Other Voices

Texas mortgage documents give unlawful power to lenders

Even if a homeowner misses mortgage payments, Texas lenders can’t take possession of their property except through a foreclosure sale.
Even if a homeowner misses mortgage payments, Texas lenders can’t take possession of their property except through a foreclosure sale. STAR-TELEGRAM

Imagine this: You’ve missed two mortgage payments. You come home from work and realize someone changed the locks on your front door and installed a lockbox on the doorknob.

Think this could never happen to you? Think again. It happens all across the country, and it could happen in Texas.

A common provision in mortgage loan documents, generally known as a “property preservation” clause, gives lenders the right to lock homeowners out of their own homes if the homeowner misses mortgage payments and is in default, or if the lender concludes that the borrower has abandoned a house.

The Supreme Court of the state of Washington examined one of these clauses in a recent case.

The court concluded that these clauses are unenforceable because, contrary to state law, they let lenders take possession of a borrower’s home before a foreclosure sale.

Texas lawmakers ought to take notice.

Like most homeowners, the plaintiff in the Washington case borrowed to buy her home.

The mortgage loan was secured by a deed of trust with a property preservation clause.

The clause gave the lender the right to rekey locks and to winterize or generally preserve the value of the borrower’s home if the lender felt the home was abandoned.

The homeowner missed two mortgage payments and went into default.

Two months later, and without prior notice or warning, the mortgage servicer, named Nationstar, sent someone to the borrower’s home to remove the existing lock and install a lockbox.

Nationstar’s representative left a notice for the homeowner stating that her home was “unsecure or vacant” and that the locks were changed to prevent “unauthorized persons” from entering the home.

The homeowner was only able to get back inside her home to retrieve her belongings after she called a phone number listed on the notice and received a code to get the key from the lockbox.

The Washington Supreme Court rejected the argument that locking an owner out of her house wasn’t “possession.”

The court held that rekeying locks constitutes control over, and possession of, a property and that lenders did not have the right to possess the home until after a foreclosure sale.

Given the similarities between Washington state laws and Texas property laws, Texas courts should also refuse to enforce these clauses.

Texas, like Washington, follows the “lien theory” of mortgages.

Under this theory, lenders have a financial interest in property that secures a mortgage loan but have no ownership interest until the home is sold at foreclosure.

As is true in Washington, Texas case law also indicates that lenders do not own a borrower’s home and do not have the right to take possession of that home before default and until the home is sold at foreclosure.

The Texas Property Code details the rights homeowners and lenders have when a home is scheduled to be sold at foreclosure, and those rights do not include the ability to lock homeowners out of their homes before a foreclosure sale.

Obviously, borrowers should repay their loans.

And lenders need to be able to protect their financial interests to prevent damage to collateral that secures their loans.

The problem with property preservation clauses, however, is that they let lenders contractually give themselves rights that are not allowed by state law, i.e., evict people from their homes before a court overseeing the foreclosure process sorts out who is entitled to possess the home.

Simply put, unless and until homeowners lose their homes in a foreclosure sale, lenders should not be able to include provisions in private contracts that are inconsistent with or that circumvent Texas law simply because those state laws do not give them the power they want.

Mechele Dickerson is a University Distinguished Teaching Professor and the Arthur L. Moller Chair in Bankruptcy Law and Practice in the School of Law at The University of Texas at Austin.