The state’s voters will decide Nov. 4 whether to unleash at least $100 billion worth of loan collateral in Texas by expanding home equity borrowing, but state regulators already are inundated with requests from lenders eager to get into the market.
More than 800 would-be lenders have staked out potential territories throughout Texas, officials said. The state’s established lenders are rushing to train employees to sell loans secured by second mortgages. If the law is approved as expected, lenders plan to market their products using phones, direct mail and even the Internet.
Texas Commerce Bank, a unit of Chase Manhattan Corp., plans to start taking loan applications on Nov. 5 if the amendment is approved, even though the loans can’t be closed until Jan. 1.
With the election nearing, these potential competitors are confidently working together to ensure passage of an amendment to the Texas Constitution that has no organized opposition. The measure cleared the legislature with overwhelming majorities.
Beneficial Texas, a unit of Beneficial Corp., is planning to open five new offices in the state by the end of the year, and add a new employee in each of its 45 existing offices to handle the expected flood of applications.
And EquiVantage, a Houston lender that specializes in loans to people with blemishes on their credit, said it will quickly increase its work force of about 240 people by about 25 percent to try to grab a share of the Texas home equity market.
This push will present Texas homeowners with new options, such as using their homes to secure hefty loans for catastrophic health care, debt consolidation or to start a business.
The change comes after 158 years of laws bridling home equity borrowing. Texas lawmakers decided this year to leave it to voters whether to amend the Texas Homestead Act, a constitutional provision championed by Stephen F. Austin in 1837 to help settlers avoid foreclosure.
Over the years, it had been amended to allow homes to be used to secure loans for home improvements, payment of taxes, and for loans required by divorce and inheritance settlements.
The prospect of the end of a prohibition dating back to the days of the Republic of Texas, has set off a rush by lenders to gain permission to get into the business.
“We’ve got more (applications) than we anticipated,” said Texas Consumer Credit CommissionerLeslie Pettijohn. She said the influx began several months ago due to “heightened anticipation” about the amendment’s passage.
“There is a significant amount of home equity in Texas and a lot of people who see that as a tremendous opportunity from a lender’s perspective,” she said. Texas already has about 2,750 regulated lenders, not counting such institutions as banks, credit unions and saving and loan associations, Pettijohn said.
Bankers and other lenders spearheaded efforts to change the policy for almost two decades. Political capitulation came only after key interest groups, including real estate agents, home builders and consumer groups, won many of the homestead safeguards they sought.
But supporters said they’re faced with misconceptions about the amendment, especially misplaced fears that the Homestead Act is being repealed.
It isn’t.
The Federal Reserve Bank of Dallas recently noted that in other states, the main purposes cited for the types of home equity loans that will be allowed in Texas are home improvement, debt consolidation, education and vehicle purchases. The debit card-style, open lines of credit that are popular in many states won’t be allowed in Texas.
Lenders have a hard time estimating the true potential of the market because they don’t know how many customer will use home equity as collateral for car loans and other transactions that would have been done anyway, said Debbie Siegfried, a spokeswoman for Texas Commerce.
The interest on home equity loans is deductible for federal tax purposes, like the interest on a home mortgage.
The interest rate on equity loans should be on a par with home improvement loans — about 8 to 9 percent, Siegfried said.
Voters will see a simple ballot proposition: “The amendment to the Texas Constitution expanding the types of liens for home equity that a lender, with the homeowner’s consent, may place against a homestead.”
Voters won’t see eight pages of single-spaced fine-print that will be imbedded in the Constitution if Proposition 8 is approved. Changing these rules would require new voter approval, a requirement enacted by lawmakers to ease concerns about future erosion of consumer and other special-interest protections.
“We believe our forefathers had the right idea. We’ve always trusted Texans, but we never trusted the bankers. We finally got enough consumer protections in here to prevent bankers from taking your home,” said Public Citizen director Tom “Smitty” Smith, a consumer lobbyist.
The rules cap interest rates at 18 percent and fees at 3 percent of the loan amount. They prescribe waiting and cooling-off periods; prohibit red-lining; ban balloon payments; and require loans to be voluntary, with the consent of each owner and each owner’s spouse.
Within months, Texas homeowners could be showered with other new loan pitches.
But with so many rules built into a law that hasn’t been approved by voters, lenders are not yet specifying their marketing approaches.
The unique provisions of the Texas law make it impossible for other states to simply shift product lines here from other states, said Rex Rudy, president of Beneficial Texas.
Although some national firms, have offered loans up to 125 percent of the value of the home, Texans will be limited to borrowing 80 percent of the value of their homes either for first and second mortgages.
