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Will Texans Loosen Restrictions That Buffered the State From the Foreclosure Crisis?

Come November, voters will weigh in on a ballot measure that relaxes rules on home equity loans.

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 elections coverage. Read our list of the most important races and ballot measures to watch here.

When the housing bubble burst in the late 2000s, no state was spared. Some, however, fared better than others. One such state was Texas. Its foreclosure rate was less than 6 percent in 2010, while the national average was nearly 10 percent, according to the Mortgage Bankers Association.

But now, lenders in the Lone Star State want to make it easier for homeowners to tap the existing equity in their homes by loosening some of the many restrictions credited with helping the state escape much of the foreclosure crisis.

The issue will be decided by a November ballot initiative, which if approved would expand the list of home equity lenders to include savings and loan companies, mortgage bankers, subsidiaries of banks and credit unions; change the fee structure for those loans; and allow homeowners to convert their home equity loans into regular mortgage loans, among other things.

Charlie Duncan, a fair housing planner at the advocacy nonprofit Texas Low-Income Housing Information Service, calls the proposed constitutional amendment a "wolf in sheep's clothing" that would ultimately increase the cost of home equity loans.

Case in point: One change would lower the fee cap for home equity loans but also allow lenders to charge for services such as appraisals and surveys. Another would let 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 fell behind on payments.

"What this amendment means is that there's going to be more people potentially exposed to these lower protections in the homeowners' market," he says.

Spporters of the initiative, including realtors and bankers, argue that the changes are 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.

"There was a hesitance on the part of lenders to make smaller home equity loans," Steve Scurlock, executive vice president of the Independent Bankers Association of Texas, told the Chronicle. With the measure, lenders are trying to "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."

The roots of the 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. In 2013, voters again opted to loosen lending laws by becomming 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.

No public polling is available regarding the current proposed amendment.

Scurlock and others point out that 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 foreclosure 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. 

But 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."

This story is part of our elections coverage. Read our list of the most important races and ballot measures to watch here.

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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