Texans have often seen their state as a country within a country. Why should home equity lending be any different?

The battle to let Texans tap the equity in their homes was a long one and was finally won in November 1997, when the Lone Star State dropped its 157-year-old ban on such loans.

It had $4.4 billion of originations last year, out of $292 billion nationwide.

The Texas market differs markedly from that of other states because of protective features in the new law, not to mention confusing language that makes compliance difficult.

The legislation prohibits open-ended lines of credit. Because of the state's homestead law, lenders can only offer fully funded, closed-end loans. Consumers must also be given a 12-day cooling-off period and a three-day right of rescission before their loans are processed.

Additionally, Texans can only borrow 80% of a home's value, as opposed to 125% in many states. And refinancing is allowed only once a year. Closing costs cannot exceed 3% of the loan's value.

Edward Skelton, a financial analyst at the Federal Reserve Bank in Dallas, said the new law is "very consumer friendly but not at all friendly to banks."

"The bill has served to cap home equity lending in Texas a little because of the low closing costs allowed and the loan-to-value ratios," Mr. Skelton said. "That makes it difficult for anybody that's not a low-cost provider to get in the game."

A recent survey of Texas Bankers Association members found that almost half of the respondents were offering home equity loans but were not actively promoting the product.

The remainder said they either had no plan to offer the product or were waiting for more market and legal clarification.

The real estate center at Texas A&M University, in conjunction with the state's banking association, said size was a major determinant of how lending institutions approached home equity lending.

Those with at least $500 million of deposits were offering the loans, and of those with at least $1 billion of deposits, 83% were actively pursuing the business.

In contrast, 37% of banks with less than $200 million of deposits did not offer home equity loans.

Mr. Skelton agreed that lenders are hesitant to fund these types of loans in Texas, particularly because there is no agency overseeing these mortgages and lenders have no place to get answers on compliance issues.

"If a lender violates any provision in the law, they lose the principal and the interest on the loan," Mr. Skelton said. "That's pretty harsh. It makes lenders not so anxious to get in, and the home equity loan hasn't been around long enough for the courts to have sorted it out."

The real estate center reported that about two-thirds of home equity lending in Texas has been in second-lien debt, with most of the remainder consisting of cash-out refinancing of first mortgage loans. The center also wrote that the reverse annuity mortgage, which helps older homeowners finance their retirement, was virtually unavailable in the state because Fannie Mae would not purchase loans made under the stipulations of the Texas law.

Mr. Skelton said that the way the reverse mortgage is structured in Texas, borrowers can only get a one-time payment on their equity.

"This would be for Texans who need a lump sum of money," Mr. Skelton said. "You pretty much have to have something specific you want to buy or pay for."

He added that Texas lenders hope that the home equity law will be clarified at the next legislative session and lenders allowed to make open-ended loans.

Mr. Skelton said he remains skeptical, though. "Just getting this one done was a real chore," he commented."

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