of more Americans achieving the cherished goal of getting — and keeping — a home of their own. By 2007, the percentage of owner-occupied households as a whole reached 68.1%, up from 63.9% in 1990, according to U.S. Census data. Vermont started at a higher base but saw ownership rise just 1.1 percentage points in that span, to 73.7%.

73.7% is out of sight. Small wonder it didn’t grow much.

Not to pile on, but it’s worth noting that one of the people the story says were denied credit during the boom years thinks it was probably a good idea that she and her husband didn’t get a loan while they were loaded up with credit-card debt:

Ms. Shields’s husband died last year. She continues to meet her monthly payments. “With my husband gone, I really think I would not have been able to keep the house” under earlier loans they had considered, she said.

Luckily, her mortgage story has a happy ending. Denied the benefit of a Pick-A-Pay 2/28 Interest-Only ARM or some other mortgage-industry dreck during the boom years, she got her credit score up and qualified for a good loan from (drumroll)—the government!

Ms. Shields and her husband went to a nonprofit mortgage-assistance program, NeighborWorks. There, a counselor guided them through paying down their debt and fixing their credit report. They were frustrated at missing out on houses they liked and tempted by mortgages they saw advertised on TV and the Internet, but heeded their counselor’s advice to hold out for a loan they could afford.

Eventually they raised their credit score to 670, says their counselor, Harry Sanderson. In 2006, he helped the couple buy a three-bedroom, ranch-style house on a quarter-acre lot, through a Department of Agriculture program that offers mortgages to lower-income households in rural areas.

Strict lending laws + socialized banking=Growth engine!

Why did this story have to try to tie the state’s growth rate to Vermont’s lending laws?

A better idea would have been to write a story with this headline…

Vermont Mortgage Laws Shut the Door on Foreclosures

…and call it a day.

Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.