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.
Both banks and nonbanks are expected to reap the rewards of the new law. On the nonbank side, Associates First Capital, Household International, and Beneficial Corp. have the advantage, Piper Jaffray said, in part because the three already have a significant lending presence in the state.
United Companies, the Money Store, and First Plus Financial are expected to use direct mail and television advertising effectively.
Beneficial Corp. is jumping in headfirst-the company started running television ads featuring boxer George Foreman, a Texas resident, the day after the referendum.
"We are already taking applications," said a Beneficial spokesman. Lenders are not allowed to make the loans before Jan. 1.
Beneficial will have 50 retail offices in Texas by yearend, the company spokesman said. That should give the company a leg up, said Mr. Rudy. "We've been very fortunate. We've been here now for 37 years, and have a tremendous retail base," he said.
The company is translating its advertisements and materials into Spanish to cater to the state's large Latino population.
Delta Financial, Cityscape Financial Corp., and Aames Financial all plan to open Texas offices this year.