Home Equity Loans Update 2018 - stewart.com€¦ · Home Equity Loans Update 2018 Charles Craig ... refinance of a lien against a homestead, including federal tax ... • No other

Welcome to today’s webinar!

Home Equity Loans

Update 2018 Charles Craig

January 18, 2018

In order to obtain a CE Certificate or CLE Credit, you must listen to the webinar for a minimum of 55

minutes obtain the password (provided at the end of

the presentation) follow the instructions as given

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ATTORNEY INFORMATION

Because of opinions expressed by the Texas Department

of Insurance (TDI) concerning rebates, legal credit is

available only to:

Attorneys who own title agencies that are Stewart Title

Guaranty Agents

Attorneys employed by a title insurance agent licensed

with Stewart Title Guaranty or Stewart entities

Fee attorneys who have an Escrow Officer license

through a Stewart Title Agent or Stewart entity

We welcome any other lawyers to listen, but cannot provide

continuing education credit to you.

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Home Equity Loans Update 2018

Charlie Craig

Associate General Counsel & Texas Underwriter

Stewart Title Guaranty Company

Austin, Texas

(512) 236-0405 [email protected]

Homestead: What is it?

Homestead is the home and surrounding land intended to be occupied

as a permanent residence. Homestead can be either Urban or Rural.

Urban Homestead defined by Texas Constitution, Article XVI, Section

51:

– “…the homestead in a city, town or village, shall consist of lot or

contiguous lots amounting to not more than 10 acres of land,

together with any improvements on the land;…”

– Maximum is 10 acres

– Must be contiguous parcels: adjoining, next to, touching

Urban Homestead: What is it?

Also defined by Texas Property Code, Section 41.002: – “(c) A homestead is considered to be urban if, at the time the

designation is made, the property is:

(1) located within the limits of a municipality or its extraterritorial

jurisdiction or a platted subdivision; and

(2) served by police protection, paid or volunteer fire protection,

and at least three of the following services provided by a

municipality or under contract to a municipality:

(A) electric;

(B) natural gas;

(C) sewer;

(D) storm sewer; and

(E) water.”

Rural Homestead: What is it?

Rural Homestead defined by Texas Constitution, Article

XVI, Section 51:

“The homestead, not in a town or city, shall consist of not more than two

hundred acres of land, which may be in one or more parcels, with the

improvements thereon;…”

– Maximum is 200 acres

– Can be in multiple parcels

– Nothing about how the parcels have to be contiguous or even close to

each other

.

Rural Homestead: What is it?

Also defined in Texas Property Code, Section 41.002:

“(b) If used for the purposes of a rural home, the homestead shall

consist of :

(1) for a family, not more than 200 acres, which may be in one or

more parcels, with the improvements thereon; or

(2) for a single, adult person, not otherwise entitled to a homestead,

not more than 100 acres, which may be in one or more parcels, with

the improvements thereon.”

The statute says “family”, not married couple. It is a broader definition

and may include individuals with dependent minors or adults that live with

them, even if they don’t live with them all the time.

.

Only One Homestead • “The” Homestead

• In Texas a property owner only gets to declare one homestead

Their principal residence as of January 1 each year

Not one Homestead per county

Not one Homestead per state

• Owner lives on site, rents out part of the property = Homestead

• Rents out all of the home to third parties by written lease, Owner

completely out of home, CAD removes HS designation = Non-HS

• Talk to your underwriter when you have a question on Homestead

status

.

Homestead is a Protected Asset in Texas

The Homestead is protected from forced sale.

• Texas Constitution, Article XVI, Section 50 (a):

– “HOMESTEAD; PROTECTION FROM FORCED SALE; MORTGAGES,

TRUST DEEDS, AND LIENS. (a) The homestead of a family, or of a

single adult person, shall be, and is hereby protected from forced sale,

for the payment of all debts except for:…”

(1) purchase money liens;

(2) taxes due on the property;

(3) owelty of partition liens, including those created in a divorce

decree;

(4) refinance of a lien against a homestead, including federal tax

liens, which need to be against both spouses if a married couple;

more …

Homestead Protection in Texas

• Texas Constitution, Article XVI, Section 50 (a), cont.

(5) liens for construction or improvement, contracted for in writing;

(6) home equity loans;

(7) reverse mortgages;

(8) and manufacture housing unit conversion liens, where a personal

property lien is converted into a real estate lien.

This list, excepting the MHU conversion lien, is duplicated in Section 41.001

of the Texas Property Code.


The Homestead cannot be sold or encumbered without the

joinder of the spouse, with limited exceptions

• Texas Constitution, Article XVI, Section 50(b):

– “(b) An owner or claimant of the property claimed as homestead may

not sell or abandon the homestead without the consent of each owner

and the spouse of each owner, given in such manner as may be

prescribed by law.”

• Texas Family Code, Section 5.001:

– “SALE, CONVEYANCE, OR ENCUMBRANCE OF HOMESTEAD.

Whether the homestead is the separate property of either spouse or

community property, neither spouse may sell, convey, or encumber the

homestead without the joinder of the other spouse except as provided

in this chapter or by other rules of law.”


Survivor has rights in the Homestead

• Texas Constitution, Article XVI, Section 52:

– “DESCENT AND DISTRIBUTION OF HOMESTEAD; RESTRICTIONS

ON PARTITION.

On the death of the husband or wife, or both, the homestead shall

descend and vest in like manner as other real property of the deceased,

and shall be governed by the same laws of descent and distribution, but

it shall not be partitioned among the heirs of the deceased during

the lifetime of the surviving husband or wife, or so long as the

survivor may elect to use or occupy the same as a homestead, or

so long as the guardian of the minor children of the deceased may

be permitted, under the order of the proper court having the jurisdiction,

to use and occupy the same.”


Protection of Proceeds from Sale of the Homestead

• Texas Property Code, Section 41.001:

– “INTERESTS IN LAND EXEMPT FROM SEIZURE…

(c) The homestead claimant's proceeds of a sale of a homestead are

not subject to seizure for a creditor's claim for six months after the date

of sale.”

This is so that an owner can acquire another homestead and not have to

worry about a creditor taking away the funds needed to buy a new

homestead.

These concepts of protecting homestead rights extends to Home Equity Loans.

Home Equity Loans

Home Equity Loans (HELs) are loans for cash advances where the borrower’s

homestead secures loan based on the existing equity in the homestead, if it

meets the requirements of Constitution Article XVI, Section 50(a)(6).

Home Equity = FMV of homestead - total mortgage debt owed against it

Section 50(a)(6) Constitutional Requirements apply to HELs:

• Voluntary Lien - each owner and spouse must consent to the lien

• Mortgage limit cannot exceed 80% FMV of the homestead

• Non-recourse loan - debt satisfied by the homestead collateral only

• Requires court order to foreclose non-judicially

• Lending must be by Authorized Lenders only

• Closed end credit – no open lines of credit unless is a HELOC under

Section 50(t)

Home Equity Loans

More 50(a)(6) Constitutional Requirements…

• No prepayment penalties are allowed

• Cannot be secured by additional property other than the homestead

• Originally, no Agricultural Designation on the homestead property allowed

• Debt Acceleration NOT allowed b/c decrease in home value or default on

other debts not secured by the home

• Closing must take place in the office of lender, attorney or title company

• Owner and spouse must acknowledge fair market value of their homestead

• No other HEL or Reverse Mortgage on the homestead at same time

• Must have been at least 12 months since date of last HEL

Home Equity Loan Endorsements

Still More 50(a)(6) Constitutional Requirements…

• Cooling off periods - Closing not less than 12 days after loan app. or date

prescribed Notice given; Loan may not disburse until 4th business day

following closing and borrower must execute a “no rescission” election by

4th day following closing

• Originally, 3% Fee limit on qualified expenses payable at closing

• Borrower must receive all closing docs on day of closing

• Documents must not have any material blanks left to fill in later

• Originally, “Once a HEL Always an HEL” – could not refinance an HEL on

the homestead unless by another HEL

• Cash-out refinance can only be by another HEL

• Originally, HELOC limited to 50% of FMV of the homestead


T-42 and T-42.1 Endorsements only apply to HELs

• Under TDI Rules P-44, P-47

• provide coverage on compliance of many of the Constitutional requirements

for HELs

– set forth in sub-paragraphs to paragraph 2 of the T-42 and to paragraph

1 of the T-42.1

– T-42 (f)(2) optional clause can be added as per P-44.C(2) covering

closing at office of the Title Company (if closing is there)

• Home Equity Affidavit in lieu of Affidavit of debts and liens


P-44 and P-47 Deletions: any part of T-42 or T-42.1 coverages can be deleted

by the insurer if it does not consider the additional risk insurable.

Check with your underwriter for approval

Premium charged, practically speaking = 25% Basic Premium Rate

T-42 = Rate Rule R-28 A, premium is 10% Basic Premium Rate

T-42.1 only issued as supplemental coverage when issuing T-42;

under Rate Rule R-28 B is 15% of Basic Premium Rate

SJR 60, 85th Texas Legislature, 2017

• Passed last legislative session making important changes to matters

related to HELs made on or after 1/1/18 and existing HELs that are

refinanced on or after 1/1/18

• Ratified by Constitutional vote on November 7, 2017

• Went into effect on January 1, 2018

• Discussed in Stewart Bulletin TX2017009 - on VU

SJR 60, 85th Texas Legislature, 2017

Changes made:

• Repealed prohibition against HELS on homesteads with AG

designation

• Now Allows Non-HELs to refinance HELs, under certain conditions

• Changed Fee % limit on HEL loans, kinds of fees to be counted

against that cap

• Repealed 50% limit on loan to FMV of homestead on HELOCs

• Amended Authorized Lenders that can make HELs

SJR 60 and Agricultural Homesteads

Historically, Home Equity Loans were not available for property

claiming Agricultural Use designation, other than for dairy farms. Many

rural homesteads did not qualify for HELs unless the AG designation on

the land was first removed.

• SJR 60 repealed the prior prohibition on Home Equity Loans for

homesteads designated for Agricultural use

• Home Equity Loans are now available on rural homesteads designated

for Agricultural use

• Changes approach to the T-42 issued on the title policy insuring an HEL


Currently, T-42 provides insurance for many of the HEL mortgage

constitutional requirements, including:

“2(b). The land being homestead property designated for agricultural

use as provided by statutes governing property tax, as set forth in

Subsection (a) (6) (i) of Section 50, Article XVI, Texas Constitution”

P-44 (B) allows for the deletion of any part of T-42 if the title insurance

company does not consider the additional risk to be “insurable”.

• Since risk of land being designated as Agricultural is no longer a real

risk, can delete item 2(b) from the T-42 endorsement

• No longer need to determine if all or part of the land has AG

Designation in examining an HEL for title insurance

• No longer need to require the AG Designation be removed as of closing


However, Tax Code Section 23.42(a-1) remains on the books…

“On or after January 1, 2008, an individual is not entitled to have land

designated for agricultural use if the land secures a home equity loan

described by Section 50a(6), Article XVI, Texas Constitution.”

• Does this mean once an HEL is constitutionally done as secured

by AG Designated property, the land loses its Ag Exemption?

Maybe…

• Would P-20 Rollbacks apply? No change in use…

SJR 60 and Refinancing HELs

Historically, Section 50 (f) of Article XVI of the Texas Constitution imposed the

“Once a HEL, Always an HEL” rule – that is, once you have an HEL on the

homestead, the only way you can refinance it would be by another HEL or

reverse mortgage.

SJR 60 amended language of Section 50(f), so that Home Equity Loans may

now be refinanced through Non-Home Equity Loans with a valid lien against

the homestead IF certain conditions are met.

Can still refinance an HEL on the homestead by another qualifying HEL, but

SJR 60 also allows for Non-Home Equity loans to refinance an HEL as an

alternative IF certain conditions are met.


Under the new Section 50(f), the Non-Home Equity loan refinancing an HEL

on a homestead must meet the following conditions:

• Occur more than 1 year after the first HEL was closed

• NOT include any additional funds other than funds to refinance the types

of debt outlined in the Constitution, and actual costs and reserves

required by the lender to refinance the debt • Cash out Refi of HEL on homestead is still only by HEL

• Be of an amount, that when added to the total outstanding principal

balances of other indebtedness secured by the homestead, is not more

than 80% of the FMV of the home. • Total of mortgage debts to value

• Lender must give the borrower the Constitutionally-mandated Written

Notice within 3 business days of a loan application and at least 12 days

before the loan is closed. • Form of the Notice is set forth at Section 50(f)(D)


What does this all mean for refinancing an HEL on the Homestead?

• Refi of HEL can still be done by HEL if it meets constitutional

requirements, using T-42, T-42.1 endorsements

• Cash-out Refi of HEL must still be by HEL only, using T-42, T-42.1

endorsements

• Non-cash out Refi of HEL can now be done by§50(f) Non-HEL,

BUT no T-42,T.42.1 endorsements are issued

• If Refi is by HEL, owner and spouse must execute a Texas Home Equity

Loan Affidavit (the same one as with T-42)

• If Refi is by§50(f) Non-HEL, owner and spouse must execute Texas

Home Equity Refinance Affidavit for Non-HELs

• Give R-8 Credit where applicable

SJR 60 and Fees Charged Historically, the fees that can be charged on Home Equity Loans could not total

to be more than 3% of the principal of the loan.

SJR 60 reduced the cap on fees to 2% of the principal of the loan

BUT also reduced the types of fees that count toward that cap. The following

expenses are now excluded from the calculation of the fee cap:

• Appraisals that are done by third – party providers;

• Property surveys by state registered or licensed surveyors;

• State “base” (basic) premiums for Title Insurance with endorsements; and

• Title examinations report if its cost is less than the state base/basic

premium for title insurance without endorsements Article XVI of the Texas Constitution, Section 50 (a)(6)(E)(i-iv)

SJR 60 and Home Equity Lines of Credit

Historically, Home Equity Lines of Credit were restricted, prohibiting additional

advances on a loan from being made if the principal amount outstanding

exceeded 50% of the FMV of the homestead.

• SJR 60 repealed that 50% limit language, thus increasing the limit from 50%

to the overall limit of 80% of the FMV of the homestead

• See T-42, item 3 addressing the HELOC priority for future advances; no

change in coverage anticipated by the increase in the limit

Article XVI of the Texas Constitution, Sections 50(a)(B), 50(t)

SJR 60 and Approved Lenders

Section 50(a)(6)(P) requires that HELS be done only by approved lenders. SJR

60 expanded current list of approved lender entities at Section 50 (a) (6) (P) to

include :

• Subsidiaries of banks, saving & loan associations, savings banks and credit

unions as long as they meet the other requirements listed in the Constitution

to make home equity loans; and

• Mortgage bankers and Mortgage companies

• Note: Mortgage “brokers” were removed from the list of approved lenders.

Article XVI of the Texas Constitution, Sections 50(a)(6)(P)

Durable Powers of Attorney for Home Equity Loans

HB 1974 amended Estates Code relating to the use of DPOAs

executed after Sept.1, 2017 in Home Equity Loan transactions:

• Estates Code §751.151 – added Home Equity Loans and Reverse

Mortgages to the list of applicable transactions requiring the DPOA

to be recorded within 30 days of closing.

• Statutory DPOA Form at Estates Code §752.051: Introductory

notice paragraph on the Form now advises principal that if he or she

wants the agent to have the authority to sign Home Equity Loan

documents, then the DPOA must be executed at the office of the

lender, an attorney, or title company.

Durable Powers of Attorney for Home Equity Loans

HB 1974: for DPOAs executed after Sept.1, 2017:

• Estates Code §752.102, powers given to the Agent under a DPOA

amended at (b) to now include the powers to execute Home Equity Loan

documents and to consent to create the lien against property owned

by the principal’s spouse in which the principal has a homestead interest.

• Certification of DPOA by Agent at Estates Code §751.023(b) - if the

DPOA is to be used in a Home Equity Loan, Certification must certify DPOA

was executed at the office of the lender, an attorney, or title company.

• Check with your underwriter on requirements

See STGC Bulletins TX2013004, TX2017007

Be Careful Out There

Charlie Craig

Associate General Counsel

Texas Underwriter

Stewart Title Guaranty Company

Austin, Texas

(512) 236-0405 [email protected]

Per the TDI and the State Bar, in order to obtain a CE Certificate or CLE Credit you must:

– listen to the webinar for a minimum of 55 minutes

–obtain the password (provided at the end of the presentation)

– follow the instructions as given

34

To Receive CE Credit Each individual seeking credit hours must send their own certificate request to:

[email protected]

Please include the following information: • Provide only this Presentation Name in the Subject Line of your e-mail – “Home

Equity Loans Update” In the body of your e-mail: • Name of Participant (as it appears on your Escrow Officer License); • Presentation PASSWORD given at the end of the webinar; • License Number Only (located on left side of Escrow Officer Certificate of License –

for example: License Number: 1234567-890123)

For Attorney CLE Credit also include: • Texas State Bar Number • Affiliation with Stewart

– Employed by Stewart Title Guaranty Company; – an affiliate; or – a Stewart agent

For more details, see the CE and CLE FAQs at:

http://www.stewart.com/en/stg/texas/education/texas-tips/ce-cle-faqs.html

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