The Fifth Circuit has certified a question about home-mortgage lending to the Texas Supreme Court.
The overarching question is whether a lender getting a borrower to agree to recapitalize unpaid insurance premiums and unpaid taxes is a refinance or a modification (and if it is merely a modification, which of the restrictions on these type of loans in the Texas Constitution apply).
The modification here was done through a less formal process than the Texas Constitution requires for a typical refinancing. The Fifth Circuit opinion says that, for that reason, if this is a refinance, “the inquiry ends: there is no dispute that the Agreements did not independently comply with” at least one of Texas’s requirements.
If the Texas Supreme Court does not consider this type of transaction to be a modification, however, the Fifth Circuit would like it to address several other questions about which rules apply to a modification:
whether this agreement is an “advance of additional funds” under the original mortgage in violation of Texas law;
in light of that answer, whether past-due property taxes and insurance can be recapitalized consistent with Texas law;
which of the regulations about home loans might apply to a modification, including whether the loan-to-value ratio must be at 80% at the time of the modification, or whether that only applies at the original closing; and
whether this type of modification to capitalize past-due payments would have to comply with the stringent rules for open-ended HELOC (home-equity line of credit) agreements.
Hat tip: David Coale of 600camp, who also blogged about this earlier today.