Article by Julia Patterson Forrester
This Article focuses on home equity loans, which will be defined as loans secured by a homeowner's residence other than loans used solely to purchase or construct the residence, to refinance a purchase money loan, or to make home improvements. A home equity loan may be secured by a second, third, or other junior mortgage on a residence, or by a first mortgage when the purchase money loan has been paid off or is being refinanced as a part of the home equity loan. Home equity lines of credit, which are revolving credit loans secured by a lien on a home, are included within the meaning of the term “home equity loan” as used in this Article.
In this Article, I advocate elimination of federal promotion of home equity financing, recommending that the federal government permit home equity financing without encouraging it. In Part II of this Article, I discuss some of the problems caused by federal promotion of home equity financing. While home equity loans carry a risk to the borrowers of losing their homes, homeowners cannot properly assess this risk due to their tendency to underestimate the probability of default and foreclosure. Homeowners who do lose their homes to foreclosure may be devastated, both financially and psychologically. Despite the risks of a home equity loan, the total amount of home equity debt has increased drastically in recent years due, in part, to the deductibility of home equity interest under federal tax law. In addition, as a result of federal preemption of state consumer protection measures such as usury statutes, predatory lenders have been permitted to victimize homeowners in low-income neighborhoods and homeowners who, like the Dunckels, are in severe financial distress. Because of special privileges given to home equity lenders under bankruptcy law, home equity borrowers may not be able find relief in bankruptcy.
In Part III of this Article, I discuss the federal government's home ownership policy because an understanding of the federal measures that promote home equity financing requires a comprehension of their relationship to measures that promote home ownership. In Part IV, I examine both the means by which the federal government encourages home equity financing under current law and the effects of these measures. In Part V, I weigh competing federal policies affected by home equity financing and propose the adoption of several measures designed to achieve a more appropriate balance. First, tax law should be changed to eliminate the deduction for home equity interest so that all consumer interest is nondeductible, regardless of whether it is secured by a lien on a home. Second, federal preemption of state usury ceilings on home equity loans should be eliminated so that states can regulate interest rates on home equity loans. Finally, bankruptcy law should be amended to permit homeowners in bankruptcy to modify their home equity loans as is permitted with other types of secured debt.
About the Author
Julia Patterson Forrester. Professor of Law, Southern Methodist University School of Law, Dallas, Texas. B.S.E.E. 1981, J.D. 1985, The University of Texas at Austin.
Citation
69 Tul. L. Rev. 373 (1994)