Construction professionals at work

When mechanics liens and mortgages are associated with one another, typically that means that a lien priority battle is taking place. Depending on the state and the situation, that battle can go either way. However, recent suits filed in San Antonio, Texas allege that Texas Home Restoration and Texas Mortgage Capital Corporation, both owned by Fred Hobbs, have been working in conjunction to issue mechanics liens billed as mortgage loans to pay for repair work. What’s more, another questionable investor, Jack Markman, has partnered with Hobbs and is purchasing the homes that fall behind on payments.

How It Works

According to this story by the San Antonio Express-News, Texas Home Restoration has been preying on customers with high cost loans. The article states that many of the company’s customers fall into trouble trying to keep up with payments, and the repair work that has taken place is often subpar. Before we get too far into the allegations, here’s a look at how the scheme actually works.

For homeowners who need repair work but don’t have the cash on hand or have the ability to secure a loan, the situation can become dire. By hiring Texas Home Restoration, these owners no longer need to come up with cash or a loan- the company will originate one for them. Well, technically Texas Mortgage Capital Corporation would do so, but both companies operate under the same leadership. Texas Mortgage Capital Corporation may not have an accurate business title, however. Rather than a traditional mortgage loan, the company loans money to its (and Texas Home Restoration’s) customer. In return, Texas Home Restoration files a mechanics lien on the home. Texas Mortgage Capital Corporation then creates a payment plan, often with exorbitant interest rates. Should the payment schedule be followed, the work is paid for and the lien is released. However, should a customer fall behind, the high interest rates can lead to a repeated inability to pay, eventually resulting in foreclosure.

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The Issue

What makes this alleged behavior so bad? For starters, Texas Home Restoration/ Texas Mortgage Capital Corporation may be quoting projects at a price far beyond what is actually proper. According to one lawsuit against Texas Home Restoration, the companies overstated the amount needed to complete the project. The suit alleges that the companies had the plaintiff take out more than three times the amount necessary to complete the project, at an interest rate of 16%. Over-loaning would not be a fatal issue if not for the fact that customers of the companies do not usually see the money they “receive.” In actuality, the money is usually paid straight to Texas Home Restoration to complete the work. There are even allegations that Texas Mortgage Capital Corporation would not allow one customer to see the amount left on their loan. Another customer reported that there were unexplained jumps in their billing.

What makes the whole situation even more worrisome is that real estate investor Jack Markman has been partnering with Hobbs to purchase homes. According to the San Antonio Express-News, Markman has recently purchased two homes from Texas Mortgage Capital and has purchased two of the contracts currently underway. Markman has been sued repeatedly for allegedly swindling low-income customers into signing installment loans that left Markman with the title to a property until a loan was repaid. The suits also claim that Markman used the language barrier with hispanic immigrants to his advantage, negotiating in Spanish before delivering an agreement with different terms in English. Markman’s contract for deed scheme operates very similarly to the mechanics liens as loans operation – in both situations, the title for a property was leveraged with loan payments containing oppressive interest rates and unexpected fees. Essentially it’s like a pawning real estate, but with higher interest rates and hidden fees blocking owners from recovering full title.

Mechanics Liens as Loans

Using mechanics liens as loans is an abuse of construction’s most important remedy. A mechanics lien is a necessary tool to ensure that contractors subs and suppliers are paid for their labor. When one of these parties goes unpaid, they can file a lien on the property where work was done. Should the property owner fail to resolve the issue, the lienor may foreclose the lien and receive payment from the proceeds of the sale. By affording them the ability to recover unpaid sums through the fear of a clouded title or eventual foreclosure, these laborers have strong recourse when they are failed by the construction payment chain. Because mechanics liens were not designed to be used as mortgage loans, the safeguards that typically protect property owners in a mortgage agreement are not present. The mortgage industry is heavily regulated, yet still has more than its share of issues. Mechanics liens were never intended to serve as the basis of a loan, so owners have even less protection. The fact that mechanics liens operate on relatively short time frames with very strict procedural requirements creates that much more of a disadvantage. Regardless of Hobbs’ intentions, Texas Home Restoration and Texas Mortgage Capital Corporation should not be leveraging mechanics liens as loans.

Changes may be coming to Texas lien law. For more information, check out our post: Changes To Texas Lien Law May Be On The Horizon. We regularly publish content on issues in the Lone Star State, so also stop by the Texas tag on the blog. For more information on the state’s lien and bond laws, here are our Texas Lien Law FAQs.

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Texas Mortgage Broker Leverages Mechanics Liens as Loans
A Texas mortgage broker has been using mechanics liens as loans in lieu of a mortgage agreement. Many customers have lost their homes. Two have filed suit.
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