Today is the beginning of what could be the home equity boom-or bust-of Texas.

The state home equity act that took effect Jan. 1 included a 12-day waiting period before borrowers could sign loan documents, making today the earliest that loans can be funded.

National lenders, seeing a new frontier to exploit, with potential annual loan volume of $10 billion to $20 billion, have been pouring money into advertising and branch construction and taking applications from homeowners.

"Someone is going to stay open until 12:01" to make the first loan, said Rob Norcross, former president of the Texas Conference for Homeowners Rights in Dallas, an association of 50,000 homeowners and 800 business members that was formed five years ago to promote the legislation.

But if you talk to some smaller local lenders, the view of the new law, which was passed by referendum Nov. 4, is decidedly more cautious.

"This law has lenders scared to death," said Richard Schwartz of Mortgage Makers Inc., noting disclosure requirements that, he claims, invite class actions against lenders.

In this first of two articles, American Banker examines the newly opened market from a local perspective.

Native Texans say that the 150-year-old ban was a throwback to a time when farmers would venture into town once a week to sell crops and pick up supplies. The fear was that a farmer would "go to a bar, get liquored up, and gamble his house away," one lender explained. "Then his wife and kids would have nowhere to stay."

The bill was 25 years in the making, Mr. Norcross said.

Many large lenders started taking applications as soon as the law was passed, and lenders from New York to California are signing up to take advantage of the law.

In fact, a record number of companies have applied to state regulators to have lending operations in Texas, according to the Consumer Credit Commissioner's office.

In fiscal year 1997, which ended Sept. 30, 834 companies applied for loan licenses, versus an annual average of 250. And during just the first three months of fiscal 1998, the office got 798 applications for regulated loan licenses.

NationsBank Corp., which has the largest banking presence in Texas, with 353 branches, started taking loan applications as soon as the law was passed, said vice president Jean Johnson.

"We've offered home equity loans since the beginning of time in the rest of our franchise," she said, "so we expect it to be an integral part of our business here."

Consumers' reasons for applying for a second mortgage "covered the waterfront," Ms. Johnson said-from bill consolidation to small-business funding to college tuition.

The law was passed at a time when much of Texas is still enjoying a building boom, leading observers to believe that the potential market may be even bigger than estimated.

Interstate 35 from Austin to Dallas is peppered with billboards advertising nearby housing developments with names like Stone Canyon and Brushy Creek and up-and-coming bedroom communities. "Homes from the $100's," "good schools," and "high SAT scores," they promise, hoping to lure the thousands of transplants to Dallas and points south.

A five-minute drive off the highway near Waco yields a diverse cross- section of blocks of cookie-cutter raised ranches, Victorian three-story mansions, and tiny houses with littered yards.

Much of the population influx followed high-tech companies moving from Silicon Valley in search of a lower cost of living and doing business.

But the flurry of building activity doesn't give local lenders a lot of confidence.

With typical Texas bravado, Mr. Schwartz of Mortgage Makers promises that his Texas subprime firm can "get you a mortgage loan before the ink on your parole papers are dry." But he is wary of second-mortgage business here because it looks too dangerous.

"There's just too much disclosure" required, said the plaid-shirted mortgage industry veteran over a lunch of chicken-fried steak.

The law allows borrowers to cancel their loan entirely if any disclosure violation is found and receive a full refund, Mr. Schwartz said.

"You don't think that there are going to be ambulance chasers lined up?" he asked. Class-action "attorneys are going to be on this thing like flies."

Mortgage Makers has applied for a license to make second-lien loans but doesn't expect to use it, Mr. Schwartz said. "When I go to seminars (on home equity lending) and ask questions, people say, 'You'll find out in the next five years in the Supreme Court,'" he said. "It's the good old American way-sue the brains out of everybody."

Adding to uncertainty among local lenders is a suit by the Houston chapter of the National Association of the Remodeling Industry arguing for a change in the language of the home improvement portion of the law. Some local news stories have portrayed the suit as capable of bringing down the whole law, although the association's lawyer denied that was the intent of the action.

"No one knows what the hell is going on," said Chuck Boyd, president of Texas Mortgage Consultants, Austin, and a former Texas Mortgage Brokers Association president. "No one knows who is doing what or who is in control."

The bill's ambiguity is in part due to politicking on both sides of the state Legislature, said Mr. Norcross. "Unfortunately the bill that the experts had worked on for three or four years became branded as the 'Bankers Bill'," he said.

It was passed by the state Senate in early 1997 but rejected by the state House, which decided to write its own legislation, Mr. Norcross said. Enabling legislation written by the House included amendments to everything from redlining to ATM fee laws, and it was rejected by the Senate.

"Now we have the unusual situation of a constitutional amendment, without any statutory change," Mr. Norcross said. In other words, although the ban has been repealed, lenders are left without thorough guidelines on making the loans.

Leslie Pettijohn, the state's consumer credit commissioner is drafting guidelines to help lenders interpret the law. But until the legislature meets again in 1999, her recommendations will be nothing but recommendations.

All this uncertainty is making local lenders, who lack strong legal departments, reticent.

"We're not interested" in home equity lending, said Marilyn Nixon of JWH Homes, a small builder-lender just south of Dallas. "It's just not our ball game-we build homes and finance them," she said.

The law has also caused infighting between large and small banks, Mr. Boyd said. "The big players out there are advertising like hell," he said. "They are going to take the cream of the crop" borrowers, because of their access to cheaper capital, he said.

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