homestead 10 things you should know - res ipsa

HOMESTEAD

10 THINGS YOU SHOULD KNOW

Richard Melamed 2100 West Loop South #1100

Houston, Texas 77027 713.572.7030

[email protected]

The 29th Annual Robert C Sneed TEXAS LAND TITLE INSTITUTE Thursday December 5, 2019

mailto:[email protected]

Richard Melamed Richard Melamed, PLLC

Houston, Texas [email protected]

Richard Melamed is a native Houstonian, a graduate from

Bellaire High School, the University of Texas and South Texas

College of Law.

Mr. Melamed has practiced real estate and business law in Texas for 40 years. He has been involved

in the title business his entire career. He was trained as a title examiner and closer. He was a Fee

Attorney/Escrow Officer for over 10 years. He has been a regular presenter of papers on various

topics for the Texas Land Title Association for over 30 years and speaks annually at their TLTA

Land Title School, for the training of industry newcomers.

As an attorney in private practice, he has represented several Title Agencies in litigation

including cases involving losses and fraud allegations.

• Board Certified in Residential, Commercial, and Farm & Ranch Real Estate by the

Texas Board of Legal Specialization

• A-V Rated by Martindale-Hubbell

• Listed in the Bar Registry of Preeminent Lawyers

• Recognized by Super Lawyers magazine for over 20 consecutive years as one of the

Top 100 lawyers in the Houston Region

• Named in the Super Lawyer’s 2011 Business Addition as the only solo practitioner

in Texas to be listed under the “Top Law Firms in Construction & Real Estate”

• Listed in Who’s Who in American Law;

• Recognized by Inside Houston and H Magazines as one of the Best Real Estate

Lawyers in Houston

• Member, State Bar of Texas Real Estate Forms Committee

• Member, State Bar of Texas Real Estate, Probate and Trust Council (2010-2014)

• Section Representative- State Bar Board of Directors (2013-2014)

• Board Certification Exam Committee (2018-2022)

• Contributor – Texas Foreclosure Manual

• Member – Supreme Court Task Force – Legal Services to the Indigent – Landlord

Tenant Forms (2017-2020)

mailto:[email protected]

TABLE OF CONTENTS

Brief Background on Separate/Community and Homestead Rights .............................................................................. Page 1 When Does a Non-Borrower (or non-Owning) Spouse Have to Sign Documents? ...................................................................

Are There Still Pretend Sales? ............................................................. Page 5

What’s Rural and What’s Urban? ...................................................... Page 11

Home Equity Loans- Forfeitures & Cures .......................................... Page 14

Do Those Cure and Forfeiture Rules Make Sense? ............................ Page 22

Reverse Mortgages ........................................................................... Page 25

Sale of Homestead as a Fraudulent Conveyance .............................. Page 27

Redemption of Homestead Sold at Tax Sale ..................................... Page 29

Residential Homestead Exemption and Open Space Valuation ........ Page 30 Addendum 1 - Consanguinity and Affinity ....................................... Page 31

TLTA 2019 Institute Homestead 1

1. BRIEF BACKGROUND ON SEPARATE/COMMUNITY AND HOMESTEAD

RIGHTS

In the most general sense, the homestead attaches to the dwelling house constituting the

family residence together with the land on which it is situated, and the appurtenances connected

therewith. In re McDonald, 486 B.R. 843, 845 (Bankr. S.D. Tex. 2013).

The Homestead Claim is Dependent on Some Indicia of Title (with one notable

exception).

A homestead must concern an estate in land. Matter of Norris, 316 B.R. 246, 250 (W.D.

Tex. 2004). Without title, there is no homestead at all. In re Brunson, 498 B.R. 160, 164

(Bankr. W.D. Tex. 2013).

However, a claim of homestead is not dependent on an unqualified fee simple

ownership of the land involved. Inwood North Homeowners’ Ass’n v. Harris, 736 S.W.2d 632,

636 (Tex. 1987); Cadle Co. v. Ortiz, 227 S.W.3d 831, 836 (Tex. App. - Corpus Christi - Edinburg

2007, pet. denied); In re Kim, 748 F.3d 647, n. 74 (5th Cir. 2014); Matter of Perry, 345 F.3d 303,

314 (5th Cir. 2003); Resolution Trust Corp. v. Olivarez, 29 F.3d 201, 205 (5th Cir.1994).

A property may be [even be] (emphasis mine) claimed as homestead although fee title

is in a third party. Rooms with a View, Inc. v. Private Nat’l Mortgage Ass’n, 7 S.W.3d 840, 849

(Tex. App. - Austin 1999, pet. denied).

Generally, any present possessory estate in real property coupled with the required

occupancy will support a homestead claim. Inwood North Homeowners’ Ass’n v. Harris, 736

S.W.2d 632, 636 (Tex. 1987); Siller v. LPP Mtg., Ltd., 2013 WL 1484506 at *7 (Tex. App. - San

Antonio 2013); In re Kim, 748 F.3d 647, n. 74 (5th Cir. 2014); Matter of Perry, 345 F.3d 303, 314

(5th Cir. 2003); Resolution Trust Corp. v. Olivarez, 29 F.3d 201, 205 (5th Cir 1994).

But, ownership of property will not necessarily entitle the claimant to a homestead.

Ownership alone is insufficient to make a premises a homestead. Marincasiu v. Drilling, 441

S.W.3d 551, 559 (Tex. App. – El Paso 2014, pet. denied); Sifuentes v. Ariola, 2009 WL 1099253

at *2 (Tex. App. – Austin 2009); Dominguez v. Castineda, 163 S.W.3d 318, 331 (Tex. App. – El

Paso 2005, pet. denied); Sanchez v. Telles, 960 S.W.2d 762, 770 (Tex. App. – El Paso 1997, pet.

denied); In re Thaw, 620 Fed. Appx. 304, 309 (5th Cir. 2015).

A debtor may own only one property and still not be able to claim it as homestead. Sanchez

v. Telles, 960 S.W.2d 762, 770 (Tex. App. – El Paso 1997, pet. denied); In re Mitchell, 80 B.R.

372, 384 (Bankr. W.D. Tex. 1987); In re Brown, 191 B.R. 99, 102 (Bankr. N.D. Tex. 1995).

A life estate will support a homestead claim. In re Moore, 93 B.R. 480, 482 (Bankr. N.D.

Tex. 1988).

Additionally, debtors in bankruptcy court have been successful asserting a homestead

claim in a leasehold. In re Chambers, 419 B.R. 652, 676 n. 17 (Bankr. E.D. Tex. 209); In re


Eskew, 238 B.R. 708, 711 (Bankr. W.D.Tex. 1998); In re Leonard, 194 B.R. 807, 811 (Bankr.

N.D. Tex. 1996); In re Shults, 97 B.R. 874, 875 (Bankr. N.D. Tex. 1989); In re Moore, 93 B.R.

480, 482 (Bankr. N.D. Tex. 1989).

However, the homestead claimant under leasehold is subject to the rights of the true owner or

those claiming under him. In re Chambers, 419 B.R. 652, n. 17 (Bankr. E.D. Tex. 2009). The

leasehold may be for a specific term or at will. In re Moore, 93 B.R. 480, 482 (Bankr. N.D. Tex.

1989). The lease does not have to be in writing. In re Brunson, 498 B.R. 160, 163 (Bankr. W.D.

Tex. 2013)

In In re Eskew 233 B.R. 708 (Bankr. W.D. Tex. 1998), the tenants were allowed a homestead

in a leasehold established under an unwritten gratuitous lease with one of the tenant’s

parents.

Exception.

There is a significant exception to the requirement that a homestead claim be anchored in

some title to the property. For married couples, the homestead exemption may attach either

to the community or separate property of either spouse. Rivera v. Hernandez, 441 S.W.3d

413, 420 (Tex. App. – El Paso 2014, pet. filed); Solomon v. Lesay, 309 S.W.3d 540, 555 (Tex.

App. - Houston [1st Dist.] 2012, no pet.); In re Wiggains, 535 B.R. 700, 718 (Bankr. N.D. Tex.

2015).

With respect to property, sole management community property, or the homestead

established on the separate property of the other spouse, an exception exists to the requirement

that the homestead be united with some form of title in the property. See In re Kim, 748 F.3d 647,

660 (5th Cir. 2014). A spouse may claim a homestead in property although the property is

the separate property of the other spouse. Rivera v. Hernandez, 441 S.W.3d 413, 420 (Tex.

App. – El Paso 2014, pet. filed); Denman v. Atlas Leasing, 285 S.W.3d 591, 595 (Tex. App. -

Dallas 2009, no pet.); Cadle Co. v. Ortiz, 227 S.W.3d 831, 836 (Tex. App. - Corpus Christi -

Edinburg 2007, pet. denied); Rooms with a View, Inc. v. Private Nat’l Mortgage Ass’n, 7 S.W.3d

840, 849 (Tex. App. - Austin 1999, pet. denied); In re Kim, 748 F.3d 647, 660 (5th Cir. 2014).

For the non-owning spouse this interest is in the nature of a life tenancy so long as the

property retains its homestead character. U.S. v. Tellez, 2011 WL 2183296 at *3 (W.D. Tex.

2011); Geldard v. Watson, 214 S.W.3d 202, 208 (Tex. App. - Texarkana 2007, no pet.).

While the claim of a marital homestead in the separate property of one spouse does not convert

that property to community property, Rivera v. Hernandez, 441 S.W.2d 413, 420 (Tex. App. – El

Paso 2014, pet. filed) it does establish in the non-owning spouse a separate and undivided

possessory and legal interest in the homestead distinct and apart from ownership which may not

be compromised by the owning spouse or by his heirs. In re Wiggains, 500 B.R. 700, 713-18

(Bankr. N.D. Tex. 2015).


The non-owning spouse has something akin to an undivided life estate in the property, (Id.

at 714. See also York v. Boatright, 2016 WL 1573912 at *3 (Tex. App. – Texarkana 2016); In re

Wiggains 535 B.R. 700, 718 (Bankr. N.D. Tex. 2015). However, the life estate analogy is

problematic on some levels of analysis. For example, a non-owning spouse’s homestead rights

may be lost by abandonment. A true life estate is not terminated by abandonment. York v.

Boatright, 2016 WL 1573912 at *3 (Tex. App. – Texarkana 2016); In re Kim, 748 F.3d 647, 714

(5th Cir. 2014); In re Wiggains, 535 B.R. 700, 716-18 (Bankr. S.D. Tex. 2015). Additionally, the

homestead interest of a non-owning spouse is inalienable. This distinguishes it from a typical

life estate. In re Wiggains, 535 B.R. 700, 718 (Bankr. N.D. Tex. 2015)) with the owning spouse

retaining an estate similar to a remainder interest. York v. Boatright, 2016 WL 1573912 at *3 (Tex.

App. – Texarkana 2016).

It is not necessary for both spouses to be record title owners in order for the homestead to

attach. Denman v. Atlas Leasing, 285 S.W.3d 591, 595 (Tex. App. - Dallas 2009, no pet.); Cadle

Co. v. Ortiz, 227 S.W.3d 831, 836 (Tex. App. - Corpus Christi - Edinburg 2007, pet. denied).

The marital survivor’s right to live in the house for life is part of this homestead estate. The

right extends to the decedent spouse’s separate property, irrespective of the terms of the

decedent’s will.

2. WHEN DOES THE NON-BORROWING (OR NON-OWNING) SPOUSE HAVE TO

SIGN?

You can sum it up for clients with two maxims:

• A spouse can have homestead rights in his or her spouse’s separate property.

• One spouse cannot sell or mortgage the other spouse’s homestead without their consent.

That breaks down to this: The non-borrowing spouse must sign the deed in a sale, and

the deed of trust in a mortgage of their homestead. The non-borrowing spouse never signs the

note: That’s why they are called the “non-borrowing spouse”.

So, in the sale of a homestead, whether separate or community property, both selling

spouses must always sign the deed. A signature on the deed or deed of trust should irrefutably

evidence her consent to the sale of mortgaging of her homestead.

On the buying side, either one or both of the spouse’s credit will be used in the loan. If

one spouse is not a borrower (the other spouse being the only borrower) sometimes the non-

borrowing spouse does not appear as a named grantee on the deed, but should nonetheless be

required to sign the deed of trust (even in a pro-forma capacity) to evidence the consent to the


borrowing spouse to pledge the homestead as collateral. If both souses are co-borrowers both

will sign everything.

But there is another twist that comes up from time to time. I first saw about 20 years ago.

The lender was making a huge refinance loan on the home residence that was on the ranch property

that had been passed down through the husband’s family for four generations. The husband

inherited the property before he married.

When the refinance closing papers came in, they showed the husband and wife both as

borrowers, both signing the note and deed of trust, and to my surprise, there was a deed included

for the husband to deed one half of the property to the wife. When we asked the husband about

it, he was surprised and angry and wasn’t going to take the ranch out of the family line of

succession just for this refinance.

By the time it reached my desk, I looked it over and figured out that some New York firm

had drafted the papers and must not have a grip on Texas community property and homestead

law. The wife didn’t need to own half of the property for the new lender to have a good insurable

first lien on the property. This new lender (and their New York lawyer) had no right to mess

around with this guy’s family plans and his title to the property.

So, someone made me call him up and explain it all. You know, homestead rights in a

spouse’s separate property; pro-forma joinder on the deed of trust; renewal, extension and

subrogation to the outstanding balance of the liens being refinanced, an insurance policy that

guaranteed they had a good foreclosable first lien on the property, all that stuff.

He listened patiently and then advised me that there had been a rash of bankruptcy

decisions regarding the issue of having a wife sign a note on her husband’s separate property.

He told me that co-debtor non-owning spouses were avoiding liability under the theory that there

had been no consideration given to the non-owning spouse for their signing on to the debt on

the other spouse’s separate property. He said that if they had approved the loan on his credit

alone, then she would be a non-borrowing spouse, and sign only the deed of trust and a few

disclosures. But since she was now going to be a co-borrower, there is no consideration for her

using her credit, and being personally liable for a debt secured by an asset that she does not own

and has no prospect of ever owning. Hence, they included the deed so the non-owning spouse

could not complain later, in bankruptcy or otherwise, about failure of consideration.


3. ARE THERE STILL PRETEND SALES?

Yes. But as a “gate keeper”, title companies are more aware and alert to them.

Now, there is no constitutional prohibition against a debtor selling his homestead so long as

the sale is (1) voluntary, (2) made with the appropriate legal formalities, (3) is intended to pass

title, and (4) involves no condition of defeasance. Ketcham v. First Nat’l Bank of New Boston,

875 S.W.2d 753, 756 (Tex. App. - Texarkana 1994, no writ); Matter of Perry, 345 F.3d 303, 312-

13 (5th Cir. 2003); In re Girard, 104 B.R. 817, 820 (Bankr. W.D. Tex. 1989).

A condition of defeasance allows a seller to reclaim title to the property conveyed. In re

Cadengo, 370 B.R. 681, 691 (Bankr. S.D. Tex. 2007). The constitution prohibits “pretended

sales” involving a condition of defeasance. TEX. CONST. art. XVI, § 50(c) (Vernon Supp. 2015).

See also Summage v. Jean, 2007 WL 1288748 at *2 (Tex. App. - Beaumont 2007); In re Jay, 432

F.3d 323, 325 (5th Cir. 2005); In re Cadengo, 370 B.R. 681, 691 (Bankr. S.D.Tex. 2007).

A pretended sale is a transaction not meeting the above four criteria and used with the intention

to subvert constitutional limitations on permitted liens against the homestead. TEX. CONST. art.

XVI, § 50(c) (Vernon Supp. 2015). See also Summage v. Jean, 2007 WL 1288748 at *2 (Tex. App.

- Beaumont 2007); In re Jay, 432 F.3d 323, 325 (5th Cir. 2005); In re Cadengo, 370 B.R. 681, 691

(Bankr. S.D. Tex. 2007).

Pretended sales may take as many forms as human ingenuity can or may yet conceive. They

may not be easily rooted out by resort to any mathematical or objective formula. In re Jay, 308

B.R. 251, 285 (Bankr. N.D. Tex. 2003).

An instrument written as a deed absolute on its face may, in fact, be a mortgage on homestead

property in violation of the Texas Constitution. RBS Mtg., LLC v. Gonzalez, 2013 WL 749730 at

*3 (Tex. App. - San Antonio 2013).

Texas courts may employ equity to look past the language and form of the deed to find a

mortgage, disguised as it may be. Johnson v. Cherry, 726 S.W.2d 4, 6 (Tex. 1987).

Whether a particular instrument is a deed, or a mortgage is a question of fact to be determined

both from the language of the contract and parole and extrinsic evidence. Johnson v. Cherry, 726

S.W.2d 4, 6 (Tex. 1987); Galindo v. Border Federal Credit Union, 2013 WL 2145783 at *2 (Tex.

App. - San Antonio 2013); RBS Mtg., LLC v. Gonzalez, 2013 WL 749730 at *3 (Tex. App. - San

Antonio 2013); In re Cadengo, 370 B.R. 681, 691 (Bankr. S.D. Tex. 2007).

The correct inquiry is whether the parties intended the transaction to be a genuine sale or merely

a sale to serve as security for a debt. Courts look to a variety of factors to determine if a deed is

a disguised mortgage. Galindo v. Border Federal Credit Union, 2013 WL 2145783 at *2 (Tex.

App. - San Antonio 2013).


The factor required by the constitution is a condition of defeasance. It is not necessary that the

condition of defeasance appear in the deed itself. The condition may appear, for example, in a

contemporaneous option contract or lease. The condition of defeasance need not be absolute. A

prohibited mortgage maybe found even if the debtor need not be obligated to repurchase the

property. However, the mere existence of a condition of defeasance will not necessarily determine

an absolute deed to be a mortgage.

If from a totality of the circumstances it appears that the parties intended a genuine sale, the

transaction is not rendered a mortgage simply because the grantor is entitled to reacquire the

property. In In re Cadengo, 370 B.R. 681 (Bankr. S.D. Tex. 2007) there was no pretended sale

because no evidence of a condition of defeasance expressed in any of the papers executed in the

transaction or in testimony adduced regarding any parol condition of defeasance.

Other factors which courts have looked at to deduce that an absolute deed was actually

intended as a mortgage include:

(1) the existence of a debtor/creditor relationship between the parties

(2) financial exigencies indicating a need for money by the grantor

(3) negotiations between the parties where a mortgage is discussed but refused

(4) an agreement to furnish more money and extinguish an old debt in exchange for a

deed to the property

(5) a sale for less than the property is worth

(6) a statement by the grantee of a willingness to reconvey the property if the money is

refunded

(7) no change in grantor’s possession of the property

(8) a repurchase price or lease that appears to be calculated on an interest rate basis.

Sale and Lease Back Transactions.

A distinct form of disguised mortgage is the sale and lease back transaction. A classic

example is found in Johnson v. Cherry. 726 S.W.2d 4 (Tex. 1987). Johnson, in financial distress,

sought unsuccessfully to borrow money on his homestead from several sources. In what Johnson

understood to be a loan transaction, Johnson executed a warranty deed to Cherry who in turn

leased the property back to Johnson and gave Johnson a written option to repurchase the property.

The purchase consideration coincided with amounts Johnson needed to pay other creditors, an

amount less than one-half of the value of the property. The lease payments and option price were

calculated on an interest basis on “purchase money” paid to Johnson rather than the fair rental

value of the property. Held on these facts that this was a pretended sale. TEX. PROP. CODE

ANN. § 41.006 (Vernon 2014).

In Orozco v. Sander, 824 S.W.2d 555 (Tex. 1992) the lender was in the business of

arranging (then constitutionally prohibited) home equity lending through pretended sales and

openly advertised this. The transaction, arranged by the lender, provided for a sale of the

homestead to the lender’s agent with a lease back to the debtor. The lease payments amortized the


credit extended to the homeowner. An agreement existed to reconvey the property to the

homeowner if all lease payments were made over the term of the lease. Held the transaction

constituted a pretended sale.

TEX. PROP. CODE ANN. § 41.006 defines certain sale and lease back transactions as disguised

mortgages. Under Section 41.006 and sale and lease back will be construed as a disguised

mortgage if:

1. there is a fixed purchase price less than the appraised fair market value of the property;

2. the grantee executes a lease back to the grantor; and

3. the lease payments exceed the fair rental value of the property

TEX. PROP. CODE ANN. § 41.006 (Vernon 2014).

Certain intra-family transactions are excluded from this definition. TEX. PROP. CODE ANN.

§ 41.006(c) (Vernon 2014).

A finding of a disguised mortgage under Section 41.006 has the following threefold affect: (1)

the transaction is a deceptive trade practice by the lender under TEX. BUS. & COM. CODE

ANN. §17.41 et seq., (2) the deed is void, and (3) all lease payments in excess of the sales

consideration are considered interest for the purposes of a usury claim.

Conveyance to Closely- Held Business.

Most difficult to reconcile are cases involving the sale of the debtor’s homestead to the

debtor’s closely held business made in order to use the property as collateral for an otherwise

prohibited loan transaction. Some cases have determined that such a transaction is not a

prohibited pretended sale. These cases reason that when the homestead is conveyed to a

corporation, the stock of which is owned by the debtor, the property loses its homestead

character by alienation regardless of whether the debtor continues to occupy the property With

such a sale, valid title vests in the corporation and the property becomes subject to the debts of

the corporation. In re Girard 104 B.R. 817 (Bankr. W.D. Tex. 1989).and In re Loter, 2 Tex.

Bankr. Ct. Rptr. 362 (Bankr. N.D. Tex. 1988).

Thus, homestead sales, made to family corporations in order to collateralize homestead,

upheld as bona fide sales. This result was reached in In re Girard notwithstanding that the sale

was always intended to secure a loan, resulted in no interruption of the debtor’s occupancy of

the home, and came at the suggestion of the lender. The debtor’s decision to convey the

homestead to the corporation was conscious and a d v i s e d . The incorporation of the business

was also supported by other legitimate business purposes. In re Girard, 104 B.R. 816, 818 (Bankr.

W.D. Tex. 1989) .

Similarly in Matter of Perry, 345 F.3d 303 (5th Cir. 2003), Perry conveyed a 26 acre tract to

Perry’s wholly owned corporation formed to facilitate the property being pledged to secure a loan

to the corporation and to avoid constitutional prohibitions against encumbering the homestead.

Evidence indicated the corporation never actively functioned. It filed no tax returns, issued no

stock, held no meetings, and adopted no by- laws. However, there was some evidence that the


corporate form was adopted by Perry to limit personal liability and that the loan would have been

made with or without the transfer of the property to the corporation. Third party evidence

described Perry as an honorable man not likely to engage in a sham transaction. Held there was

no pretended sale.

A pretended sale requires more than a simple showing that the property was conveyed to

the corporation solely to avoid prohibitions against encumbering the homestead. Proof must

additionally show that the parties did not intend for title to vest in the corporation. With only the

self-serving testimony of the debtor that title was not intended to vest, the court refused to find a

pretended sale. Perry also concluded that Texas law prohibits only those pretended sales that

include a condition of defeasance. A condition of defeasance allows the seller to reclaim title to

the property after the loan is repaid. Because Perry’s testimony indicated there was no such

condition attached to the sale to the corporation, no prohibited pretended sale was shown.

For cases finding a pretended sale when property was conveyed to the debtor’s business,

refer to Matter of Rubarts, 896 F.2d 107 (5th Cir. 1990). and First Bank v. Pope. 141 B.R. 115

(E.D. Tex. 1992). In each of these cases the debtors sold their homestead to a corporation in a

transaction involving no interruption of debtor’s occupancy, an intention to reconvey without

necessity of repayment, and lender involvement in suggesting the transaction. Concentrating on

the absence of an intention for an unconditional sale evidenced by an agreement for reconveyance

without repayment of the debt, the transactions were void as pretended sales. Significant weight

factors in the examination of this question are the lender’s degree of knowledge of and

participation in the subterfuge, the absence of other business reasons for the transaction, the

financial straits of the borrower, and any future intention to reverse the sale. A pretended sale to

a corporation does not convey legal title away from the homestead claimant. As a result, the

corporation cannot encumber any legal interest in the property.

Intra-Family Transactions.

In Ketcham v. First Nat’l Bank of New Boston, 875 S.W.2d 753 (Tex. App. - Texarkana

1994, no writ).a fact issue regarding a pretended sale was raised when parents sold their

homestead to their son who financed the sale with a bank loan. The loan proceeds were paid to

the parents who in turn endorsed the check and directed that the proceeds be made available to

the son. The son presented evidence that the bank required the transaction be so structured in

order to make him a loan and that he considered the sale a sham.

In Snyder v. Zaylor, 309 B.R. 272 (E.D. Tex. 2004). the debtor conveyed her homestead

to her two children shortly before filing bankruptcy. The sale was made without consideration

and without relinquishing possession of the property. The purpose was to defraud the debtor’s

creditors. Held the sale was void as a sham. The debtor could continue to claim her fee interest

in the transferred property as her homestead.


In Larsen v. OneWest Bank, FSB, 2015 WL 6768722 (Tex. App. – Houston [14th Dist.]

2015).a couple held their home as community property. Preparatory to and to facilitate a reverse

mortgage, the wife conveyed all of her interest in the home to husband. Held there was no proof

of a pretended sale without proof the lender knew or should have known that the transaction was

a sham.

Other Forms of Pretended Sales.

In In re Robinson, 180 B.R. 174 (Bankr. E.D. Tex. 1995). a debtor conveyed his homestead

to a trustee for the benefit of another for estate planning purposes yet continued to reside upon

the property. Held there was no pretended sale. The estate planning nature of the transfer was a

legitimate purpose. Therefore, the conveyance was not a sham.

Effect

A pretended sale is void to the extent it attempts to create an impermissible lien against the

homestead. TEX. CONST. art. XVI, § 50(c) (Vernon Supp. 2015). See also Summage v. Jean,

2007 WL 1288748 at App. - Beaumont 2007); Ortega v. LPP Mortgage, Ltd., 160 S.W.3d 596,

602 (Tex. App. - Corpus Christi - Edinburg 2005, pet. filed); Smith v. JP Morgan Chase Bank,

N.A., 825 F. Supp.2d 859, 861 (S.D. Tex. 2011); In re Ritter, 2009 WL 1024656 at *3 (Bankr.

E.D. Tex. 2009); In re Cadengo, 370 B.R. 681, 691 (Bankr. S.D. Tex. 2007 Equitable title will

remain in the debtor allowing the debtor to continue to claim a homestead exemption in the

property. With a pretended sale, the debtor may continue to enjoy the benefits of the homestead

laws even where the debtor participates in a device designed to defeat the purpose of the

homestead exemption.

Retention-of-Benefits Rule.

When the pretended sale is a disguised mortgage, the Court may cancel the deed as an

effective conveyance. In re Jay, 308 B.R. 251, 290 (Bankr. N.D. Tex. 2003). However, if the

transaction is reconstrued as a mortgage, equity will prevent the debtor from repudiating the deed

but retaining the benefits of the loan. Chase Manhattan Mortgage Corp. v. Cook, 141 S.W.3d

709, 717 (Tex. App. - Eastland 2004, no pet). An enforceable debt will be imputed between the

creditor and debtor. If a deed is cancelled, the party seeking equity must do equity by restoring

the consideration given for the deed. Equity accomplishes this restoration automatically by

awarding a judgment to the creditor against the debtor for the money loaned and interest. This

can be done as part of the court’s equitable powers even if the pleadings of the creditor do not

request this relief. Johnson v. Cherry, 726 S.W.2d 4, 8 (Tex. 1987).

When a finding of a disguised mortgage results in a judgment awarded to the creditor, the

debt created is not secured for repayment by any lien against the debtor’s homestead. The

retention-of-benefits rule is not applied in a manner that denies constitutionally protected

homestead rights. However, if the disguised mortgage transaction involved both homestead and

non-homestead property, the court may grant an equitable lien on the non-homestead portion of

the property to secure the debt. For example, in Johnson v. Cherry, Johnson “sold” and leased


back from Cherry a 348-acre tract which encompassed his 200-acre homestead. When the

transaction was construed to be a disguised mortgage, Cherry was awarded judgment against

Johnson for the amount of credit extended plus interest. In addition, the court created an

equitable lien to secure that debt on the 148 acres not covered by Johnson’s homestead

exemption.

Effect of Sale on Subsequent Purchasers

Generally, a subsequent purchaser of homestead will be entitled to assert their

predecessor’s homestead protection against prior lienholders. Marincasiu v. Drilling, 441

S.W.3d 551, 559 (Tex. App. – El Paso 2014, pet. denied); Dominguez v. Castaneda, 163 S.W.3d

318, 330 (Tex. App. - El Paso 2005, pet. denied).

This enables the purchaser to take free of such prior liens. Marincasiu v. Drilling, 441

S.W.3d 551, 559 (Tex. App. – El Paso 2014, pet. denied); Cadle Co. v. Harvey, 46 S.W.3d 282,

285 (Tex. App. - Fort Worth 2001, pet. denied); Sanchez v. Telles, 960 S.W.2d 762, 770 (Tex.

App. - El Paso 1997, pet. denied); Lawrence v. Lawrence, 911 S.W.2d 450, 452 (Tex. App. -

Texarkana 1995, writ denied); Intertex, Inc. v. Kneisley, 837 S.W.2d 136, 138 (Tex. App. -

Houston [14th Dist.] 1992, writ denied). See also Op. Tex. Atty Gen. DM-366 (1995). There is a

dispute among authorities over whether a prior lienholder’s interest may attach if there is a gap

in time between the sale of the homestead and the recordation of the buyer’s interest.

In Intertex, Inc. v. Kneisley, 837 S.W.2d 136 (Tex. App. - Houston [14th Dist.] 1992, writ

denied). a debtor sold homestead subject to an abstracted judgment. The buyer failed to record

the deed for 5½ months. The court held that this gap in recording the buyer’s interest allowed

the prior judgment lien to attach to the property. However, in U.S. v. Johnson, the Fifth Circuit

refused to follow Intertex on similar facts. Finding that the Intertex runs counter to the

overwhelming weight of Texas authority, the Court noted that alienation is complete on

conveyance not recordation. In re Girard, 104 B.R. 816, 818 (Bankr. W.D. Tex. 1989).

The strong policy of protecting homesteads from judgment liens would be gutted by strict

adherence to Intertex. There is inevitably some gap between the execution of a deed and its

recordation.

In Cadle Co. v. Harvey, 46 S.W.3d 282 (Tex. App. - Fort Worth 2001, pet. denied). Kelly

entered into a lease purchase arrangement for the sale of his homestead. He signed a five-year

lease and simultaneously entered into an executory sales contract to sell the property to the lessee

at the end of the lease term. The effect of the executory sales contract was to immediately vest

the purchaser with equitable title to the property which ripened into full legal title when the sale

closed five years later. As a result, there was no “gap” of abandonment of the homestead between

the execution of the executory sales contract and the closing of the sale. A pending judgment lien

did not attach to the property.


4. WHAT ARE THE RULES OF URBAN vs. RURAL?

Texas maintains separate statutory schemes for rural and urban homesteads. Matter of

Perry, 345 F.3d 303, 310 n.7 (5th Cir. 2003). The current rural and urban homestead exemptions

are as follows:

URBAN SINGLE ADULT:

One or more contiguous lots amounting to not more than 10 acres in a city, town, or

village and used for the purposes of a home or both as an urban home and a place to exercise

a business or calling of the claimant together with improvements . TEX. CONST. art. XVI,

§§ 50, 51 (Vernon Supp. 2015); TEX. PROP. CODE ANN. §§ 41.002.

RURAL SINGLE ADULT:

(i) 100 acres not in a city, town, or village used for the purposes of a home together

with improvements TEX. CONST. art. XVI, §§ 50, 51 (Vernon Supp. 2015); TEX. PROP.

CODE ANN. §§ 41.002(b)(2), 41.005(b) (Vernon 2000). See also Smith v. Hennington, 249

S.W.3d 600, 603 (Tex. App. - Eastland 2008, pet. denied); Duran v. Henderson, 71 S.W.3d 833,

841 (Tex. App. - Texarkana 2002, pet. denied); Riley v. Riley, 972 S.W.2d 149, 153 (Tex. App. -

Texarkana 1998, no pet.); Matter of Henderson, 18 F.3d 1305, 1307 n.1 (5th Cir. 1994); Matter of

Bradley, 960 F.2d 502, 506 n.6 (5th Cir. 1992).

URBAN FAMILY

One or more contiguous lots amounting to not more than 10 acres in a city, town, or

village and used for the purposes of a home or both as an urban home and a place to exercise

a business or calling of the claimant together with improvements TEX. CONST. art. XVI, §§

50, 51 (Vernon Supp. 2015); TEX. PROP. CODE ANN. §§ 41.002(a), 41.005(b) (Vernon 2014).

See also Smith v. Hennington, 249 S.W.3d 600, 603 (Tex. App. - Eastland 2008, pet. denied);

Majeski v. Estate of Majeski, 163 S.W.3d 102, 108 (Tex. App. - Austin 2005, no pet.); Matter of

England, 975 F.2d 1168, 1172 n.7 (5th Cir. 1992); In re Montemayor, 547 B.R. 684, 696 (Bankr.

S.D. Tex. 2016); In re Parsons, 530 B.R. 411, 415 (Bankr. W.D. Tex. 2014). The urban homestead

has a business component to allow an urban dweller to protect the claimant’s means of survival in

addition to the claimant’s home. Matter of Perry, 345 F.3d 303, 317 (5th Cir. 2003).

RURAL FAMILY

200 acres not in city, town, or village used for the purposes of home together with

improvements TEX. CONST. art. XVI, §§ 50, 51 (Vernon Supp. 2015); TEX. PROP. CODE

ANN. §§ 41.002(b)(1), 41.005(a) (Vernon 2000). See also Smith v. Hennington, 249 S.W.3d 600,


603 (Tex. App. - Eastland 2008, pet. denied); Hutson v. Tri- Counties Prop., 240 S.W.3d 484, 488

(Tex. App. - Fort Worth 2007, pet. denied); Duran v. Henderson, 71 S.W.3d 833, 841 (Tex. App. -

Texarkana 2002, pet. denied); NCNB Texas Nat’l Bank v. Carpenter, 849 S.W.2d 875, 879 (Tex.

App. - Fort Worth 1993, no writ); Fajkus v. First Nat’l Bank of Giddings, 735 S.W.2d 882, 884

(Tex. App. - Austin 1987, writ denied). Significantly more land is set apart for the rural homestead

because of the greater property needs of the rural family which usually relies on farming or ranching

for support. Matter of Perry, 345 F.3d 303, 316 n. 17 (5th Cir. 2003). The rural homestead is

contemplated to provide the dual purpose of a home and a place to assure family support and thus

survival. Id. at 317.

The homestead is limited by size, In re Montemayor, 547 B.R. 684, 696 (Bankr. S.D.

Tex. 2016). There are no constitutional dollar limits on the value of a Texas homestead. Matter

of Kim, 748 F.3d 647, 653 (5th Cir. 2014); In re: McCombs, 659 F.3d 503, 507 (5th Cir. 2011); In

re Fehmel, 372 Fed. Appx. 507, 508 (5th Cir. 2010); In re Comu, 542 B.R. 371, 384 (N.D. Tex.

2015); In re Montemayor, 547 B.R. 684, 696 (Bankr. S.D. Tex. 2016).

Distinguishing the Rural and Urban Homestead

A debtor can claim either a rural or urban homestead, Smith v. Hennington, 249 S.W3d

600, 603 (Tex. App. - Eastland 2008, pet. denied); PaineWebber, Inc. v. Murray, 260 B.R. 815, 822

(E.D. Tex. 2001); In re Crump, 533 B.R. 567, 571 (Bankr. N.D. Tex. 2015); In re Saldana, 531

B.R. 141, 156 (Bankr. N.D. Tex. 2015). but not both. State of Texas By and Through Texas

Department of Mental Health and Mental Retardation v. Ellison, 914 S.W.2d 679, 684 (Tex. App.

- Austin 1996, no writ); Farrington v. First Nat’l Bank of Bellville, 753 S.W.2d 248, 251 (Tex. App.

- Houston [1st Dist.] 1988, writ denied); Fajkus v. First Nat’l Bank of Giddings, 735 S.W.2d 882,

884 (Tex. App. - Austin 1987, writ denied); In re Grisham, 230 B.R. 529, 531 (Bankr. N.D. Tex.

1998); In re Julian, 163 B.R. 478, 482 (Bankr. N.D. Tex. 1994); In re England, 141 B.R. 495, 497

(N.D. Tex. 1991).

The homestead must be one or the other. First Nat’l Bank of McAllen v. Jones, 244

S.W. 1057, 1058 (Tex. Civ. App. - San Antonio 1922), rev’d on other grounds, 259 S.W. 157

(Tex. Comm’n App. 1924, judgm’t adopted).

A debtor cannot blend a homestead which is part rural and part urban. In re Grisham,

230 B.R. 529, 531 (Bankr. N.D. Tex. 1998).

This inelastic rule makes the characterization of the homestead as rural or urban of critical

importance. In re Perry, 267 B.R. 759, 765 n.5 (Bankr. W.D. Tex. 2001).

The property’s characterization will determine the amount of acreage subject to homestead

protection from creditors, the acceptable bases of a lien or encumbrance against the property, the

necessity of joinder of the spouse in any sale, conveyance, or encumbrance of the property, the

susceptibility of the property to partition after death, the necessity of a written contract to support


a lien for improvements, and many other issues of importance to those who deal with the homestead

claimant and his property.

Whether a homestead is rural or urban is a question of fact. Matter of Bouchie, 324

F.3d 780, 782 (5th Cir. 2002); PaineWebber, Inc. v. Murray, 260 B.R. 815, 822 (E.D. Tex. 2001);

In re Perry, 267 B.R. 759, 764 (Bankr. W.D. Tex. 2001).

While the homestead exemption is generally liberally construed, Texas law does not

liberally presume one form of homestead over another. In re Grisham, 230 B.R. 529, 531 (Bankr.

N.D. Tex. 1998). The burden of proving the rural or urban character of the homestead is on the

homestead claimant. In re Ramirez, 2011 WL 30973 at *6 (S.D. Tex. 2011).

The Property Code provides a definition for an urban homestead. TEX. PROP. CODE

ANN. § 41.002(c) (Vernon 2014). See also Matter of Bouchie, 324 F.3d 780, 784 (5th Cir. 2002);

In re Perry, 267 B.R. 759, 765 (Bankr. W.D. Tex. 2001).

A homestead is considered to be urban if:

(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:

(A) electric

(B) natural gas

(C) sewer

(D) storm sewer; or

(E) water

All of these services, inclusive of police and fire protection, must be provided by the

municipality or under contract with the municipality. The test is conjunctive. The property must

be served by both municipal police and fire protection and at least three of the other municipal

services to be an urban homestead.

By negative implication, all homesteads not meeting this statutory test are considered

rural. In re Dietz, 2011 WL 671959 at *4 (Bankr. E.D. Tex. 2011).

Matter of Bouchie considered whether the 1999 Property Code definition for an

urban homestead completely displaced all former tests for distinguishing between the rural

and urban homestead. The court concluded that the detailed scheme represented by the 1999

amendment (adopting some elements of former methodology and rejecting others) was intended

by the legislature to completely displace all other and prior tests for distinguishing the rural and

urban homestead. 249 S.W.3d 600 (Tex. App. - Eastland 2008, pet. denied).


The time to determine the rural or urban character of the homestead is at the time that

the homestead designation is made. TEX. PROP. CODE. ANN. § 41.002(e) (Vernon 2014).

See also In re Ramirez, 2011 WL 30973 at n. 5 (S.D. Tex. 2011

5. HOME EQUITY LOANS - FORFEITURES & CURES

In 1998, Texas became the last state in the nation to permit home equity lending.

Wells Fargo Bank, N.A. v. Murphy, 458 S.W.3d 912, 917 (Tex. 2015); Finance Comm’n of Texas

v. Norwood, 418 S.W.3d 566, 571 (Tex. 2013); LaSalle Bank Nat’l Ass’n. v. White, 246 S.W.3d

616, 618 (Tex. 2007); Larson v. OneWest Bank, FSB, 2015 WL 6768722 at *4 (Tex. App. -

Houston [14th Dist.] 2015); Garofalo v. Owen Loan Serv., 626 Fed. Appx. 59, 61 (5th Cir. 2015).

A homestead may now be encumbered with a lien securing a “home equity loan.” Finance

Comm’n of Texas v. Norwood, 418 S.W.3d 566, 571 (Tex. 2013); Doody v. Ameriquest Mortgage

Co., 49S.W.3d 342, 343 (Tex. 2001); Stringer v. Cendant Mortgage Corp., 23 S.W.3d 353, 354

(Tex. 2000); Hill v. Sword,454 S.W.3d 698, 702 (Tex. App. - Tyler 2015, pet. denied); Wells

Fargo Bank, N.A. v. Leath, 425 S.W.3d 525, 529 (Tex. App. - Dallas 2014, pet. filed). See also

TEX. ESTATES CODE ANN. § 102.004 (Vernon 2015); TEX. PROP. CODE ANN. §

41.001(b)(6) (Vernon 2014).

The restrictions on home equity loans and reverse mortgages are in the Texas Constitution as

a guard against future political pressure for changes by the Legislature. Finance Comm’n of Texas

v. Norwood, 418 S.W.3d 566, 571 (2013); Gutowsky v. Deutsche Bank Nat’l Trust Co., 2014 WL

2696630 at *3 (S.D. Tex. 2014).

In a departure from more than 150 years of prior Texas practice, the validity of a home

equity lien is generally not dependent upon the use to which the loan proceeds are applied. ,Finance Comm’n of Texas v. Norwood, 418 S.W.3d 566, 571 (Tex. 2013); Larson v. OneWest

Bank, FSB, 2015 WL 6768722 at *4 (Tex. App. - Houston [14th Dist.] 2015).

A home equity loan allows an owner who has entirely repaid his home loan, or who has

accumulated equity in his home, to secure a loan with that equity. Doody v. Ameriquest Mortgage

Co., 49 S.W.3d 342, 343 (Tex. 2001)

However, constitutional provisions authorizing home equity lending continue to reflect a

strong public policy solicitous of the homestead as the last shield against destitution. Home

equity loans are authorized only on satisfaction of a labyrinthine number of constitutional

safeguards and restrictions aimed at protecting homestead owners. Hawkins v. JP Morgan Chase

Bank, N.A., 2013 WL 443954 at *3 (W.D. Tex. 2013). At over 6,000 words and 150 sub-parts

TEX. CONST. art. XVI § 50 is the longest and most complex part of the Texas Constitution.

Finance Comm’n of Texas v. Norwood, 418 S.W.3d 566, n. 14 (Tex. 2013). These safeguards and

restrictions detail the terms and conditions that may be placed on a home equity loan and list the

rights and obligations of the borrower and lender. These restrictions reflect continuing concern

for unwise debtors and overreaching creditors. Hawkins v. Wells Fargo Bank, 2012 WL 2376272

at *3 (W.D. Tex. 2012); Marketic v. U.S. Bank, N.A., 436 F.Supp2d 842, 846 (N.D. Tex. 2006)


Finance Comm’n of Texas v. Norwood, 418 S.W.3d 566, 571 (Tex. 2013); Larsen v. OneWest

Bank, FSB, 2015 WL 6768722 at *4 (Tex. App. - Houston [14th Dist.] 2015); Wells Fargo Bank,

N.A. v. Leath, 425 S.W.3d 525, 529 (Tex. App. - Dallas 2014, pet. filed); In re Chambers, 419

B.R. 652, 667 (Bankr. E.D. Tex. 2009).

The restrictions on home equity liens are non-severable and nonwaivable. All

requirements must be satisfied to create a valid lien. Strict compliance with the

requirements of the Constitution is required. See Toler v. Fertitta, 67 S.W.2d 229, 230 (Tex.

Comm’n App. 1934, holding approved); In re Gulley, 436 B.R. 878, 885 (Bankr. N.D. Tex. 2010).

If these requirements are not met, the purported lien against the homestead is not valid

and the loan is treated as unsecured as to the homestead property. Wells Fargo Bank, N.A. v.

Leath, 425 S.W.3d 525, 530 (Tex. App. - Dallas 2014, pet. filed); Curry v. Bank of America, N.A.,

232 S.W.3d 345, 348 (Tex. App. - Dallas 2007, pet. denied); Poswalk v. GMAC Mtg., LLC, 519

Fed. Appx. 884, 886 (5th Cir. 2013); Puig v. Citibank, 2012 WL 1835721 at * 13 (N.D. Tex.

2012). In re Box, 324 B.R. 290, 292 (Bankr. S.D. Tex. 2005).

Constitutional restrictions on home equity lending must be satisfied in fact for a valid lien

to be created. False recitals or declarations of compliance by the debtor given at closing cannot

breathe life into an otherwise invalid home equity transaction. In re Box, 324 B.R. 290, 294 (Bankr.

S.D. Tex. 2005).

In In re Box, a lender required the debtor to apply home equity loan proceeds to pay off

unsecured debt owed to the lender in violation of TEX. CONST. art. XVI § 50(a)(6)(Q)(i). The

lien was invalid irrespective of written declarations made by the debtor at closing that the

application of loan proceeds was voluntary. The lender could not rely on the false recitations

known to misrepresent the facts of the transaction.

Authorized Lenders

Home equity loans may only be made by an authorized lender. These include:

(1) a bank, savings and loan association, savings bank, or credit union doing business

under Texas or federal law;

(2) a federally chartered lending instrumentality;

(3) a person approved as a mortgagee by the United States government to make federally

insured loans;

(4) a person licensed to make regulated loans under Texas law;

(5) a seller financing all or part of the homestead purchase;

(6) a person related to the borrower within the second degree of affinity or consanguinity;

(7) a person regulated as a mortgage broker.

(8)


A lender not falling within categories (1), (2), (3), (5), (6), or (7) above must obtain a regulated

loan license under TEX. FIN. CODE ANN., Chapter 342 to qualify as a home equity lender under

(4) above.

Forfeiture Provision

Constitutional provisions for home equity lending contain a harsh forfeiture

provision for nonconforming loans. Finance Comm’n of Texas v. Norwood, 418 S.W.3d 566,

571 (Tex. 2013); Garofalo v. Ocwen Loan Serv., 626 Fed. Appx. 59, 63 (5th Cir. 2015); Hawkins

v. JP Morgan Chase Bank, N.A., 2013 WL 443954 at *3 (W.D. Tex. 2013); In re Gulley, 486

B.R. 878, 890 (Bankr. N.D. Tex. 2010); In re Cadengo, 370 B.R. 681, 698 (Bankr. S.D. Tex.

2007).

If a lender or holder (1) fails to comply with any of its obligations under the extension

of credit and (2) fails to cure that failure within 60 days after the date that the lender or

holder is notified by the borrower of the failure to comply, all principal and interest on the

extension of credit are forfeited. TEX. CONST. art. XVI, § 50(a)(6)(Q)(x) (Vernon Supp. 2015).

See also Finance Comm’n of Texas v. Norwood, 418 S.W.3d 566, 571 (Tex. 2013); Alanis v. U.S.

Bank, N.A., 2015 WL 6694005 at *10 (Tex. App. – Houston [14th Dist.] 2015); Wells Fargo Bank,

N.A. v. Leath, 425 S.W.3d 525, 530 (Tex. App. – Dallas 2014, pet. denied); Santiagov. Novastar

Mtg., Inc., 443 S.W.3d 462, 469 (Tex. App. – Dallas 2014, pet. granted); Curry v. Bank of America,

N.A.,232 S.W.3d 345, 348 (Tex. App. - Dallas 2007, pet. denied).

The uncured violation turns voidable home equity lien into a void home equity lien.

Warren v. Bank of America, N.A., 2013 WL 8177096 at *7 (N.D. Tex. 2013). Any violation of

home equity constitutional limitations will support a forfeiture, In re Cadengo, 370 B.R. 681, 698

(Bankr. S.D. Tex. 2007), even if unintentional or inadvertent. Finance Comm’n of Texas v.

Norwood, 418 S.W.3d 566, 571 (Tex. 2013).

Forfeiture includes disgorgement of all sums already paid and forfeiture of all sums

yet to be paid. Puig v. Citibank, N.A., 2012 WL 1835721 at * 13 (N.D. Tex. 2012); Thomison v.

Long Beach Mortgage Co., 176 F.Supp.2d 714, 718 (W.D. Tex. 2001); In re Gulley, 486 B.R. 878,

890 (Bankr. N.D. Tex. 2010); In re Cadengo, 370B.R. 681, 698 (Bankr. S.D. Tex. 2007); In re

Adams, 307 B.R. 549, 553 (Bankr. N.D. Tex. 2004).

A borrower has a right to bring a suit for forfeiture after the loan closes.

What Violations Invoke a Forfeiture?

The Constitution provides that a forfeiture may occur for any failure to comply with

the lender’s or holder’s “obligations under the extension of credit”. TEX. CONST. art. XVI,

§ 50(a)(6)(Q)(x) (Vernon Supp. 2015). Vincent v. Bank of America, concluded that a forfeiture

is available only for a violation of the constitutionally mandated provisions in the extension of

credit. Violations of any other provision of the extension of credit may result in traditional

breach of contract remedies but no forfeiture. Vincent v. Bank of America, 109 S.W.3d 856,

862 (Tex. App. - Dallas 2003, no pet.); Rosales v. Wells Fargo Bank, N.A., 2014 WL 5819819 at


*3 (W.D. Tex. 2014); Modelist v. Deutsche Bank Nat’l Trust Co., 2006 WL 2792196 at n. 12

(S.D. Tex. 2006).

Thus, in Vincent when the lender failed to comply with the loan documents only in the manner

of applying the debtor’s payments, the debtor was not entitled to a forfeiture of the loan.

In Wells Fargo Bank v. Robinson, 2012 WL 61384871 (Tex. App. - Dallas 2012). Wells Fargo

foreclosed a home equity lien contrary to the provisions of a court order thereby violating

constitutional provisions requiring that such a lien be foreclosed only upon court order.

Notwithstanding, forfeiture was not an appropriate remedy for the borrower. Forfeiture is only

available when the loan agreement, as originally entered into by the parties, fails to comply

with constitutional requirements.

No Forfeiture without Notice and Opportunity to Cure.

There can be no forfeiture without notice and opportunity to cure. Hawkins v. JP

Morgan Chase Bank, N.A., 2013 WL 443954 at *7 (W.D. Tex. 2013).

Statute of Limitations on Suit for Forfeiture.

There is a four-year statute of limitations on a claim (whether raised as a suit or

affirmative defense) for forfeiture of a nonconforming home equity loan. TEX. CIV. PRAC.

& REM. CODE ANN. § 16.051 (Vernon 2015). See also Kyle v. Strasburger, 2015 WL 7567523

at *4 (Tex. App. – Corpus Christi – Edinburg 2015); Wood v. HSBC Bank USA, N.A., 439 S.W.3d

588, 592, 595 (Tex. App. – Houston [14th Dist.] 2014, pet. granted); In re Estate of Hardesty, 449

S.W.3d 895, 911 (Tex. App. – Texarkana 2014, no pet.); Santiago v. Novastar Mtg., Inc., 443

S.W.3d 462, 469 (Tex. App. – Dallas 2014, pet. granted); Williams v. Wachovia Mtg. Corp., 407

S.W.3d 391, 394 (Tex. App. – Dallas 2013, pet. denied).

The cause of action for forfeiture accrues, under the legal injury rule, on the date the loan

closes. Wood v. HSBC USA, N.A., 439 S.W.3d 585, 594-95 (Tex. App. – Houston [14th Dist.]

2014, pet. granted); In re Estate of Hardesty, 449 S.W.3d 895, 912 (Tex. App. – Texarkana 2014,

no pet.); Santiago v. Novastar Mtg., Inc., 443 S.W.3d 462, 469 (Tex. App. – Dallas 2014, pet.

granted); Salas v. LNV Corp., 409 S.W.3d 209, 217 (Tex. App. – Houston [14th Dist.] 2013, no

pet.); Rivera v. Countrywide Home Loans, Inc., 262 S.W.3d 834, 840 (Tex. App. - Dallas 2008,

no pet.); Salas v. LNV Corp., 409 S.W.3d 209, 217 (Tex. App. – Houston [14th Dist.] 2013, no

pet.).

This four-year limitation period applies to all violations of TEX. CONST. art. XVI

§ 50(a)(6) by a lender or holder. Bormio Inv. v. Wells Fargo Bank, N.A., 2016 WL 446659 at

*3 (N.D. Tex. 2016); Jones v. Bank of New York Mellon, 2015 WL 300495 at *10 (S.D. Tex.

2015); Warren v. Mortgage Electronic Registration System, 2014 WL 4636030 at *7 (N.D. Tex.

2014); Scott v. JP Morgan Chase Bank, N.A., 2014 WL 4167980 at *5 (S.D. Tex. 2014); Lux v.

Bank of New York Mellon, 2014 WL 684972 at n. 7 (N.D. Tex. 2014).


Cure Provisions

To mitigate the drastic results of forfeiture, the Constitution contains a series of cure

provisions. Priester v. JP Morgan Chase Bank, N.A., 708 F.3d 667, 675 (5th Cir. 2013); Iacobucci

v. Wells Fargo Bank, N.A., 2013 WL 6061343 at *3 (N.D. Tex. 2013); Smith v. JP Morgan Chase

Bank, N.A., 2014 WL 1318526 at *2 (N.D. Tex. 2014); In re Erickson, 2012 WL 4434740 at *6

(W.D. Tex. 2012).

If a lender fails to comply with a constitutional restriction on home equity loans, the

lender may generally avoid a forfeiture of all principal and interest and validate an otherwise

invalid lien by timely curing (within 60 days) the failure. TEX. CONST. art. XVI, §

50(a)(6)(Q)(x) (Vernon Supp. 2015); 7 TEX. ADMIN. CODE, § 153.95(a) (2008). See also Wood

v. HSBC Bank USA, N.A., 439 S.W.3d 585, 591 (Tex. App. – Houston [14th Dist.] 2014, pet.

granted); Wells Fargo Bank, N.A. v. Leath, 425 S.W.3d 525, 530 (Tex. App. – Dallas 2014, pet.

denied); Williams v. Wachovia Mtg. Corp., 407 S.W.3d 391, 394 (Tex. App. – Dallas 2013, pet.

denied); Summers v. Ameriquest Mtg. Co., 2008 WL 123903 at *3 (Tex. App. - Houston [14th Dist.]

2008); Curry v. Bank of America, N.A., 232 S.W.3d 345, 348 (Tex. App. - Dallas 2007, pet. denied).

The cure provisions, in many cases, allow the lender to cure a violation unilaterally.

Puig v. Citibank, N.A., 2012 WL 1835721 at * 14 (N. D. Tex. 2012).

The constitutional cure provisions are equally available to cure problems with an original

home equity loan made under TEX. CONST. art. XVI, § 50(a)(6) or a refinance of a home equity

loan made under TEX. CONST. art. XVI, § 50(f). In re Adams, 307 B.R. 549, 553 (Bankr. N.D.

Tex. 2004).

The constitutional cure procedures are specific to certain types of home equity lending

violations:

Cure of Violation of Restriction on Fees, Restriction on Prepayment Penalties, or Restriction

on Interest.

In the event of a violation of constitution restrictions found at TEX. CONST. art. XVI, §

50(a)(6)(E) (restriction of fees), § 50(a)(6)(G) (restriction on prepayment penalties) or §

50(a)(6)(O) (restriction on interest), the lender may cure the violation by refunding to the borrower

the amount of the overcharge. The cure is effective when the lender credits the borrower’s account

with the refund, places the refund in the mail or other delivery carrier, or delivers the refund in

person. A cure may also be made using any other delivery method agreed to by the borrower in

writing after the lender receives notice of lender’s failure to comply.

Cure of Violation of Restriction on Loan-to- Value Ratio.

In the event of a violation of the constitutional restriction found at TEX. CONST. art.

XVI, § 50(a)(6)(B) (restriction on loan-to-value ratio), the lender may cure the violation by


sending to the borrower an acknowledgment that the lien is valid only to the extent that the loan

amount does not exceed the loan-to-value restriction. TEX. CONST. art. XVI, § 50(a)(6)(Q)(x)(a)

(Vernon Supp. 2015). See also In re Adams, 307 B.R. 549, 557 (Bankr. N.D. Tex. 2004). A credit

is as effective a cure as a refund by check. Madsen v. Bank of America, 2013 WL 8211970 at *6

(N.D. Tex. 2013).7 TEX. ADMIN. CODE § 153.94(a)(1), (2) (2004).

The cure is effective when the lender places the acknowledgment in the mail or other

delivery carrier or delivers the acknowledgment in person. A cure may also be made using any

other delivery method that the borrower agrees to in writing after the lender receives notice of

lender’s failure to comply.

Cure of Violation of Restriction against Additional Collateral or Restriction on Qualifying

Agricultural Homestead.

In the event of a violation of constitutional restrictions found at TEX. CONST. art. XVI,

§ 50(a)(6)(H) (restriction against additional collateral) or § 50(a)(6)(I) (restriction on qualifying

agricultural homestead), the lender may cure the violation by sending to the borrower an

acknowledgment that the home equity loan is not secured by the prohibited additional collateral

or non-qualifying agricultural property. TEX. CONST. art. XVI, § 50(a)(6)(x)(b) (Vernon Supp.

2015). See also Solis v. HSBC Bank USA, 584 Fed. Appx. 222, 223 (5th Cir. 2014).

The cure is effective when the lender places the acknowledgment in the mail or other

delivery carrier or delivers the acknowledgment in person. A cure may also be made using any

other delivery method that the borrower agrees to in writing after the lender receives notice of

lender’s failure to comply.

Cure of Violation of Restriction against Prohibited Amount, Percentage, Term, or Other

Provision.

In the event of a violation involving some other prohibited amount, percentage, term, or

other provision, the lender may cure the violation by (1) sending written notice to the borrower

amending the prohibited provision and (2) adjusting the account of the borrower to ensure that the

borrower is not required to pay more than an amount permitted by the Constitution or that the

borrower is not subject to any other term or provision prohibited by the Constitution.1293 The cure

is effective when the lender

(1) makes the necessary adjustment to the debtor’s account and (2) places the notice in the

mail or other delivery carrier or personally delivers the notice. A cure may also be made using

any other delivery method agreed to by the borrower in writing after the lender receives notice of

lender’s failure to comply. 7 TEX. ADMIN. CODE § 153.94


Cure of Violation of Requirement for Delivery of Documents.

In the event of a violation of the constitutional restriction found at TEX. CONST. art. XVI, §

50(a)(6)(Q)(v) (requirement for delivery to borrower of copies of all documents signed by

borrower), the lender may cure the violation by delivering the required documents to the

borrower. TEX. CONST. art. XVI, § 50(a)(6)(Q)(x)(d) (Vernon Supp. 2015). See also Steptoe

v. JP Morgan Chase Bank, N.A., 2013 WL 592659 at *4 (S.D. Tex. 2013); In re Chambers, 419

B.R. 652, 678 (Bankr. E.D. Tex. 2009).

The cure is effective when the lender delivers the required documents by placing them in the mail

or other delivery carrier or by personally delivering the documents to the debtor. A cure may also

be made by any other delivery method that the borrower agrees to in writing after the lender

receives notice of lender’s failure to comply. 7 TEX. ADMIN. CODE § 153.94(a) (2004).

Cure of Violation of Requirement for Acknowledgment of Fair Market Value of

Homestead.

In the event of a violation of the constitutional restriction found at TEX. CONST. art. XVI,

§ 50(a)(6)(Q)(ix) (requirement that lender and borrower sign written acknowledgment of the fair

market value of homestead), the lender may cure the violation by obtaining the appropriate

signatures on the required acknowledgment of fair market value; TEX. CONST. art. XVI, §

50(a)(6)(Q)(x)(d) (Vernon Supp. 2015). See also Billiter v. Central Mtg. Co., 2015 WL 867443 at

*6 (S.D. Tex. 2015).

Cure of Violation of Restriction on Number of Home Equity Loans.

In the event of a violation of the constitutional restriction found at TEX. CONST. art. XVI,

§ 50(a)(6)(K) (anti-stacking provision allowing only one home equity loan on a homestead at a

time), the lender may cure the violation by sending a written acknowledgment to the borrower that

the accrual of interest and all of the borrower’s obligations under the extension of credit are abated

while any prohibited prior lien remains secured by the homestead. The cure is effective when the

lender places the acknowledgment in the mail or other delivery carrier or personally delivers the

acknowledgment to the debtor. A cure may also be made by any other delivery method that the

borrower agrees to in writing after the lender receives notice of lender’s failure to comply. TEX.

CONST. at XVI § 50(a)(6)(Q)(x)(e) (Vernon Supp. 2015). See also Prutzman v. Wells Fargo Bank,

N.A., 2013 WL 4063309 at n. 2 (S.D. Tex. 2013). 7 TEX. ADMIN. CODE § 153.94(a)(1) and at

§ 153.94(a)(3) (2004).

Cure of Requirement that Lien be Created by Written Agreement with the Consent of Each

Owner and Each Owner’s Spouse.

In the event that the home equity lien is created without a written instrument with the

consent of each owner and each owner’s spouse, this may be cured if the omitted spouse


subsequently consents. TEX. CONST. art. XVI § 50(a)(6)(Q)(xi) (Vernon Supp. 2015). See also

Strasburger v. Kyle, 2016 WL 1072618 at*5 (Tex. App. – Corpus Christi – Edinburg 2016);

Kramer v. JP Morgan Chase Bank, N.A., 574 Fed. Appx. 370, 374 (5th Cir. 2014); Mady-Jokinen

v. Flagstar Bank, F.S.B., 2013 WL 5162203 at *2 (S.D. Tex. 2013)

“Catch-All” Cure Provision.

In the event of a violation of constitutional restrictions on home equity lending which

cannot be cured by any of the above cure provisions, (like failing to provide the 12-day review

period) the lender may cure any other violation by

(1) refunding or crediting the borrower $1,000. See Summers v. Ameriquest Mtg. Co.,

2008 WL 123903 at *4-5 (Tex. App. - Houston [14th Dist.] 2008). The lender has the

option to make a $1,000 refund or give a $1,000 credit. TEX. CONST. art. XVI, §

50(a)(6)(Q)(x)(f) (Vernon Supp. 2012); 7 TEX. ADMIN. CODE § 153.96(b)(1) (2004).

and;

(2) offering to modify or refinance the extension of credit for the borrower for the

remaining term at no cost to the borrower, on the same terms, including interest, as the

original extension of credit as necessary to comply with the Constitution. TEX. CONST.

art. XVI, § 50(a)(6)(Q)(x)(f) (Vernon Supp. 2015); 7 TEX. ADMIN. CODE § 153.96

(2004). See also Puig v. Citibank, N.A., 2013 WL 657676 at *3 (5th Cir. 2013); In re

Chambers, 419 B.R. 652, 678 (Bankr. E.D. Tex. 2009).

The lender may offer to modify the extension without completing the requirements of a refinance

or may offer to refinance the extension of credit in a manner that complies with TEX. CONST. art.

XVI, § 50(a)(6). 7 TEX. ADMIN. CODE § 153.96(b)(2) (2004).

If the borrower accepts the offer to modify or refinance, the lender must modify or refinance

within a reasonable time as is customary and usual in the industry. This catch-all cure provision

presupposes the debtor’s compliance and cooperation with the lender’s attempted cure. The debtor

may not block the lender’s cure by the debtor’s refusal to cooperate. The cure protection afforded

the lender is complete upon the refund or credit of the $1,000 and the timely delivery of an offer to

modify or refinance. The offer to modify or refinance is delivered by placing the offer in the mail

or with other delivery carrier or by personal delivery to the borrower. In In re Adams, 307 B.R. 549

(Bankr. N.D. Tex. 2004), the lender sought to cure certain violations by a reasonable offer to

refinance the debt without cost to the borrower. The debtor declined to accept the offer. Held that

the lender had fulfilled the lender’s burden to cure the claimed defects and save the lien by making

the unaccepted offer to refinance. Summers v. Ameriquest Mtg. Co. 2008 WL 123903 (Tex. App. -

Houston [14th Dist.] 2008), concluded that a violation of the restriction against closing a home

equity loan within one year of closing a previous home equity loan could be cured by using the

“catch all” cure provisions

Noncurable Violations?

The cure provisions of the Texas Constitution apply to all of the lender’s obligations applicable to

home equity loans. Kyle v. Strasburger, 2015 WL 7567528 at *4 (Tex. App. – Corpus Christi –

Edinburg 2015); Williams v. Wachovia Mtg. Corp., 407 S.W.3d 391, 397 (Tex. App. – Dallas


2013, pet. denied); Nunez v. CitiMortgage, Inc., 606 Fed. Appx. 786, 790 (5th Cir. 2015); In re

Chambers, 419 B.R. 652, 678 (Bankr. E.D. Tex. 2009).

Non-Severability Provision

Home equity lending is authorized only on condition that none of the constitutional restrictions

ever be preempted by federal law. To this end, TEX. CONST. art. XVI, § 50(j) contains a “Don’t

Mess with Texas” provision providing that all home equity provisions are non-severable, that none

would have been enacted without the other. If any home equity provision is held to be preempted

by federal law, all home equity lending provisions are rendered invalid. In such a case, a savings

provision upholds the validity of home equity loans made before the decision holding any aspect

of home equity lending preempted by federal law.

Void Liens.

Generally, any attempt to mortgage or impose a lien on homestead for a purpose or in a

manner not permitted by the Constitution is void, conferring upon the purchaser no rights in the

property. Generally, such a void lien is an utter nullity which never becomes effective to any extent

even after the property is no longer impressed with the homestead character. In In re Nelson, a

debtor executed a void non- purchase money deed of trust on his business homestead. The debtor’s

subsequent abandonment of this business homestead in favor of a rural residential homestead held

not to resuscitate the void deed of trust.

However, in certain instances, a lien invalid at the time of its execution can be made valid

if a “cure” provision is available by constitution or statute. An example of this are the cure

provisions attendant to home equity lending. Because of these cure provisions, any home equity

lien initially failing to comply with constitutional restrictions is considered “voidable” not “void.”

An otherwise voidable home equity lien may be made valid after the fact upon (1) proper cure or

(2) the passage of the appropriate statute of limitations. This is a new development in the

venerable law protecting Texas homesteads.

6. DO THE CURE AND FORFEITURE RULES MAKE SENSE?

The Texas Constitution establishes requirements for homestead secured home equity loans.

The constitutional provisions also provide a stiff penalty of forfeiture of all principal and interest

paid for any violation that is not cured by the holder of the loan. However, there was uncertainty

on the application of the forfeiture penalty. Texas appellate courts and federal district courts issued

split decisions concerning whether a suit alleging a violation could be brought at any time or

whether such suit was subject to a 4-year limitations period. The Fifth Circuit Court of Appeals

tried to resolve the split in its 2013 Priester v. JP Morgan Chase Bank decision that found a 4-

year limitations period.


The Texas Supreme Court settled the issue definitively in its May 2016 decision in Wood v.

HSBC Bank USA, N.A., holding that no statute of limitations exists for a constitutional violation.

The Supreme Court further held that the lien on a home equity loan is invalid until the violation is

cured. On the same day, the Supreme Court issued its decision in Garofolo v. Ocwen Loan

Servicing, L.L.C. that holds that the only constitutional right for a non-compliant loan is protection

from foreclosure. However, a borrower can file a breach of contract suit to obtain forfeiture for

any violation that can be cured by a corrective measure stated in the constitution. Here is how the

Texas Supreme Court reached those conclusions.

In Wood v. HSBC Bank USA, N.A., Alice and Daniel Wood obtained a home equity mortgage

loan secured by their homestead in 2004. Eight years later, the Woods realized the loan violated

the constitutional home equity loan requirement that closing fees not exceed 3% of the loan amount

and notified the loan's current holder, HSBC Bank USA, N.A., and mortgage servicer, Ocwen

Loan Servicing, LLC, of the violation. Neither party cured the violation. The Woods sued HSBC

and Ocwen to quiet title and to obtain a declaratory judgment that the lien securing the home equity

loan is void due to the constitutional violation, entitling them to forfeiture of all principal and

interest paid on the loan, and also asserted claims for breach of contract, fraud, and forfeiture due

to the constitutional violation. The Woods moved for summary judgment. HSBC and Ocwen also

moved for summary judgment, arguing that the lien was voidable and not void, so the claims were

barred by the 4-year statute of limitations. The trial court denied the Woods' motion and granted

HSBC and Ocwen's motion after holding that the lien was voidable and thus the claims were time

barred.

The Woods appealed the application of the statute of limitations to the quiet title and forfeiture

claims. The Woods argued that the lien of a noncompliant loan is invalid, until the violation is

cured, and their lien became void upon the failure to cure after notice, so there is no statute of

limitations. The intermediate appeals court affirmed the trial court's decision.

The Woods then appealed to the Texas Supreme Court. The state high court affirmed in part

and reversed in part the trial court's decision. The high court first held that a noncompliant home

equity loan is invalid until cured. The high court then held that, based on its first holding, there is

no statute of limitations applicable to a violation of the constitutional home equity loan provisions.

This second holding was supported by the fact that the constitutional home equity loan provisions

do not impose a statute of limitations and a separate constitutional provision provides protection

to bona fide purchasers. Finally, the high court held that the Woods were not entitled to forfeiture

for the constitutional claim based on its holding in Garofolo v. Ocwen Loan Servicing, LLC.

Teresa Garofolo paid off her home equity loan with Ocwen Loan Servicing, LLC. Ocwen

recorded a release of lien but failed to send Garofolo a release in recordable form, as required by

the loan agreement and the home equity loan provisions in the Texas Constitution. Garofolo

notified Ocwen of the failure, but Ocwen did not send the document. Garofolo sued Ocwen for

violating the home equity loan provisions in the Texas Constitution and for breach of contract.

Garofolo argued that she was entitled to the constitutional remedy of forfeiture of all principal and


interest paid on the loan. Garofolo also argued that she was entitled to forfeiture for breach of

contract because the loan agreement included the remedy for any violation. The trial court

dismissed Garofalo’s claims. Garofolo appealed.

The appellate court certified the following questions to the Texas Supreme Court:

1. Does a lender or holder violate Article XVI, Section 50(a)(6)(Q)(vii) of the Texas

Constitution, becoming liable for forfeiture of principal and interest, when the loan agreement

incorporates the protections of Section 50(a)(6)(Q)(vii), but the lender or holder fails to return

the cancelled note and release of lien upon full payment of the note and within 60 days after

the borrower informs the lender or holder of the failure to comply?

2. If the answer to Question 1 is "no," then, in the absence of actual damages, does a lender or

holder become liable for forfeiture of principal and interest under a breach of contract theory

when the loan agreement incorporates the protections of Section 50(a)(6)(Q)(vii), but the

lender or holder, although filing a release of lien in the deed records, fails to return the

cancelled note and release of lien upon full payment of the note and within 60 days after the

borrower informs the lender or holder of the failure to comply?

The Texas high court answered both questions in the negative. The state high court relied

on the plain language of the constitutional home equity loan provisions to conclude that the only

constitutional rights they provide are protection from foreclosure to satisfy the obligation upon

default when the provisions are not followed. Thus, a holder's failure to comply with a

constitutional home equity loan provision is not a constitutional violation that would entitle the

borrower to forfeiture. However, a borrower can pursue a breach of contract action to obtain the

forfeiture remedy. The high court then held that the forfeiture remedy is only available when one

of the six corrective measures in the home equity loan provisions can actually cure the holder's

failure. The failure to send the release of lien in recordable form could not be corrected by any of

the corrective measures, including the catch-all provision, because that provision assumes the loan

is still in existence. Thus, Garofolo was not entitled to forfeiture for the breach of contract claim.

In light of these decisions, mortgage holders and servicers need to be vigilant and cure

violations of the home equity loan constitutional provisions upon receipt of notice from a borrower

or after any compliance review identifying a violation. Failure to do so could result in forfeiture in

a breach of contract suit brought by a borrower. Documentation of the cure must be maintained

over the life of the loan in case of suit.

Some uncertainty remains on the effect of these decisions on foreclosures. For any

noncompliant loan, the foreclosure was improper so the borrower could be entitled to forfeiture.

Foreclosed property held by a mortgagee may also have title issues as these properties are not

protected by the bona fide purchaser provision in the Texas Constitution.

Wood v. HSBC Bank USA, N.A., 2016 Tex. LEXIS 383, 2016 WL 2993923 (Tex. May 20, 2016).


Garofolo v. Ocwen Loan Servicing, LLC, 2016 Tex. LEXIS 391, 2016 WL 2986237 (Tex. May

20, 2016).

7. REVERSE MORTGAGES

The homesteads of certain debtors may be encumbered with a reverse mortgage. TEX.

CONST. art. XVI, § 50(j) (Vernon Supp. 2015). Id. at § 50(k). See also TEX. PROB. CODE

ANN. § 270(7) (Vernon 2003); TEX. PROP. CODE ANN. § 41.001(b)(7) (Vernon Supp. 2012).

See also Finance Comm’n of Texas v. Norwood, 418 S.W.3d 566, 571 (Tex. 2013); Gilbreath v.

Steed, 2013 WL 2146230 at *4 (Tex. App. - Tyler 2013); Robinson v. Saxon Mtg. Serv., 240

S.W.3d 311, 313 (Tex. App. - Austin 2007, no pet.).

A reverse mortgage is an instrument that allows a debtor to borrow against the debtor’s home

equity to create an annuity-like debt See Larsen v. OneWest Bank, FSB, 2015 WL 6768722 at *4

(Tex. App. – Houston [14th Dist.] 2015); First Gibraltar Bank, F.S.B. v. Morales, 19 F.3d 1032,

1037 (5th Cir. 1994).

Its underwriting underpinnings turn upon the value of debtor’s equity in their home and

their actuarial life expectancy Larsen v. OneWest Bank, FSB, 2015 WL 6768722 at *4 (Tex. App.

– Houston [14th Dist.] 2015).

Like home equity loans, reverse mortgages are subject to a host of constitutional restrictions:

• A reverse mortgage must be a voluntary lien created by written contract. TEX. CONST.

art. XVI, § 50(k)(1) (Vernon Supp. 2015).

• The joinder of each owner and each owner’s spouse is required to encumber the marital

homestead with a reverse mortgage.

• A reverse mortgage loan cannot be made unless the borrower or the borrower’s spouse is

62 years of age or older.

• A reverse mortgage must be without recourse for personal liability against the owner or

the owner’s spouse. The lender may look only to the proceeds from the sale of the house

for repayment.

• A reverse mortgage loan must provide for advances to the borrower based on the

borrower’s equity in the homestead.

• The lender may make advances on the reverse mortgage note on behalf of the borrower

at any time if the borrower fails to pay any of the following that the borrower is obligated

to pay:

o taxes;

o insurance;

o costs of repair or maintenance (if performed by a party not an employee or directly

or indirectly controlled by the lender);

o assessments; or

o any lien that has or may obtain priority over the reverse mortgage


o and, to the extent necessary, to protect the lender’s interest in or the value of the

homestead property. Necessary means that the advance must be paid to achieve

the desired result of protecting the lender’s interest in the collateral.

• There is no restriction on the purpose and use of the future advances by the borrower. TEX.

CONST. art. XVI § 50(n)(1) (Vernon Supp. 2015). Nor is there any restriction on the term

of future advances.

• Advances made to the borrower are not taxable as income and do not affect eligibility for

social security, Medicare, Medicaid, low-income energy assistance, property tax relief,

and other means-tested allowances, benefits, or services.

• Reverse mortgages have no monthly repayment requirements. The note may not require

repayment of either principal or interest unless:

▪ all borrowers have died;

▪ the homestead property securing the loan is sold or otherwise transferred;

▪ all borrowers cease occupying the homestead property for period of longer than 12

consecutive months without prior written approval from the lender;

▪ the borrower defaults on an obligation specified in the loan documents to repair and

maintain, pay taxes and assessments on, or insure the homestead property;

▪ the borrower commits actual fraud in connection with the loan; or

▪ the borrower fails to maintain the priority of the lender’s lien on the homestead property,

after the lender gives notice to the borrower, by promptly discharging any lien that has priority or

may obtain priority over the lender’s lien within 10 days after the date that the borrower receives

the notice unless the borrower (a) agrees in writing to the payment of the obligation secured by the

lien in a manner acceptable to the lender; (b) contests in good-faith by, or defends the enforcement

of the lien in legal proceedings so as to prevent the enforcement of the lien or the forfeiture of any

part of the homestead property; or (c) secures from the holder of the lien an agreement satisfactory

to the lender subordinating the lien to all amounts secured by the lender’s lien on the homestead

property. TEX. CONST. art. XVI § 50(k)(6) (Vernon Supp. 2015).

• When the note becomes due, the lender must satisfy the note from the sale of the mortgaged

homestead. Neither the note nor any deficiency will be an obligation of the borrower’s estate.

• Reverse mortgages contemplate that no principal or interest are payable until the entire

note becomes due upon the occurrence of one of several triggering events. Unlike home equity

loans there is no restriction against a balloon payment.

• A reverse mortgage may not be made unless the owner receives counseling regarding the

advisability and availability of reverse mortgages and other financial alternatives.1395 The owner

must attest in writing that the owner received the required counseling.1396

• All lien advances made or to be made under a reverse mortgage and for interest on those

advances has priority over a lien filed for record after the recordation of the reverse mortgage.1397

There is no limitation on the term that future advances take priority over intervening liens.1398


• A reverse mortgage may accrue interest at either a fixed or variable rate.

• The interest rate may also be made contingent on an appreciation of the fair market value

of the homestead securing the note. • Interest accrues only on amounts advanced over the loan’s term.

• While no interim interest or principal payments may be required until the entire note is

due, interest may accrue and be compounded during the term of the note as provided by the

reverse mortgage loan agreement. There is no prohibition on compound interest or interest on

interest.

• Reverse mortgages are freely assignable. There is no requirement that a percentage of the

reverse mortgage proceeds be advanced before assignment of the reverse mortgage.

•

• If the lender fails to make loan advances as required in the loan documents after notice

from the borrower, the reverse mortgage death penalty will apply. In such a case, the lender forfeits

all principal and accrued interest on the reverse mortgage note. The death penalty will not apply

when a government agency or instrumentality takes an assignment of the loan in order to cure the

default.1407 • The reverse mortgage must require the lender, at the time the loan is made, to disclose by

written notice the specific repayment restrictions for reverse mortgages found at TEX. CONST.

art. XVI, § 50 (k)(6).

8. SALE OF HOMESTEAD AS A FRAUDULENT CONVEYANCE

Here’s some irony! Because the homestead is exempt from the claims of the owner’s creditors,

its conveyance by the debtor generally may not be attacked as a fraudulent conveyance. Almanza

v. Salas, 2014 WL 554807 at *3 (Tex. App. – Houston [14th Dist.] 2014); Martinek Grain & Bins,

Inc. v. Bulldog Farms, Inc., 306 S.W.3d 800, 806 (Tex. App. – Dallas 2012. no pet.); Duran v.

Henderson, 71 S.W.3d 833, 841-43 (Tex. App. - Texarkana 2002, pet. denied); Fitzgerald v.

Antoine Nat’l Bank, 980 S.W.2d 228, 231 (Tex. App. - Houston [14th Dist.], 1998, no pet.).

In Fitzgerald v. Antoine Nat’l Bank, 980 S.W.2d 228 (Tex. App. - Houston [14th Dist.] 1998,

no pet.). the debtors sold their homestead to the Fitzgeralds ostensively for $650,000. However,

the debtors gave a “discount” to the Fitzgeralds of $162,500 of this sales price. The Fitzgeralds in

turn leased the homestead back to the debtors who continued to occupy it. Antoine National Bank,

a judgment creditor of the debtors, claimed that this sale for inadequate consideration was a

fraudulent conveyance. Held: the sale of exempt homestead, whether for adequate consideration

or not, is not a fraudulent conveyance. The sale deprived the creditor of no right it had against the

exempt property.

As long as a legitimate transfer is intended, the debtor may sell his homestead or even give it

away Duran v. Henderson, 71 S.W.3d 833, 843 (Tex. App. - Texarkana 2002, pet. denied).


However, a sale of the homestead may be a fraudulent transfer if made (1) for the purpose of

showing only an apparent right in the purchaser to protect the property for the future .benefit of

the debtor and (2) accompanied by the debtor discontinuing use of the property as homestead. In

Duran v. Henderson, Duran conveyed the 165 acres surrounding his home to the Duran Family

Trust reserving a one-acre homesite. Later Duran sold his home to his daughter reserving a life

estate to himself. Duran never moved from the property. Held there was no fraudulent conveyance

because the facts showed no sham transaction to allow Duran to retain rights in the property while

ending its homestead use.

It is not a fraudulent conveyance for a debtor to invest nonexempt assets into a homestead

with the intent to shelter those assets from creditors. This is true even when the debtor is in failing

or insolvent condition. In In re Coates, 980 S.W.2d 228 (Tex. App. - Houston [14th Dist.] 1998,

no pet.). Mr. and Mrs. Coates used cash assets to pay off the lien on their homestead just 18 days

before they file bankruptcy. Held the Coates’ investment in their homestead was not a fraudulent

conveyance although made with a motivation to defeat their creditors.

Sometimes a creditor will request that a resulting trust, constructive trust or equitable lien

of some type be imposed against a homestead. There is a split of authorities over whether the

homestead may be burdened with a constructive trust when the homestead is purchased or

improved by the fruits of the homestead claimant’s fraud.

In Curtis Sharp Custom Homes v. Glover, 701 S.W.2d 24 (Tex. App. - Dallas 1985, writ

ref’d n.r.e.). The homestead claimants used embezzled funds to improve their homestead. When

the aggrieved party sought to foreclose an equitable lien against the property by judicial decree,

the Court held in favor of the embezzlers. When the homestead had been established before the

embezzled funds were used to improve it, a constructive trust could not attach to the homestead.

In Matter of Moody, 862 F.2d 1194 (5th Cir. 1989), the court refused to impose an

equitable lien or constructive trust on a homestead improved by fraudulently obtained money. The

court distinguished homesteads purchased with wrongfully obtained funds from homesteads

improved with wrongfully obtained funds. Only the former may be subjected to an equitable lien.

However, in Bransom v. Standard Hardware, Inc., 874 S.W.2d 919 (Tex. App. - Fort Worth

1994, writ denied) the court imposed a constructive trust on the proceeds from the sale of an

alleged embezzler’s homestead. Held a constructive trust may be imposed on a homestead

irrespective of whether the wrongfully obtained funds are used for improvements or purchase

money. The stolen funds never acquired homestead rights because they were never the property of

the wrongdoer but considered held in an equitable trust for the rightful owner. Blankenship v.

Wightman, 2006 WL 1865635 at *2 (Tex. App. - Texarkana); Branson v. Standard Hardware,

Inc., 874 S.W.2d 919, 928 (Tex. App. - Fort Worth 1994, writ denied); In re Cowin, 2014 WL

1168714 at *48-49 (Bankr. S.D. Tex. 2014); In re Gamble-Ledbetter, 419 B.R. 682, 701 (Bankr.

E.D. Tex. 2009); In re Huie, 2007 WL 2317152 at *5 (Bankr. W.D. Tex. 2007).


The superior equitable claims of the true owner, when enforced against the homestead,

does not constitute an improper impairment of the homestead exemption. In re Cowin, 2014 WL

1168714 at *48 (Bankr. S.D. Tex. 2014). The framers of the Texas Constitution never intended

to distort homestead protection to protect thievery or provide a haven for wrongfully obtained

money or property. In the Estate of Byrom, 2013 WL 3967432 at *1-2 (Tex. App. – Tyler 2013);

Branson v. Standard Hardware, Inc., 874 S.W.2d 919, 928 (Tex. App. – Fort Worth 1994, writ

denied); In re Douglass, 2015 WL 6446305 at *24 (Bankr. E.D. Tex. 2015); In re Cowin, 2014

WL 116874 at *48 (Bankr. S.D. Tex. 2014); In re Gamble-Ledbetter, 419 B.R. 682, 701 (Bankr.

E.D. Tex. 2009).

A debtor cannot use the homestead as a shield against the superior equitable title of the

rightful owner. In re Cowin, 2014 WL 1168714 at *49 (Bankr. S.D. Tex. 2014). It makes no

difference if the ill- gotten funds are used to pay for the purchase money or improvements all at

once or paid incrementally over time. Blakenship v. Wightman, 2006 WL 1865635 at *2 (Tex.

App. - Texarkana 2006); In re Gamble-Ledbetter, 419 B.R. 682, 702 (Bankr. E.D. Tex. 2009).

9. REDEMPTION OF RESIDENCE HOMESTEAD SOLD AT TAX SALE

Formerly, all property sold at a tax sale could be redeemed by the taxpayer within two

years of the recordation of the tax sale purchaser’s deed. In 1993, the Texas Legislature amended

the Tax Code to reduce the redemption period from two years to six months. Excepted from this

shortened redemption period are residence homesteads and land designated for agricultural use.

For these types of properties, the redemption period remains two years. TEX. TAX CODE ANN.

§ 34.21(e) (Vernon Supp. 2015). See also Gonzalez v. Razi 338 S.W.3d 167, 172 (Tex. App. -

Houston [1st Dist.] 2011, pet. denied); Hutson v. Tri-County Prop., 240 S.W.3d 484,488 (Tex.

App. - Fort Worth 2007, pet. denied). Id. at § 34.21(a)-(c). See also Hutson v. Tri-County Prop.,

240 S.W.3d 484, 488 (Tex. App. – Fort Worth 2007, pet. denied); Nichols v. Lincoln Trust

Co., 8 S.W.3d 346, 348 (Tex. App.- Amarillo 1999, no pet.).

To qualify for the extended redemption period the property must be used as a residence

homestead or designated for agricultural use when the tax suit was filed or the application for tax

warrant was made. Id. See also Gonzales v. Razi, 338 S.W.3d 167, 172 (Tex. App. - Houston

[1st Dist.] 2011, pet. denied); Hutson v. Tri-County Prop., 240 S.W.3d 484, 488 (Tex. App. - Fort

Worth 2007, pet. denied); Day v. Knox County Appraisal Dist., 2006 WL 826094 at *2 (Tex.

App. - Eastland 2006).

While a tax exemption cannot be taken absent application for the exemption, TEX. TAX

CODE ANN. § 11.43(a) (Vernon Supp. 2015), Nichols v. Lincoln Trust Co. 8 S.W.3d 346 (Tex.

App. - Amarillo 1999, no pet.) concluded that the two-year redemption period applies to all

property “qualified” to receive the homestead exemption whether or not the owner applied for and

actually received the homestead tax exemption.


If a third party buys the homestead property at the tax sale, the two-year redemption period

begins to run when the purchaser’s tax deed is recorded. If a taxing authority buys the homestead

property at the tax sale, the two-year redemption period begins to run from the date that the deed

to the taxing authority is recorded even if the property is later resold to a third party.

If the homestead property is sold to a third party at a tax sale, the redemption consideration

is determined by the formula set out at TEX. TAX CODE ANN. § 34.21(a). See also Gonzales

v. Razi, 338 S.W.3d 167, 171 (Tex. App. - Houston [1st Dist.] 2011, pet. denied).

If the homestead is sold to a taxing authority at the tax sale, the redemption consideration is

the lesser of the amount of the tax judgment against the property or the market value of the property

specified in the judgment (plus the filing fee for the taxing unit’s deed and costs expended by the

taxing unit) If the property is sold to a taxing authority at the tax sale but later resold to a third

party, the redemption consideration is determined by the formula set out at TEX. TAX CODE

ANN. § 34.21(c); provided that if this redemption consideration is less than the tax judgment, the

owner must also pay this difference to the taxing authority before redeeming the property. TEX.

TAX CODE ANN. § 34.21(d) (Vernon Supp. 2015).

10. RESIDENCE HOMESTEAD EXEMPTION AND OPEN SPACE LAND

VALUATION

No, I am not going to tell you much about either one here. But it does seem a little

counterintuitive that one property could have both, But they can.

The seems to be little interest in the real estate bar in the exciting world of ad valorem taxes!

The tax ode is very much one sided and draconian. It is very difficult to win a case in tax court

unless your client is being sued over taxes on land, he says he doesn’t own. The bureaucracy

and procedural rules are stacked against the tax protester.

The residence homestead exemption requires that the property be used as a residence. TEX.

TAX CODE ANN. § 11.13(j)(1) (Vernon Supp. 2015). See also Parker County Appraisal Dist.

v. Francis, 436 S.W.3d 845, 847, 851 (Tex. App. – Fort Worth 2014, no pet.).

To qualify for open-space land valuation, a property must be devoted principally to

agriculture. TEX. TAX. CODE ANN. § 23.51(1) (Vernon 2015). See also Parker County

Appraisal Dist. v. Francis, 436 S.W.3d 845, 851 (Tex. App. – Fort Worth 2014, no pet.).

Parker County Appraisal Dist. v. Francis, 436 S.W.3d 845 (Tex. App. – Fort Worth 2014, no

pet.). determined that these two uses were not incompatible under the Texas Tax Code. The

homestead tax exemption and open- space valuation may be claimed simultaneously on the same

property.


ADDENDUM “1”

TEX. GOV’T CODE ANN. § 573.021-.025 (Vernon 1994 and Supp. 2004).

Computation of degrees of affinity and consanguinity - TEX. GOV’T CODE ANN. § 573.021-

.025 (Vernon 1994 and Supp. 2004).

(a) The degree of relationship by consanguinity between an individual and the

individual's descendant is determined by the number of generations that separate them. A parent

and child are related in the first degree, a grandparent and grandchild in the second degree, a great-

grandparent and great-grandchild in the third degree and so on.

(b) If an individual and the individual's relative are related by consanguinity, but neither

is descended from the other, the degree of relationship is determined by adding:

(1) the number of generations between the individual and the nearest common

ancestor of the individual and the individual's relative; and

(2) the number of generations between the relative and the nearest common

ancestor.

(c) An individual's relatives within the third degree by consanguinity are the individual's:

(1) parent or child (relatives in the first degree);

(2) brother, sister, grandparent, or grandchild (relatives in the second degree); and

(3) great-grandparent, great-grandchild, aunt who is a sister of a parent of the

individual, uncle who is a brother of a parent of the individual, nephew who is a child of a brother

or sister of the individual, or niece who is a child of a brother or sister of the individual (relatives

in the third degree).

Sec. 573.024. DETERMINATION OF AFFINITY. (a) Two individuals are related to

each other by affinity if:

(1) they are married to each other; or

(2) the spouse of one of the individuals is related by consanguinity to the other

individual.

(b) The ending of a marriage by divorce or the death of a spouse ends relationships by

affinity created by that marriage unless a child of that marriage is living, in which case the marriage

is considered to continue as long as a child of that marriage lives.

(c) Subsection (b) applies to a member of the board of trustees of or an officer of a school

district only until the youngest child of the marriage reaches the age of 21 years.


Sec. 573.025. COMPUTATION OF DEGREE OF AFFINITY. (a) A husband and wife

are related to each other in the first degree by affinity. For other relationships by affinity, the

degree of relationship is the same as the degree of the underlying relationship by consanguinity.

For example: if two individuals are related to each other in the second degree by consanguinity,

the spouse of one of the individuals is related to the other individual in the second degree by

affinity.

(b) An individual's relatives within the third degree by affinity are:

(1) anyone related by consanguinity to the individual's spouse in one of the ways

named in Section 573.023(c); and

(2) the spouse of anyone related to the individual by consanguinity in one of the

ways named in Section 573.023(c).

http://www.statutes.legis.state.tx.us/GetStatute.aspx?Code=GV&Value=573.023

http://www.statutes.legis.state.tx.us/GetStatute.aspx?Code=GV&Value=573.023