Issue
When it comes to home-equity lending, Texas has some of the most extensive homeowner protections in the country. Key among these provisions is the requirement that a home-equity loan may not exceed 80% of the market value of the homestead.
This Texas Constitution protection allows ample access to capital while at the same time ensures homeowners do not incur excessive debt. This measure helped insulate Texas from the recession that followed the 2008 housing bubble.
What does this mean for the real estate industry?
Some states allow for home-equity loans upward of 120% loan-to-value (LTV), creating a situation where homeowners become instantly upside-down because they owe more to the bank than their homes are worth.
When recessions have occurred causing real estate values to dip in these states, many homeowners walked away from their obligation. Foreclosures hurt the overall real estate market and lower home values.
Texas REALTORS® position
Our association supports maintaining the strong consumer protections in home-equity lending provided in the Texas Constitution and opposes moving any segment of those protections, including the required 12-days advanced consumer notice before loan closing, from the Constitution to the Texas Finance Code or any other statutes.
Legislative outlook
Some lawmakers will seek to dilute the strong constitutional protections afforded to Texas homeowners. There may be some attempts to pass a joint resolution amending these consumer protections; however, most lawmakers agree that these protections helped Texas avoid much of the national foreclosure crisis.
Historical perspective
In 1997, the Texas Association of REALTORS® was very involved in passing a constitutional amendment allowing Texans access to the equity in their homestead. For more than 140 years, Texas did not allow home-equity loans because of the possible repercussions from defaulting on the loan.
Since 1997, when the voters of Texas approved home equity lending, some lender groups have tried to tinker with the home-equity provisions of the Texas Constitution to either make them more lender-oriented and a less less consumer friendly or to allow changes to home equity law more easily without having to go to Texas voters for approval.
In 2003, Texas voters passed constitutional amendments that allowed homeowners who currently have one type of home-equity loan to refinance it with another type of home-equity loan to comply with the limitation in the law. Minor revisions were passed during the 2007 legislative session that modified the procedures for obtaining and granting a home-equity loan.
In 2017, Texas voters overwhelmingly approved a constitutional amendment SJR 60 (Proposition 2) that modernized how Texas homeowners can access home equity loans and home equity lines of credit:
- Redefined what is and is not included in the calculation of the 3% cap on fees associated with a home equity loan
- Allowed for a seasoned refinanced loan into one loan with one rate and term
- Maintained the $4,000 draw requirements on home equity lines of credit (HELOCs) and increased the 50% equity provision to 80%–same as in a home equity loan
- Allowed farm and ranch property owners to acquire home-equity loans, while allowing for continuation of agricultural valuation of their properties
- Made technical changes in the Texas Constitution to ensure out-of-date terminology was updated.
As a result, home equity loans have been made available to more Texas homeowners—all while maintaining the strict consumer protections that have served the state so well. In addition, homeowners with existing home equity loans now have more options when it comes to refinancing.
In 2019, a new law was passed to allow a property owner to use agricultural land as collateral for a home equity loan.