Sunday, May 24, 1998

Homeowners finding obtaining equity loans a frustrating experience

By JAY JORDEN / Associated Press

DALLAS -- Carl Wolff wanted to get some cash out of the six-figure investment he'd already made into his home, so he applied for a home equity loan when the state opened the door to such lending.

That was in January.

Since then, the 65-year-old Dallas businessman has hit nothing but roadblocks in his quest to turn his home equity into cash. Despite trying to get a loan through multiple lenders, Wolff has so far been unable to close.

The problem? State legislators, he says.

"It seems to be pretty much of a farce the way they engineered the law. It's as if they did not want to make it work. Or maybe the politicians thought they were pleasing the public when they really were not," Wolff said.

Texas was the last state to approve home equity loans, which allow borrowers to take out a loan against the equity in their home mortgages to use for debt consolidation, college, start-up businesses, major purchases and virtually any other expense.

Before Texans overwhelmingly passed the constitutional amendment last November, they were only allowed to get home equity loans for home improvement projects. That ban dated to 1837, when a recession devastated settlers, causing many to lose their property.

Since New Year's Day, when the new amendment took effect, Texas homeowners have been allowed to pledge their houses for loans of up to 80 percent of the value not already mortgaged.

Whether the amendment is a success is in doubt.

There are several problems, regulators say. Many of those stem from lenders' hesitance about the new rules.

"It is a scary bill and there will be lobbying for an amendment in the next session of the Legislature," said Terry Fann, manager of Dallas-based Miracle Mortgage Corp.

Broker Michael Anderson at Reliance Mortgage Co. calls the issue a nightmare, noting that many who have applied for the loans have yet to close because the laws are too stringent on lenders.

"Texas got ripped off by the Legislature," he said about the law written by state leaders. "If you are really in pristine shape, with great credit, and almost don't need the loan, then you can get it."

Lenders also don't like that they can collect no more than a 3 percent fee from borrowers. The state insurance commissioner has requested an attorney general's ruling on which fees are "necessary and reasonable" and subject to the limit.

"The law is vague on what is a fee and what is not," Fann said. "If you're a lender and you guess wrong, you forfeit the principal and interest."

Then there's the conflict between Texas' homestead provisions and the new home equity law. A house qualifying for the homestead exemption must be on less than one acre of land in cities and on more than one acre in rural areas.

So a home on more than one acre of urban land or on less than one acre in a rural setting might not be eligible for a home equity loan.

"This is excluding some people who would like to take advantage of the home equity product," said John Gavin, Norwest Corp.'s regional president for the Fort Worth market. "This includes the group that is not in an urban, purely neighborhood tract, but not in a farm setting either."

Also, lenders must go through the courts to foreclose and sell a property put up as collateral for a delinquent loan. They have no other recourse, such as personal borrower or third-party liability.

Lenders say getting judges' permission to foreclose can take months. But a member of the Supreme Court task force that recommended the rules said since most foreclosures are uncontested, the delay is reduced to weeks.

"Lawyers either like this law or they hate it," said Manuel Newburger, a consumer law attorney with the Austin firm of Barron & Newburger.

Some lenders have all but abandoned home equity loans because they can make more money refinancing mortgages or selling new ones. Others blame the delay in home equity deals on loan requirements that they say are highly restrictive or ambiguous.

To balance the risk, some lending institutions are offering double-digit interest rates -- far above the prime lending rate. And that's only if prospective borrowers can even find a lender able to close.

Still, because more than 8 million homeowners across the country have home equity loans totaling about $400 billion and the Texas market has been estimated to be worth as much as $170 billion, banks in the Lone Star State are continuing to advertise and woo the home equity business.

And demand for home equity loans is still high because borrowers can benefit through lower interest loans and increased tax deductions.

The number of deals that are or aren't getting approved is hard to figure. Data has yet to be compiled in Texas and although the government will gather some loan data later this month, home equity deals will be lumped with other types of loans.

Bob Mahalik, senior mortgage banking analyst for the Federal Reserve Bank in Dallas, believes the market is hottest for larger lenders with the most resources and for "specialty" or "subprime" institutions that handle riskier transactions.

"The best impression I get is that a lot of the community banks and middle-sized banks are waiting to see what comes out of the home equity laws and the lawsuits," he said.

"The best feel I have for it is that the big players -- the NationsBanks and the Norwests -- with the experience of doing this for years can get into the market," he said. "Also, the specialty lenders whose business it is to deal with risk, and what is one more risk, dealing with a new law? So they are doing almost all the business and reaping all the profits."

Thousands of consumers have received loans at NationsBank, according to Vivian Pangburn, the bank's Texas marketing manager in Dallas.

"The loan purposes are just as we predicted: a broad range, from weddings to school education. Debt consolidation is also a big part of that," she said, declining to release any figures.

The state's consumer credit agency and Texas A&M University's Real Estate Center agree that demand remains high and that many deals are being made.

"It is good for Texans to be able now to have access to this type of borrowing. It allows them to lower the cost of their debt," said Fiona Sigalla, regional economist for the Federal Reserve. "That's good for the economy, good for Texas."

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Some pros and cons of home equity loans, according to financial experts.

PROS:

--Makes available loans for all types of purchases, not just the limited purposes of paying taxes or making home improvements.

--Allows homeowners to borrow against the equity in their homes and deduct that interest.

--The loans generally carry interest rates of 9 percent to 12 percent, compared with credit card interest rates of 14 percent to 20 percent.

--Increased cash flow helps economy. CONS:

--Defaulting can lead to losing the home.

--The new lending law is fairly restrictive, allowing homeowners to borrow up to only 80 percent of the value of their homes. Other states allow up to 125 percent.

--Less convenient than using a credit card for a cash advance because users must fill out forms and qualify for loans.