DALLAS -- Texas lenders are closer to offering home equity loans after a federal court ruled that thrifts and finance companies are exempt from a 155-year-old constitutional restriction of second mortgages.

The U.S. Court of Appeals for the Fifth Circuit ruled that federal regulation overrides the state constitutional provisions which have made Texas the only place where homeowners cannot borrow against their equity.

Loan Bonanza Envisioned

Hungry for new business, bankers have estimated that home equity borrowing could produces as much as $4 billion in new loans. It would also generate loan demand that is not as cyclical as traditional mortgages.

"We know that this is a several billion dollar market," said Harvey Mitchell, chairman and chief executive at Bank One Texas. "We don't know how much of will benefit this company, but in our other states it has helped in gaining market share."

While the three-judge panel in New Orleans focused on the federal override specifically for thrifts and finance companies, experts say that if the April 29 ruling is upheld, its impact could be extended to commercial banks.

State officials have said they will appeal the decision in the lawsuit brought by First Gibraltar, a Texas thrift, and the local division of New Jersey-based Beneficial Corp. It could be next summer before a final verdict is rendered.

A Spur for Lawmakers

In the meantime, observers say uncertainty over the status of home equity lending could finally spur lawmakers to take action after more than a decade of failed lobbying by bankers.

"There is no immediate impact from this, but the real benefit will be that this could help out in the Legislature," said James Sexton, a consultant with the law firm of Bracewell & Patterson.

Since his days as the Texas banking commissioner, Mr. Sexton said, efforts by bankers to put a constitutional amendment before voters have been shot down by a combination of inattention by legislator and opposition from consumer groups.

The prohibition on second mortgages dates back to the mid-1800s when banks foreclosed on the homes of many Texas settlers. Newspaper editorials in Texas cite home equity lending as a ruinous route to easy money.

"This ruling takes the heat off the Legislature," he said. "They could argue that the court has already shot a hole in the constitutional prohibition and that Texas migh as well set the particulars of how this can be done, rather than leave it up to the federal courts."

Indeed, after years of rejection, bankers are optimistic that the 1995 legislative session may finally see support for the amendment.

"I'm very encouraged that this [ruling] has improved our chances for 1995," said Bank One's Mr. Mitchell. "For most legislators this was not even on their radar screen, but this court case puts it there."

Even as lawmakers killed a proposal last June to open the state to home equity lending, lenders formed a coalition that has continued a low-profile campaign to build grass roots support for the idea.

The state's leading commercial banks, finance companies, and others formed the Texas Conference for Homeowners Rights to push the idea that individuals - and not the state -- should have the power to decide how they borrow money.

Savings Factor Played Up

Using a toll-free number and literature, the organization has been focusing on the fact that home equity loans are cheaper than other forms of lending and offer a federal income tax benefit.

For instance, Bank of American-Texas customers opened recent statements to find a flier from the group pitching the fact that Texans could have saved tens of millions of dollars of income taxes if they had the option of home equity lending.

"We look at it as a rights issue," said Randy Hicks, spokesman for Irving-based subsidiary of BankAmerica Corp. "We would just like to see it put up for a vote. If the people of Texas say no -- and I don't think they will -- then it will go away."

Proponents say that opposition has dwindled with every effort to pass home equity legislation. Once vocally opposed, senior citizens groups are now neutral on the issue. The strongest fight will likely come from some consumer groups, farmers, and real estate agents.

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