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 2 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. 3 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. Homestead Protection in Texas 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.” Homestead Protection in Texas 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.” Homestead Protection in Texas 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 Home Equity Loan Endorsements 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 Home Equity Loan Endorsements 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 .