In a recent post, I talked about many of the requirements for a home equity loan. Two weeks ago, Texas voters approved a constitutional amendment, SJR 60, that changed many of the requirements and restrictions on home equity loans.
The ballot title was as follows:
“The constitutional amendment to establish a lower amount for expenses that can be charged to a borrower and removing certain financing expense limitations for a home equity loan, establishing certain authorized lenders to make a home equity loan, changing certain options for the refinancing of home equity loans, changing the threshold for an advance of a home equity line of credit, and allowing home equity loans on agricultural homesteads.”
This amendment made the following changes to the law:
- Fee Cap. Proposition 2 lowers the fee cap on home equity loans from 3% to 2% of the original principal amount of the loan. However, while the fee cap is lower, the following fees are excluded from the cap: appraisal, property survey, title insurance premiums, and title examination. Previously, there was no list of items excluded from the fee cap.
- Agricultural Homesteads. Proposition 2 allows owners of houses on land classified as agricultural to enter into voluntary liens to secure home equity loans. Previously, only owners of houses on land used for milk production could take home equity loans.
- Refinancing a Home Equity Loan. Proposition 2 allows a borrower to refinance a home equity loan with a purchase money loan when the following conditions are met. (Previously, home equity loans could not be refinanced.)
- The refinanced loan is signed at least one year after the original home equity loan originated;
- The refinanced loan cannot provide any additional money to the borrower other than to cover the cost of the refinancing;
- The refinanced loan cannot exceed 80% of the fair market value of the house; and
- The lender must provide the borrower with a notice about their rights associated with a home equity or non-home equity loan at least 12 days before the refinance.
- Home Equity Lines of Credit. Proposition 2 removes a restriction on advances for home equity lines of credit. Previously, no advances were allowed if the principal amount of the debt was more than 50% of the fair market value of the home. The amendment allows advances under a home equity line of credit of up to 80% of the fair market value of the home.
- Approved Lenders. Proposition 2 allows for subsidiaries of a bank, savings & loan, or credit union to make home improvement loans. Previously, only a bank, savings & loan, or credit union could make the home improvement loan.
Many supported Proposition 2 because it gives homeowners a greater ability to mortgage their homes and removes restrictions. However, by removing the restrictions, it also removes many of the protections.
Specifically, while the proposition may have been marketed as reducing the cost to homeowners (e.g., lower the fee cap to 2%), it may actually increase costs since many closing costs are now excepted from the fee cap. Rather, the reduction of the fee cap and inclusion of the fee exceptions allows lenders to put together loans for $100,000 or less. Before, the fee cap made these loans impractical – the smaller loan amounts and the inclusion of the standard items for fee cap precluded the closing of these loans. More particularly, it was nearly impossible to close a loan for less than $3,000 because of the nearly fixed costs of appraisals, title insurance, and surveys.
Additionally, the amendment allows borrowers to increase the amount of their indebtedness for home equity lines of credit (which can be a benefit or detriment depending on your perspective). By changing the entities able to make home equity loans, the proposition allows banks to move “bad loans” to their subsidiaries and keep them off of their books.
The ability to refinance a home equity loan and a purchase money loan removes an important consumer protection. Before, home equity loans were always considered home equity loans. As such, their character could not be changed, and they were always subject to the same regulations and consumer protections. One of the most important consumer protections surrounds the default provisions. More particularly, home equity loans require judicial foreclosure and are non-recourse (meaning that the borrower’s liability is limited to the property itself).
Now, with the ability to refinance, a loan can be recharacterized, and a homeowner can then become personally liable for the amount of a loan that exceeds the value of the home. Regardless of your view on the free market (i.e., whether you are in favor of the non-recourse provisions or not), we can agree that this is a significant change to home equity loans. This change could expose many to increased liability on home equity loans if property values were to drop.
It should be noted that the top donors who supported this amendment were:
- Credit Union National Association
- Independent Bankers Association
- IBAT PAC
- Randolph-Brooks FCU
- American Airlines FCU
While I’m not offering an opinion about whether this proposition is good for the citizens of Texas, it cannot be overlooked that the major proponents were the banks – the institutions with the most to benefit from the constitutional amendment.