Texas’ Residential and Commercial Real Property Foreclosures Called into Question
On July 2, 2020, Governor Abbott amended Executive Order GA-28 to prohibit outdoor gatherings in excess of 10 people unless the local mayor (or county judge in an unincorporated area) authorizes a larger gathering. On August 1, 2020, Texas Attorney General Ken Paxton issued an informal letter opinion concluding that:
- …a foreclosure sale of residential or commercial real property that is conducted outdoors is subject to the limitation on outdoor gatherings in excess of 10 persons imposed by Executive Order GA-28. The consequence is that potentially all foreclosure sales held after June through year end or until the order is changed are subject to attack. Meanwhile, consult with local counsel regarding your foreclosure practices at this time.
If a gathering larger than 10 persons isn’t authorized, an outdoor foreclosure proceeds, and one or more willing bidders are unable to attend because of the attendance limit, the Attorney General opined that “the propriety of a foreclosure auction may be called into question.” Based on that, the Attorney General concluded that “the sale should not go forward as it likely would not comport with the Property Code requirement that the sale be a ‘public sale.’”
Note: If you have foreclosed on commercial or residential property in Texas on or after July 2, 2020, contact your institution’s legal counsel to determine whether this affects the sale. While we are providing this information for general informational purposes, foreclosure law is outside our area of expertise.
Payroll Protection Program - Round 2
When many clients expressed that they had nowhere to turn for documents for Round 1 of PPP in early 2020, we decided to assist them free of charge until adequate third-party documentation assistance was available. Now that third party resources are available, PPDocs is not providing documents for future rounds of PPP.
Please know that we did not make this decision without consideration of our clients’ needs. It simply boils down to the fact that we are not experts on the Small Business Administration and the legislation surrounding the PPP program. While a fair amount of research and work was put into putting the first round of materials together, even that was more of a best effort than something we could provide representations and warranties for.
Note: In order to help serve our clients PPP needs, we sought out alternatives and determined that the San Antonio/Austin law firm of Kennedy Sutherland is able to best serve Texas lenders’ PPP lending needs. Please feel free to contact Dub Sutherland at Kennedy Sutherland firstname.lastname@example.org to discuss options. You can learn more about their team at: https://www.kslawllp.com/our-team
January’s Frequently Asked Question
Question: We have a buyer with a 1st and 2nd lien that we are rolling into a new refinance loan. The 2nd lien was taken out after the home was purchased. Our underwriter has informed us that we have to structure this loan as a Texas A(6) Cash-out loan because we are paying off a 2nd lien that was not used to originally purchase the property.
Answer: The underwriter appears to be referencing the requirements of a FNMA “cash out refinance”. That is an underwriting category under the FNMA Selling Guide, but it is not the same as a 50(a)(6) Texas home equity loan, which is a product of Texas law.
The FNMA Selling Guide provides that when you are refinancing a first and second lien, and the subordinate lien was not used to purchase the property, then the refinance loan must be underwritten as a FNMA “cash out refinance”, and cannot be underwritten as a “limited cash out refinance.”
FNMA Selling Guide – Section B2-1.3-02
When the following conditions exist, the transaction is ineligible as a limited cash-out refinance and must be treated as a cash-out refinance:
- no outstanding first lien on the subject property (except for single-closing construction-to-permanent transactions, which are eligible as a limited cash-out out refinance even though there is not an outstanding lien on the subject property);
- the proceeds are used to pay off a subordinate lien that was not used to purchase the property (other than the exceptions for paying off PACE loans and other debt used for energy-related improvements, described above);
- the borrower finances the payment of real estate taxes that are more than 60 days delinquent for the subject property in the loan amount; and
- a short-term refinance mortgage loan that combines a first mortgage and a non-purchase-money subordinate mortgage into a new first mortgage or any refinance of that loan within six months.
The transaction is not eligible for delivery to Fannie Mae when the subject property is listed for sale at the time of disbursement of the new mortgage loan.
In the FNMA Selling Guide section on 50(a)(6) Texas home equity loans, however, FNMA points out that what constitutes a 50(a)(6) under Texas law is not the same thing as what constitutes a “cash out refinance” under the FNMA Selling Guide.
FNMA Selling Guide – Section B2-1.3-02
Lenders should be aware that Fannie Mae’s classification of loan transactions as “cash-out refinance” or “limited cash-out refinance” may differ from the way loans are classified under Texas law.
Lenders should not rely on Fannie Mae’s categorization of refinance loans for purposes of determining whether compliance with the provisions of Texas Constitution Section 50(a)(6) is required. Rather, such lenders should consult with their counsel to determine the applicability of Texas Constitution Section 50(a)(6) to a particular loan transaction.
Texas law determines whether or not a loan is a Texas Section 50(a)(6) loan, and Fannie Mae’s policy determines whether the loan must be delivered as a cash-out refinance transaction or as a limited cash-out refinance transaction.
The lender is responsible for determining:
- the applicability of Texas Constitution Section 50(a)(6) regardless of Fannie Mae’s definitions of cash-out and limited cash-out refinance transactions; and
- if the loan should be delivered to Fannie Mae as a cash-out refinance or a limited cash-out refinance transaction, including the applicable special feature codes and payment of all applicable LLPAs.
All loans that constitute Texas Section 50(a)(6) loans under Texas law must comply with these provisions, regardless of whether the loan is classified as a “cash-out refinance” or “limited cash-out refinance” in the Selling Guide. See B5-4.1-03, Texas Section 50(a)(6) Loan Underwriting, Collateral, and Closing Considerations
For any refinance of a Texas Section 50(a)(6) loan that results in a loan originated in accordance with and secured by a lien permitted by Article XVI, Section 50(a)(4) of the Texas Constitution, an affidavit referenced in Section 50(f-1) Article XVI of the Texas Constitution must be prepared and recorded in connection with each such transaction.