BILL ANALYSIS
C.S.S.J.R. 25
By: Patterson
State Affairs
3-27-95
Committee Report (Substituted)
BACKGROUND
The Texas Constitution prohibits the forced sale, or foreclosure,
of a homestead except for the failure to pay property taxes, to
repay a purchase money mortgage (a mortgage to finance the purchase
of a homestead), or to repay a home improvement loan. The effect
of this provision is to prevent homestead owners from using any
portion of their homesteads as collateral for any other type of
loan.
Texas is the only state that prohibits the use of homestead equity
as collateral for equity loans. An independent economic study
conducted by the University of Texas estimated the total
unencumbered equity in Texas homesteads was $116 billion at the end
of 1991.
Texas is also the only state that includes business property in its
homestead restrictions. Texas law allows one acre, regardless of
value, to each single person or head of a family as an urban
homestead. This acre can be one lot, or a series of lots, as long
as the total acreage does not exceed one acre. If more than one
lot qualifies as an urban homestead, the lots do not have to be
located next to each other.
The lots that comprise the one-acre urban homestead can be used for
a residence or a business. Many Texans that live in urban areas
have homes on pieces of property whose size is less than one acre,
and businesses on separate pieces of property. Texas law prohibits
borrowing against either piece of property for any reason except
purchase, improvements to the property, or to pay property taxes.
The law applies automatically; a small business owner cannot waive
the homestead designation on the business property and borrow
against it.
PURPOSE
As proposed, C.S.S.J.R. 25 requires the submission to the voters of
a constitutional amendment authorizing a voluntary, consensual
encumbrance on homestead property to pay back an equity loan.
RULEMAKING AUTHORITY
It is the committee's opinion that this bill does not grant any
additional rulemaking authority to a state officer, institution, or
agency.
SECTION BY SECTION ANALYSIS
SECTION 1. Amends Section 50, Article XVI, Texas Constitution, as
follows:
Sec. 50. (a) Adds equity loans to the list of debts for which
a family or individual's homestead is not protected from
forced sale for payment of the debt.
(b) Created from existing text. Makes nonsubstantive
changes.
(c) Created from existing text. Makes a conforming change.
(d) Authorizes an equity loan to be made only by certain
parties.
(e) Prohibits an equity loan from being secured by homestead
property that is designated for agricultural use.
(f) Prohibits a homestead from being encumbered by more than
one equity loan in addition to a valid encumbrance on the
homestead property (property).
(g) Prohibits a lender from making an equity loan other than
a reverse mortgage if a borrower under the loan is age 65 or
older.
(h) Prohibits a lender from requiring or accepting real or
personal property as additional collateral on an equity
loan, with certain exceptions. Authorizes only the property
securing the equity loan to be collateral for the equity
loan.
(i) Prohibits a lender from requiring or accepting a
borrower's property as collateral on a debt not described by
Subsection (a).
(j) Prohibits the principal amount of an equity loan plus
the aggregate total of the outstanding balances of other
indebtedness secured by valid encumbrances of record against
the property from exceeding 90 percent of the fair market
value of the property.
(k) Provides that the aggregate total of the outstanding
balances of indebtedness secured by valid encumbrances of
record against the property does not include any advance
made by a lender to protect a lien, security interest, or
other valid encumbrance on the property securing the loan.
(l) Prohibits a lender from accelerating the remaining
payments of an equity loan because of a decrease in the
market value of the property securing the equity loan, with
an exception. Provides that this section does not prohibit
a lender from refusing to make additional advances under an
equity loan other than a reverse mortgage if the value of
the property decreases.
(m) Prohibits a lender from accelerating the remaining
payments of an equity loan because of the borrower's default
under any other indebtedness not secured by a prior valid
encumbrance on the property. Provides that this section
does not prohibit a lender from refusing to make additional
advances under an equity loan, other than a reverse mortgage
if the borrower has defaulted in another payment of
indebtedness.
(n) Prohibits a lender from seeking recourse against or
exposing assets of a borrower other than the property
securing the equity loan for payment or performance of an
obligation of an equity loan.
(o) Authorizes a lienholder or assignee for value to rely on
an acknowledgment by the owner of a homestead and the
owner's spouse, of compliance with applicable requirements
for an equity loan secured by a mortgage, trust deed, or
other lien on a homestead.
(p) Defines "blended equity loan," "equity loan," "net
equity," and "reverse mortgage."
SECTION 2. Adds a temporary provision to the Texas Constitution,
as follows:
TEMPORARY PROVISION. (a) Applies this provision to the
constitutional amendment authorizing a voluntary, consensual
encumbrance on homestead property.
(b) Effective date: May 1, 1996.
(c) Provides that this temporary provision takes effect on
the adoption of the amendment by the voters and expires May
2, 1996.
SECTION 3. Requires this constitutional amendment to be submitted
to the voters at an election to be held November 7, 1995. Sets
forth the required language for the ballot.