Twenty years ago, Texas became the last state in the union to legalize the home equity loan, allowing people for the first time to use their own homes as collateral. But lawmakers also kept tight restrictions on the loans, which saved Texans from the excesses that contributed to a housing bust that nearly brought down global economy.
Across the country, homeowners borrowed against the value of their properties to supplement their incomes as a bubble grew, piling on debt that became unsustainable when the market tanked. Texas' limits on home equity loans were widely credited with saving the state from the worst of the foreclosure crisis.
Now, a coalition of lenders and Realtors is trying to loosen the rules on those loans in ways that homeowner advocates say could get borrowers in trouble.
"It's a wolf in sheep's clothing," says Charlie Duncan, a fair housing planner at the advocacy nonprofit Texas Low-Income Housing Information Service. "Make no mistake, more families will lose their homes because of the irresponsible lending this amendment will allow."
The proposed changes will be on the ballot this fall as a constitutional amendment, having passed unanimously through both houses of the Legislature. (The section of the Texas Constitution that deals with home equity loans is the longest in the entire document, spelling out all terms and regulations rather than leaving them to statute, because of Texas' historic emphasis on property rights.)
In the ballot language, the changes seem innocuous, but may carry risk.
One provision would expand the list of entities able to make home equity loans from primarily banks to savings and loan companies, mortgage bankers, subsidiaries of banks and credit unions.
Another provision lowers the cap on fees that lenders can charge homeowners from 3 percent of the loan to 2 percent. But the change would likely would increase the amount borrowers end up paying by shifting most of the large expenses in closing costs — surveys, appraisals, and title insurance — outside the cap. In that way, the fees paid by homeowners could rise to 4 to 5 percent of the loan, according to Chip Lane, a Houston attorney who represents homeowners in foreclosure cases.
Banks say the change is necessary to make it worth it for them to do smaller loans. Their profits took a hit in 2013, when the Texas Supreme Court overturned interpretations by the Texas Finance Commission that allowed lenders to add expenses on top of the 3 percent cap.
State-chartered banks how hold about $6.6 billion in home equity loans, which is down significantly since 2009. (That doesn't include loans made by national banks, which don't have to break out that loan category by state.)
"There was a hesitance on the part of lenders to make smaller home equity loans," says Steve Scurlock, executive vice president of the Independent Bankers Association of Texas. "What we tried to do is get the banks back in the game, and get those homeowners who may not have a $2 million home to have an ability if they needed to borrow $20,000 or $30,000 a bit more opportunity to do it."
But Robert Doggett, a lawyer who has represented homeowners for decades and led the litigation that resulted in the 2013 Supreme Court decision, says the change would make these loans more expensive, and prompt lenders to pressure homeowners into taking out loans they don't need.
"Lender fees are not about simply bilking homeowners out of money," Doggett says. "Up-front fees are very dangerous because they incentivize bad loans, they give loan officers and bad originators a reason to make up stuff so the loan is approved."
Banks shouldn't need to make money on up front fees, Doggett says, because interest on the loan generates a steady income, as long as lenders keep them on the books. Many lenders instead sell those loans, reducing their incentive to make sure the loan is sound in the first place, especially if they've already been paid well at closing.
Advocates are also alarmed by a provision that would allow homeowners to convert their home equity loans into regular mortgage loans, which have lower interest rates, but fewer protections.
In order to foreclose on a home equity loan, a lender must get a ruling from a judge, and can't go after a homeowner's other assets if the value of the property doesn't cover the amount owed. Lenders can foreclose on regular mortgage loans more quickly and easily, and can claim the borrower's other assets if necessary in order to be paid back in full.
When it originally helped negotiate the legalization of home equity loans back in 1997, the Texas Association of Realtors had insisted that home equity loans should always have a thicker layer of protections, because a rash of foreclosures could be bad for the entire market. This year, they joined lender groups to allow homeowners to convert their home equity loans into regular mortgage loans.
"In order to have that protection, you pay a premium," says Daniel Gonzalez, legislative director for the Realtors' association. "We want to make sure we're not standing in the way of homeowners getting lower interest rates. What this amendment will do is simply give folks an option."
But advocates worry that sometimes people under financial stress will choose to convert their home equity into conventional loans loans for lower interest rates, and not realize that they could more easily lose their properties if they fell behind on payments.
"If you're a regular homeowner in Texas, you're not going to know that you've got all these protections with a home equity loan," says Lane, who testified against the amendment in committee. "If they come along and say 'I can save you $200 on your monthly mortgage payment,' you're going to do it."
One important part of the law, limiting the amount of the loan to 80 percent of the value of the home, will stay put.
Along with the Realtors and community banks, the amendment is supported by JPMorgan Chase, Wells Fargo, the Texas Credit Union Association, the the Texas Land Title Association, the Texas Farm Bureau and Texas Mortgage Bankers Association.
Several of those organizations have been top donors to state Sen. Kelly Hancock, a Fort Worth Republican and chairman of the Senate Business and Commerce Committee, and state Rep. Tan Parker, R-Flower Mound, chairman of the House Investments and Financial Services Committee. They were the lead sponsors of the bills underlying the constitutional amendment.
Hancock declined to comment. Parker said the Legislature approved the bill "as as a result of Texans sharing their challenges concerning the current home equity law" with him an his colleagues.
Correction: An earlier version of the story included data that reflected only home equity loans issued by lenders regulated by the Office of the Consumer Credit Commissioner. The story has been updated to include data from state-chartered banks.
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