Prop 2 makes equity loans more expensive

This column first appeared in the San Antonio Express News on October 30, 2017.

2017-10-30Dear Mr. Premack: I just got my Voters Guide from the League of Women Voters. The election on November 7 includes seven proposed amendments to the Texas Constitution. I’m interested in Proposition 2 relating to Home Equity Loans. The wording is vague. Can you explain the Proposition? – E.R.

Here is Prop. 2 with added parenthetical divisions [(A), (B) etc.]. It says: “The constitutional amendment to (A) establish a lower amount for expenses that can be charged to a borrower and removing certain financing expense limitations for a home equity loan, (B) establishing certain authorized lenders to make a home equity loan, (C) changing certain options for the refinancing of home equity loans, (D) changing the threshold for an advance of a home equity line of credit, and (E) allowing home equity loans on agricultural homesteads.”

Home equity loans (HELs) were illegal in Texas for many years. The banking industry lobbied successfully to change the Texas Constitution, and have asked the voters to approve adjustments several times. HELs are now common in Texas, in the form of straight loans, lines of credit, and reverse mortgages. However, Prop. 2 does not involve reverse mortgages.

Part (A) implies that fees will be lowered. Currently, lenders can charge fees up to three percent of the loan amount. Prop. 2 would drop the fee to no more than two percent. However, Prop. 2 also excludes a variety of existing fees from being included in that two percent, like appraisal costs, survey costs, title insurance premiums and a title report. Consequently, borrower’s expenses will likely increase under Prop. 2.

Example under current 3% cap: $100,000 HEL can have $3,000 fees, which may include $500 for a survey, $800 to title insurance, $375 for an appraisal, leaving the lender’s fee $1,325. Borrower’s out-of-pocket: $3,000.

Example under Prop. 2’s 2% cap: $100,000 HEL can have $2,000 fees, not including the survey, title insurance and appraisal. Borrower pays $2,000 to lender and separately pays $500 for survey, $800 for title insurance, and $375 for appraisal. Borrower’s out-of-pocket: $3,675. The lender gets more and the borrowers pays more.

Part (B): Currently, a Bank, Savings & Loan, or a Credit Union can make HELs. Under Prop. 2, any “subsidiary” of a Bank, S&L, or Credit Union will be allowed to make HELs. This allows the Bank, S&L, or Credit Union to keep bad loans off of their books, and to establish mortgage specialist subsidiaries (for example, eCU Mortgage, a subsidiary of First Service Credit Union in Houston, would be able to handle HELs in addition to regular mortgages).

Part (C) deals with refinancing equity loans. It allows a lender to refinance a HEL as a regular mortgage, so long as a disclosure of the negative effects is provided to the borrower. One of the negative effects is that a regular mortgage creates personal liability for the borrower, while a HEL is limited to the value of the home. If passed, this would give lenders more power.

Part (D) changes the availability of draws on a line-of-credit HEL. Currently, if the loan exceeds 50% of the home’s value, no advancements can be paid to the borrower. Under Prop. 2, advancements will be allowed until the loan reaches 80% of the home’s value. This makes more money available to the borrower, but also increases the amount of debt and risk of default.

Part (E) would allow people with agricultural exemptions to use a HEL on their farm or ranch land. Currently, farms and ranches are not permitted to use HELs to borrow money.

Whether you support or do not support SJR 60 (Prop. 2), it is important for you to vote on November 7.

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