Home equity: Mortgage finance

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Issue
When it comes to home-equity lending, Texas has some of the most conservative homeowner protections in the country. Key among these provisions is the requirement stipulating a home-equity loan may not exceed 80% of the market value of the homestead (80% LTV). Such laws allow ample access to capital while at the same time ensuring homeowners do not incur excessive debt. These legal measures helped insulate Texas from the recession that followed the 2008 housing bubble.

What does this mean for the real estate industry?
Some states allow for home-equity loans upward of 120% loan-to-value (LTV), creating a situation where homeowners become instantly upside down because they owe more to the bank than their homes are worth. When real estate values dipped in these states, many homeowners walked away from their obligation. Foreclosures hurt the overall real estate market and lower home values. The current law allows property owners ample access to the built-up equity in their home.

The Texas REALTOR® position
The Texas Association of REALTORS® supports a few select proposed changes related to home-equity loans:

  • Redefine what is and is not included in the calculation of the 3% cap on fees associated with a home-equity loan
  • Allow for an alternative in refinancing a seasoned home-equity loan with a purchase money loan into one loan with one rate and term
  • Maintain the $4,000 draw requirements on home-equity lines of credit (HELOCs) and increase the 50% equity provision to 80%—same as in a home-equity loan
  • Allow farm and ranch property owners to acquire home-equity loans while maintaining the agricultural valuation of their properties
  • Make technical changes in the Texas Constitution to ensure out-of-date terminology is updated. In addition, the Texas Association of REALTORS® opposes moving from the Texas Constitution to the Texas Finance Code the notice that a home-equity loan may not close before 12 days after a borrower submits a loan application to the lender or before 12 days after a borrower receives the notice.

Legislative outlook
Some lawmakers will seek to dilute the conservative constitutional protections afforded to Texas homeowners. There may be some attempts to pass a joint resolution amending these consumer protections; however, most lawmakers agree that these protections helped Texas avoid much of the national foreclosure crisis.

Historical perspective
In 1997, the Texas Association of REALTORS® was very involved in passing a constitutional amendment allowing Texans access to the equity in their homestead. For more than 140 years, Texas did not allow home-equity loans because of the possible repercussions from defaulting on the loan.

Since 1997, some lender groups have tried to change the home-equity provisions of the Texas Constitution to allow a refinance of a home-equity loan to a conventional loan. Currently, once a loan is designated a home-equity loan, it will always be a home-equity loan and subject to all the consumer protections outlined in the Texas Constitution.

In 2003, Texas voters passed constitutional amendments which allowed homeowners who currently have one type of home-equity loan to refinance it with another type of home-equity loan to comply with the limitation in the law. Minor revisions were passed during the 80th legislative session in 2007 that modified the procedures for obtaining and granting a home-equity loan.

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