New research from UGA and Miami University examines the real-world effects of relaxed mortgage lending on an economy both before and after tight restrictions were lifted.
The findings help explain how a 1997 amendment to the Texas Constitution that loosened restrictions on mortgage lending boosted statewide retail sales. It also provided evidence about the importance of using housing as collateral to relax constraints on borrowing-what economists call “the collateral effect” of the housing market.
The research was published in the American Economic Journal: Macroeconomics.
“Since Texas became a state in 1845, they’ve always had an attitude of protecting the homestead, going back to the days of Stephen F. Austin. There was an idea you can’t foreclose on any loan because you’d be taking people’s homes away,” said William Lastrapes, economics professor in the Terry College of Business and co-author of the research. “This runs deep in their history. So it took them from 1845 until 1997 to actually make a change to allow people to borrow on their home equity for general spending purposes.”
When the amendment passed, Texas homeowners suddenly had the same credit freedoms as the rest of the nation. They could borrow against the equity in their houses to do things like buy a new car, go on a trip or pay for their children’s education.
It also provided Lastrapes and co-author Chadi S. Abdallah, a former UGA graduate student and current assistant professor of economics at Miami University, with real-world data from a “natural experiment.” By examining the Texas economy before and after the amendment passed and making comparisons to surrounding states’ economies, the researchers were able to isolate what effect the amendment had on statewide consumer buying.
“What we learned is that borrowing restrictions mattered. Policymakers in the state thought they were doing the right thing by preventing foreclosures, but when they relaxed those restrictions, people responded and increased their spending,” Lastrapes said. “After looking through the data, we found that the amendment had an important effect on consumer behavior: Retail spending in Texas was 2 to 3 percent higher than it would have been had the amendment not passed.”