Wrap-Around Mortgages

By Cassandra McGarvey, Founder of McGarvey PLLC on July 29, 2021

Texas Senate Bill 43 amends current law in relation to mortgage loans and is meant to address issues including:

  • fraud involving financing when a residential property with an outstanding lien is sold without notifying the buyer of the lien
  • foreclosure by a lender on property without any form of missed payment to the lender
  • loans which may never have been recorded

What’s a Wrap-Around Mortgage Loan?

A wrap-around agreement is a type of secondary mortgage financing and involves the buyer paying the seller directly for a residential property — often at a higher interest rate than the original mortgage. The seller retains the mortgage on the home, wrapping the buyer’s loan into the existing mortgage. The seller assumes the role of lender while continuing to make payments on the original mortgage.

In this arrangement, the originating lending institution can still foreclose on a property if the seller fails to maintain the mortgage. To protect the purchaser of the wrap-around mortgage, Texas Senate HB 43:

  • provides for wrap payments to be held in a constructive trust by the seller for the benefit of the buyer
  • establishes that anyone collecting or receiving a payment from a wrap borrower in connection to a wrap mortgage owes a fiduciary duty to the borrower for the payments
  • discloses the nature and risks of wrap transactions to buyers and offer consumers the right to rescind transaction/agreement when disclosures are not made timely
  • defines “wrap mortgage loans” as a residential mortgage loan:
    • made to finance the purchase of residential real estate that will continue to be subject to an unreleased lien that attached to the property before the loan was made
    • secures debt incurred by a person other than the wrap borrower that was not paid off at the time the loan was made
    • obligates the wrap borrower to the wrap lender for payment of debt, the principal amount of which includes the outstanding balance of the debt and any remaining amount of the purchase price financed by the wrap lender
  • clarifies that a wrap mortgage loan may only be closed by an attorney or title company
  • prevents “house flippers” from registering as financial service providers
  • prohibits a person from making wrap mortgage loans unless the person is licensed or registered to originate or make residential mortgage loans

The new law goes into effect on January 1, 2022. For questions about Texas real estate law or wrap-around mortgages, please contact Cassie McGarvey at cmcgarvey@mcgarveypllc.com.

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