Tighter Mortgage Rules Mean Fewer Defaults

One of the primary causes of the spectacular decline in housing prices, according to real estate analysts, was lending money to borrowers with poor credit and no steady income. When times got tough, the borrowers couldn’t pay back the loans, which were made on the assumption that home prices would continue to go up. A tidal wave of foreclosures began when the opposite happened, as many homeowners found themselves with rising interest rates on adjustable-rate mortgages coupled with homes worth less than what they owed on them.

President Obama has called for tighter mortgage regulation to prevent future real estate busts. One model for reform could be Vermont, which has strict lending laws and foreclosure rates far below the national average. Some critics, however, claim that the price of tougher laws is a rein on economic growth. Vermont did miss out on the heady growth rates that boom states enjoyed, but it also has had relatively stable home prices and foreclosure rates that are among the lowest in the nation. In July, just one in every 28,300 housing units in Vermont was in some stage of foreclosure, compared to a boom state like Nevada, where one in every 56 homes was in the process.

Vermont mortgage laws require lenders to tell borrowers when the rates they are offering are substantially higher than those offered by competitors. The legislature also passed a law that outlines a mortgage broker’s fiduciary responsibility to the borrower rather than the lender. Brokers must shoulder some of the burden if the loan goes south. As a result, only 5.8% of the outstanding loans in Vermont are categorized as subprime, about half the national average of 11.3%, and compared to rates of 15.7% in Florida and 12.5% in Arizona.