Magazine article American Banker

Texans Support Repeal of Home Equity Loan Ban, but Limits Imposed

Magazine article American Banker

Texans Support Repeal of Home Equity Loan Ban, but Limits Imposed

Article excerpt

Texas voters gave home equity lending a thumbs-up last week when they supported legislation repealing a century-old ban on such loans.

The referendum overturned a law that made home equity lending illegal in the state, and it opens up an estimated $200 billion of equity to secure new loans by banks and finance companies.

Originations from the Lone Star State are expected to be $10 billion to $20 billion annually, about 5% of the national home equity market, according to a recent Piper Jaffray report.

The legislation does not, however, portend a lending free-for- all. It limits a homeowner's first mortgage and equity loans to 80% of a home's value, interest rates on the equity loans to 18%, and origination fees on the loans to three points.

The law also requires a 12-day waiting period between application and funding, makes prepayment penalties illegal, and prohibits revolving lines of credit.

Rex E. Rudy, president of Beneficial Texas Inc., said the home equity legislation is "the strictest that I know of." However, he said, "We're happy that we got the bill passed. It's breaking the barrier for the first time."

In part because of the law's restrictions, the market is going to develop some "unique characteristics," the Piper Jaffray report said. Texas is expected to be primarily a retail-sourced market; prepayment speeds will be lower than in other states, and spreads will be smaller.

In addition, foreclosures will be less common because the law requires a judicial foreclosure process, which generally takes two years to complete, versus one year for nonjudicial process. …

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