Home Equity Loan Did Not Run Afoul of the Texas Constitution
February 22, 2015Homeowners Nader and Fariba Daryapayma purchased a $1.5 million house and financed $735,000 of the purchase price with two loans secured by liens on the home. Shortly thereafter, the Daryapaymas applied for and obtained a home equity loan from Countrywide for $937,500, the purpose of which was to pay off their current mortgage (i.e. the existing $735k loans). Countrywide funded the home equity loan and the Daryapaymas used the proceeds to pay off the first two loans.
A few years later, the Daryapaymas defaulted on the home equity loan. Bank of New York Mellon (BONY), as the assignee of the loan, foreclosed on the Daryapaymas property and then filed a petition for forcible detainer. The Daryapaymas counterclaimed, contending that the home equity loan violated the Texas Constitution, which limits the amount of home equity loans, when combined with existing mortgages, to 80% of a home’s fair market value. The Daryapaymas argued that because the $937k home equity loan combined with their outstanding $735k mortgages exceeded 80% of the home’s value, the foreclosure was unenforceable. The trial court agreed and granted the Daryapaymas summary judgment.
The Dallas Court of Appeals reversed, holding that because the loan documents reflected that the $937k home equity loan was made, in large part, to pay off the existing mortgages, the trial court erred in including the balance of those loans in its calculation of the total amount of indebtedness.
