Texas Constitution Limits Potential Reverse Mortgage Market Growth

Even though Texas’ Homestead law will continue to prevent the state from offering the HECM for Purchase program until at least 2013, some lenders are preparing to enter the market they believe will open up if the constitution is amended to allow the product.

The state’s warm climate, low cost of living, and lack of income tax makes it a particularly favorable location for seniors who are looking to downsize or relocate into a new home, says David Cook, manager of Network Funding, LP’s reverse mortgage division. Added to those factors is a 10% senior citizen population, according to U.S. Census data, making for a ripe market.

“The originators are ready for it, Realtors are ready for it, builders are ready for it, and seniors are ready for it,” says Cook of the HECM for Purchase. “We all think seniors should have this option.”

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Cook has given presentations to groups of realtors to promote discussion of the program, in order to get their opinion on the product.

“Without exception, they get very, very excited about the HECM for Purchase,” he says. “When you think of a realtor or a builder that can be educated on the HECM for Purchase, what they see is an opportunity to provide financing for a senior that’s purchasing a property that otherwise they won’t qualify for under the new stringent requirements. There are a lot of seniors that, four years ago, could have bought a home with a traditional mortgage, and today, they can’t. So it gives them an option that they couldn’t otherwise.”

Other Texas lenders agree on the program’s viability.

“I think there’s a huge market for [HECM for Purchase]. If you look at other states, you would see that the HECM for Purchase is a tool that many seniors are utilizing, that is not available in Texas,” says Phillis Jackson, Manager of Athlan Mortgage, a branch of Network Funding, LP.

However, in order to allow the HECM for Purchase program, which gives borrowers the ability to purchase a new home using the proceeds from a reverse mortgage on that property, Texas’ constitution would have to be amended, says Scott Norman, the immediate past president of the Texas Mortgage Brokers Association (MBA).

“Anything that relates to home equity lending in the state of Texas must be authorized by the constitution,” he says, explaining that current law requires a prospective borrower to have equity in a house before obtaining any sort of a lien against it.

In 1997, Texas was the last state to allow reverse mortgages, a change which also required amending the constitution (the HECM for Purchase program had not yet been developed at that time). Since then, it’s become the state with the second-highest endorsement volume, behind California.

“Technically speaking, a reverse mortgage is a refinance—you already own the house. And with a HECM for Purchase, you don’t own the house yet,” said Norman, adding that it’s a classic ‘chicken or the egg’ quandary. “How do you buy a house, by getting a reverse mortgage on it, if you already have to own it, per the constitution?”

The Texas legislature will not meet again until January of 2013, and in the meantime, Norman is heading up the Texas MBA and the National Reverse Mortgage Lenders Association’s (NRMLA) efforts to amend the constitution.

In order to do this, state legislators need to sponsor legislation to change what Norman says amounts to a “technical glitch” in the constitution. He says they’ve spoken to a few who were supportive, but still do not have any lined up.

Written by Alyssa Gerace

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  • The Texas Constitutional issue is an interesting one.  For example, not long ago one of my friends was looking to buy rental property near TTU in Lubbock.  His principal residence is in Dallas.  He was toying with the idea of getting a forward mortgage on the rental or a reverse on his home.  The constitution issue made the matter a no-brainer.
     
    His home is protected under state law.  If he put the reverse on that property, negative amortization could threaten its eventual loss; something he and his wife are not prepared to risk.  Instead they took out the forward mortgage.  Under Texas law, their home is not at risk unless they agree to a lien on it.  It is generally not subject to taking under normal deficiency judgments unrelated to the home.

    In other states homestead laws are not so generous.

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