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Texans Loosen Regulations That Protected the State During Foreclosure Crisis

The ballot measure was widely supported by lenders and real estate agents. Critics warn that it's “a wolf in sheep’s clothing.”

Texas' restrictions on home equity loans, which date back to the 1800s, are credited with sparing it from the worst of the housing crisis.
(Flickr/Jeff Turner)
This story is part of our 2017 elections coverage.

Texans on Tuesday opted to loosen some of the tightest home lending restrictions in the country. But some warn that they did so at their own peril.

By a more than two-thirds margin, voters approved a ballot measure that expands who can make a home equity loan, changes the fee structure for those loans, and allows homeowners to convert their home equity loans into regular mortgage loans.

The measure was widely supported by lenders and real estate agents who said it should be easier for homeowners to tap the existing equity in their homes. Bankers also argued that the changes were necessary if they are to continue making smaller loans. According to the Houston Chronicle, state-chartered banks now hold about $6.6 billion in home equity loans, down significantly since 2009. The decline is blamed in part on a 2013 Texas Supreme Court ruling that blocked lenders from adding expenses on top of the state's 3 percent fee cap for loans.

However, fair housing advocates have warned that the measure is “a wolf in sheep’s clothing” and will ultimately increase the cost of home equity loans.

"Texas consumers lost today," says Charlie Duncan, a fair housing planner at the advocacy nonprofit Texas Low-Income Housing Information Service. He notes that the proposal lowers the fee cap for home equity loans -- but also allows lenders to charge for services such as appraisals and surveys.

Another provision lets homeowners convert their home equity loans into regular mortgage loans to take advantage of lower interest rates. However, Duncan says, that conversion also has fewer protections, and homeowners may not realize that they could more easily lose their properties if they fall behind on payments.

That protection is one of the home lending restrictions in Texas that many say helped buffer the state from the foreclosure crisis a decade ago. During the height of the crisis in 2010, the Lone Star State’s foreclosure rate was less than 6 percent while the national average was nearly 10 percent, according to the Mortgage Bankers Association.

Still, the lynchpin of the state's lending protections -- limiting the amount of the loan to 80 percent of the value of the home -- is staying put. That limitation distinguished Texas during the crisis because borrowers in other states had taken out second loans that in many cases were larger than the balance on their initial loan. When the bubble burst, those borrowers quickly went underwater on their mortgages.

Duncan says it's not enough. "You're increasing the chance of default," he says, "by allowing homeowners to expose more of their equity to credit."

The vote marks the second time in four years Texans have opted for looser lending laws. In 2013, voters approved a ballot measure that made Texas the last state to allow reverse mortgages, in which a creditor provides money to an older borrower in exchange for a lien on the borrower's home.

The roots of the state’s lending restrictions can be traced back to the late 1830s, when Texas was still a republic. In those years, many homesteaders lost their properties thanks to a bank panic and ensuing foreclosures. When Texas later wrote its state constitution, it banned home equity loans to homesteaders. That restriction that remained in place until 1998, when voters approved a constitutional amendment lifting the ban.

This story is part of our 2017 elections coverage.

Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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