Texans, who opened a large new market to home equity lenders by legalizing the loans two years ago, could do the same for reverse mortgages next month.
Reverse mortgages are a type of home-equity loan geared to people 62 or older. They allow homeowners to convert their equity into cash, with repayment due when they die or move from the home.
Texas has quickly become the fifth-biggest market for home-equity loans; residents took out $4.4 billion last year. Now lenders are pushing Proposition 2, which would overturn a clause in the earlier proposition that makes reverse mortgages unattractive to lenders and impossible to fund in the secondary market. Proposition 2 comes to a vote Nov. 2.
"Lenders are just champing at the bit, just waiting to make these types of loans. There's something like two million seniors in the state of Texas with potential to take out these types of reverse mortgages," said Robert Mahalik, a senior mortgage banking analyst at the Federal Reserve Bank in Dallas. "Lenders want to do it, but everybody just wants to make them, package them, and ship them off. They don't want to hold them in their own portfolios, and the secondary market just doesn't want them the way it's written now."
Mr. Mahalik explained that the Department of Housing and Urban Development will not insure reverse-mortgage loans made in Texas, and Fannie Mae (the major purchaser of this product) will not buy them because current law forbids lenders from foreclosing on an abandoned house as long as the borrower is alive.
"If a person vacates a house -- if they have to go to a nursing home for example -- all they have to do is send a note every six months saying they're alive, and then the lender can't take the property," Mr. Mahalik said. "In this new legislation, once the property has been abandoned for 12 months, they are allowed to take possession. Fannie and HUD have both said, if the occupancy issue can be cleared up so that they can collect on the loan, then they'll go ahead and open up the Texas market."
Texans will also consider proposals to make it simpler for home-equity lenders to foreclose on properties under probate and to allow home-equity loans on lots as big as 10 acres. Currently, the maximum lot size is one acre; borrowers who own larger lots must go to the expense of dividing them so the house is on a one-acre lot.
"The way a reverse mortgage is presented under Texas law, (it) makes no financial sense for a lender to go do it," said Bank of America's government relations manager, Jon DeLagaza Jr.
Even if Proposition 2 does pass, reverse-mortgage lending may not boom the way home-equity lending has, because it would bar setting up the loans as lines of credit, as permitted in other states.
Roger Reynolds, national coordinator for reverse-mortgage lending at Norwest Mortgage, said the credit line was the most popular option across the country.
"Unfortunately, making all that money available to a senior can be a problem. It can drop them out of some benefits because they have an asset and it can also make them vulnerable to different predatory investment propositions," Mr. Reynolds said.
Nevertheless, he said, "I think it could be a hot-ticket item to start with. I get calls from people all the time wanting them, and I tell them to call after the ballot."
Some consumer advocates warn that reverse lending can cause problems for the borrowers' heirs, if unscrupulous lenders persuade seniors to take out loans for frivolous purposes. But Ann Graham, senior vice president of the Texas Bankers Association, said Texans deserve the right to choose the product.
"There is some concern that Texas voters don't understand what a reverse mortgage is. But our polling numbers show that people are overwhelmingly in favor of the product once they understand it," Ms. Graham said. "This can make a major difference between a reasonable retirement or struggling month to month."