Thursday, November 12, 2015

Why Your Attorney Wants To Make Less Money Off Your Case

5 Ways Your Divorce Lawyer Saves You Money

There’s a myth out there about lawyers – they want to over-charge you by racking up those “billable hours.”

Grant it, there are always bad players in any industry. And, admittedly in contrast to these bad players, by God’s grace and the kindness of so many great attorneys, I am connected with a great number of wonderful, generous and magnanimous lawyers, Texas’s family law attorneys. For whatever reason, the divorce lawyers I see and with whom I interact, have the highest standards of ethics. They are truly interested in helping children and individuals blunt the otherwise ill effects of a traumatic event, divorce.

I can honestly say that I trust these attorneys and esteem them highly; as professionals and as individuals. I am fond of them all.

The myth is not true. Attorneys do not wish to simply rack up unnecessary “billable hours” and over-charge their clients. The opposite ethos prevails. They want their clients to get a good deal and they only wish to be paid for their honest work. It’s actually to their advantage that their clients get more value than what they pay for….a “good deal.”

So, I thought I would list out how my attorney friends – specifically, the ones who refer their clients to me for mortgage financing – are saving their clients money. These are real examples representing real dollars. But, some of it unseen because the savings is, sometimes, simply a reduction in the cost of doing business and the client never sees what costs would have been had they not been referred to me.

Here are the five ways…

1.    Appraisals. It’s amazing that many lawyers still have clients ordering appraisals - sometimes two – in a divorce process. The couple wishes to determine a value of what is usually the largest asset they own. These appraisals cost about $500 each and are, many times, disparate in their reporting of “opinion of value.”

For several years now (since May 1, 2009), the only appraisal that is usable for mortgage financing is the one ordered by the lender. So, if mortgage financing is going to be needed (for refinances and buyouts), then any other appraisal obtained is totally useless. Not only is it useless – it is a forbidden practice that the lender’s appraisal (and the appraiser who is chosen in a black hole / round robin type selection process) be influenced by any other appraisal. This means that the appraisals ordered by the unaware attorney are a total waste of money.

What if no mortgage financing is required? It’s still a waste of money – to order appraisals outside the lending process - because the appraisal report is not to a real estate professional and the numbers are too easily “fudged.” You see, appraisals are reports to an individual or a firm or a company/lender. This is why two appraisals - one ordered by husband’s side, the other by wife’s side – are frequently disparate in reported value. The appraiser knows that folks outside the lending process will be reviewing the appraisal. When a lender orders the appraisal, the appraiser knows that their report will be reviewed by an AMC (Appraisal Management Company), scrutinized by the Loan Originator and underwritten by a trained and accountable underwriter. Not so much funny business.

So, what to do when no mortgage financing is contemplated – there’s still a way to get an accurate appraisal. Either 1) have your attorney tell the appraiser that you are going to have a lender (me, Noel Cookman) review this appraisal and you want it done to underwriting standards; or 2) have the grantee (the person who is going to be awarded the house) contact me, do an application; and, we’ll order an appraisal for the sole purpose of providing accurate information for your divorce settlement. It’s a better, more realistic appraisal, devoid of the sort of manipulation that could otherwise affect the “opinion of value.” It’s a bit of work for me and my team but we gladly do it in order to serve our wonderful referring attorneys. Our goal is to make the attorneys and clients happy. That’s just one way to strive to do that.

2.    Less Time = Lower Fees. When you and your attorney do not have to spend a lot of time wondering about whether or not you can finance the house or buy a new house or what is required to qualify, you will spend less time in your attorney’s office and therefore spend less money getting your divorce final. Attorneys do not want to charge you for their time if they are not dispensing good LEGAL advice. And when they have to dabble in real estate, mortgage finance, etc. during your session, you get nowhere and the attorney’s reputation is at risk because they are getting away from their expertise – the law. The perfect situation, I’ve often thought, is for a potential divorce client to speak with me first about the house and finance issues. What if the client could walk into their attorney’s office and say “I can qualify to refinance the house and perform a buyout of my spouse’s interest and I have an Assessment/Approval from Noel Cookman that outlines the conditional loan approval?” Turns an hour of wondering into five minutes of knowing.

3.    If you mediate or collaborate. Preparation is the key to saving money when you are mediating or collaborating. Experts (mediators, attorneys, financial neutral experts, mental health and communication experts, et al) have to be paid and, generally speaking, when an hour is gone, they cannot charge for unused time. So, every minute is valuable; or, I should say, costly. When your attorney connects you with me, you will enter each meeting prepared. You will know the answers to a plethora of questions that nearly always come up: Can you afford the house (whatever that means)? Can you refinance the house and get the loan out of your spouse’s name? Can you include a buyout to pay your spouse for their interest in the property? How much? What does the property appraise for? How do we know? Who says? Who or what determines what value we should agree on for the property’s value? How much of it can be financed (Loan To Value ratio)? When can the loan close…how long after final divorce? What agreements are required in order to successfully close your loan? How much support is required (if any) for you to qualify for financing? How long will it need to continue?

These questions - and the discussions that ensue – often eat up many hours…and many times, at the end of the discussion, no real-time, solid, verifiable answers are apparent. Everyone is left with the need for more research; or worse, guess work guides the agreement. Answers to all of these questions (and more) can be obtained before mediation/collaboration (or any other sort of meetings) by connecting with me in advance. I can cut hours off of the time spent in such meetings. The client and his/her attorney enters the meeting prepared with my unique Assessment/Approval which outlines exactly how the transaction can close, ex-spouses paid and removed from liability (in refinance buyouts), how long it will take and what conditions must prevail.

This service alone can save hundreds of dollars.

4.    Take advantage of free valuable services. In the divorcing client’s world, professionals are paid one of two different ways: 1) by charging for their time or 2) by charging for a job or transaction. Professionals like me make our money by the transaction. We don’t charge by the hour.

(Mortgage originators cannot, by law, charge by the hour….our compensation is a matter of regulations and is a fixed amount based on the loan itself, not the work that we perform to close that loan. Incidentally, this is not a benefit to the consumer but rather the concoction of starry-eyed Marxist staffers on Capitol Hill and in the regulatory agencies like the misnamed Consumer Finance Protection Bureau; I am afield from the purpose of this article but, if you know me, you know I cannot help myself).

But, do you realize what this means? At least when you use my services, it means that you can take advantage of my expertise for free. No, I really mean FREE. Here’s how it works. You are going to get mortgage financing anyway. So, the cost of financing is a foregone conclusion. By using me, you get competitive mortgage financing AND my financial/mortgage expertise: Taking the application before (not after) final divorce; providing conditional approvals with specific steps to proper settlements which enhance your mortgage qualifying; staying abreast of your divorce and making sure your mortgage loan approval is continuously updated so as to reflect the settlement (take the guess work totally out of your divorce-related financing); a written Assessment which is a report to your attorney

Now, how is that NOT an example of your attorney saving you untold hundreds and thousands of dollars?

5.    Mortgage financing done right. This one is a little hard to explain. I usually just accept the fact that I’ll be doing a great service for folks but they’ll never truly understand what I’ve done. So grant it, you’ll have to take my word for it to some degree.

There is a right way and a wrong way to approach mortgage financing for divorcing folks. The wrong way is more expensive (comes with higher interest rates and more restrictive terms) and sometimes simply produces a loan denial. Okay, you need an example. I’ll give you two. And, these are part of my “secret sauce” so, in a way, I hope that some people DON’T read this.

When buying out a former spouse in a refinance transaction, it’s important that the borrower not “cash out” but rather have their loan structured as an Owelty lien. Cash out financing, especially in Texas (but in other states as well), comes with a higher relative interest rate and permanent restrictions on the property’s financing. But, that’s the wholes story. Rarely should the buyout be stated as the actual or “net” buyout to the spouse. There are several reasons for this. Now that will have to remain part of my “secret sauce.” It should be sufficient to say that I innovated the creative use of the Owelty buyout in financing which has enabled so many people to get better financing. At the end of the day, the customer has a better deal even though they may not realize it.

Here’s a second example. When structuring a buyout, many times a borrower’s debts exceed the allowable limits. The term is “debt to income ratio.” Often, I recommend a particular structure to the settlement and financing that effectively allows the mortgage to leverage this debt into a lower ratio. Again, this must remain part of my “secret sauce.” I can only tell you that I do it quite routinely now and have for about 10 years now. Even though people in my industry say it cannot be done, I just keep on doing it…legally, ethically, with no problems. In fact, we eliminate problems. The end result is that newly divorced home owners have significantly lower payments (for their entire budget) than otherwise. They are much better off.

So, why would an attorney actually prefer to charge you less (by working fewer hours on your case)? Because they want something more than a few more dollars from you – they want happy clients? That’s why they look for extra value. That’s why they refer you to me? It’s not just because they like me….I hope they do like me and my services. But, it’s for a reason – it helps you.

Okay, so it is the attorneys who are referring their clients to me who are saving them significant amounts of money. The good news is that more and more Texas family law attorneys are doing this. And, my team is growing commensurately to take care of the gargantuan need.

Yes, Texas family law attorney are the grandest professionals in the world. I’ve met and know hundreds of them, maybe a few thousand. And, I love them all. I can honestly say that they are magnanimous and awesome. They truly seek what is best for you and your family. This article explains just one way they look out for your best interest by referring you to me and, thus, saving you real, tangible dollars.

Thanks for reading. Write me and tell me if you enjoyed this or benefited in some way. I appreciate hearing from you.

Noel Cookman




Wednesday, October 21, 2015

Why Divorcing Clients Need to Pay/Receive Support Immediately and Not Wait Until Final Divorce

You (lawyers) live in the world of judgments, orders and agreements. It’s somewhat precise. My world is somewhat precise as well but with different rules (or points of precision).

For example, when it comes to support (spousal and/or child), you think of what is ordered or agreed….and the exact date when it starts and stops.

I, on the other hand, think in terms of documentation. Of course, I have to live with what is ordered/agreed – every word of a decree is reviewed and underwritten in a loan application. But, remember – I am involved during the process of divorce, not just after everything is agreed.

This is important because support can be engineered in your settlements so as to accommodate mortgage financing without violating the essence of the agreement.

For instance, when it comes to support, here are the mortgage rules. Generally speaking, in order for support income to be considered qualifying income, we must document (remember that word) that the support has been received for 6 consecutive months and that it will continue for 3 or more years.

Most folks – even mortgage professionals – assume that this means the borrower cannot qualify with support income until at least 6 months after divorce. *But, this is not what the guidelines say. Fannie, HUD and VA only require documentation of the support, not its court order.

This means that two divorcing parties can, by good faith agreement, begin to exchange support payments. I say “exchange” because here’s how it looks: Let’s say the wife is trying to qualify to refinance the mortgage so husband can be released of its liability and move ahead in life without this “monkey on his back.” And, let’s say that the wife needs child or spousal support in order to qualify for this mortgage. And, for illustration purposes, let’s say that the house payment is $1,000/month, the utilities are $300, and groceries are $500/month. Since husband has been the main breadwinner, he has been paying these bills from his own account or from a joint account (even though the wife may have been, in fact, writing the checks or managing the account). Let’s also assume that the contemplated support is $1800/month. My recommendation is that wife establish her own sole/separate checking account (just as she will surely do by final divorce); and that husband begin support payments of $1800/month which wife will then use to pay the bills. Husband doesn’t actually pay anything extra (until support is ordered) so there is no loss to husband. All is whole so long as the couple “juggles” the accounts so as to create a paper trail.

You will quickly see that this is not “gaming” the system. It is, in fact, mirroring the post-divorce reality….this is how it’s going to be.  It’s the closest thing to reality that an underwriter can possibly see as she evaluates the applicant’s ability to repay the mortgage loan.

Most importantly, the documentation is established.

Here’s one more important distinction that lawyers may not usually conceive – it does not matter on what day of the month the support is paid so long as it is paid within the month for which the support is due. That’s right. You usually think of support as due on the 1st and the 15th or by whatever dates are standard. But, mortgage guidelines are generally unconcerned about those dates and think in terms of months more than in terms of days of the month. I know it sounds counterintuitive to the world of orders and agreements. But, here’s how it can work:

At the end of October, a couple can begin paying/exchanging support immediately. So long as the funds move before the end of the month, October counts as the first month. Conceivably, our borrower could qualify for financing near the end of February (the 5th month) if ex-spouse pays March’s payment early. (This is a judgment call and doesn’t always work but it can under certain circumstances). This means that 4 months after we direct the couple to exchange support payments, the borrower can be closing her loan….having established a SIX MONTH pay history.

Cool, eh?

While most people assume that the support cannot begin until after divorce or until after temporary orders. But, with a literal stroke of a pen, divorcing parties can create their own loan qualifying many months earlier than by waiting until final divorce.

Let’s review.
1.  As soon as a couple seriously contemplates divorce, the non-custodial parent should begin paying (really, exchanging) support.
2. Payments should be documented as coming from payer’s sole/separate account and paid into payee’s sole/separate account.
3. Amount should be at least that which is contemplated; and, payments must be made in consecutive skipped months.
4.“Juggling” the funds (so that no loss is incurred and that both parties are whole) is left to the couple. Most folks can figure it out fairly easily if they want to.


Borrowers can use support income to qualify for mortgage financing if certain documentation rules are followed. The support does not necessarily have to be ordered. But, a pay history must be developed.

A competent Divorce-Lending Specialist should advise. But, generally, here is how to do it.

1. Payer should pay from his/her own sole/separate account.
2. Payee should deposit into his/her own sole/separate account.
3. Make sure payments are made in consecutive months – no missing monthly payments.
4. Payments do not have to be made by a certain date within the month so long as payment is made before month end.

*Freddie Mac’s guidelines require that the support be ordered (as in a decree). But, this order can be by temp orders, Rule 11 Agreement, MSA, etc. Moreover, Freddie Mac is used much less frequently than Fannie Mae and I, personally, only use it to accommodate other particular nuances in a loan application.

Thanks for reading.

Noel Cookman

Tuesday, October 13, 2015

How to Specify Dates for Closing and Funding a Buyout

Sometimes, deals blow up because the lender is not able to meet deadlines set forth in a divorce settlement. Financial loss. Unhappy clients. Additional litigation. No one wins in these situations.

I can’t say that I’ve seen it all but after 13 years specializing in Divorce-Lending, I’ve seen enough to create a response concerning how grantees (of awarded properties) are required to pay buyouts to ex-spouses. I’m speaking mostly of the time elements that are specified in a decree such as “Respondent to pay $50,000 by Nov. 1, 2015” or “Petitioner to pay $50,000 within 60 days of entry of this decree.”

I have a few suggestions that I believe will accommodate your settlements and avoid unhappy clients because dates are missed or because the feat, itself, is impossible.

An example: We are just closing a transaction wherein the MSA required payment of grantor’s interest within 60 days OF THE DATE OF THE MSA, not from the date of final divorce. Since an Owelty cannot be financed until after final divorce (not merely after a judge says “I’m granting this divorce” and answers “yes” to the party’s question “your honor, does this mean I’m divorced”), the date of the MSA is irrelevant to the actual closing and funding of any Owelty buyout – only the date of entry of the final divorce decree affects when this Owelty buyout can occur.

Well, the drafting attorney – the attorney for the grantor (who was to receive a buyout) – had not drafted the decree as of about 2 weeks prior to the 60-day time limit. I could see that there was no way we could meet the deadline. Opposing attorney (my customer’s attorney) took up the task of drafting; but, even then, there was no way to meet the deadline. My customer’s attorney (who had referred said customer to me) was a talented negotiator and bought us some extra time, by extending the deadline to a more reasonable date in the final decree. That - I’m sure you caught this – was a change to an IRREVOCABLE AGREEMENT. Nifty trick if you can pull it off. Great legal work; and, I assume, kudos to the other side that agreed to it and helped to accommodate a realistic time table.

This true account has the elements of my suggestions below. So, I won’t tease you and wait until the final suggestion to give you the most important element, the critical factor in writing agreements and decrees that “turn white paper into green money.” Here it is:

1.    Get a Divorce-Lending Specialist working on this ASAP. That is - Refer your client to me. Or have opposing refer their client to me.  I would say refer them to any good, competent, experienced, top-of-the-line Divorce-Lending Specialist. But, as much as I would like to say that there are plenty of Divorce-Lending Specialists out there, that statement is not true. Is this blatant commercialism and capitalist opportunism on my part. Sure…

But, there is a real reason for this important step. Without the consultation of a specialist, how does anyone (parties, attorneys, judges, mediators, neutral professionals in collaborative, et al) have any idea IF the buyout can be financed at all let alone if it can transpire by ANY particular date? I cannot emphasize this enough! At least when assets are split in a liquid account, everyone can see that there are X dollars here and this party can be awarded X minus Y and the other can be awarded Y. But, when financing is required, who is able to assure the parties/attorneys/court that the grantee can, in fact, be granted a mortgage loan?

Here’s why I am very confident that most cases have been settled (many times with unrealistic deadlines) and no one in the divorce action (parties, attorneys, mediators/judges) is confident of financing: hardly any lender even takes a loan application until the divorce is final, let alone delivers approval statements prior to final divorce. They could if they wanted to but they just don’t know what to do with an unresolved (not final) divorce case. I, on the other hand, know exactly what to do. I get the borrower prepared and processed; and, I deliver to them and their attorney an approval statement with precise recommendations concerning what elements must be present in order to close their loan and “turn white paper into green money.”

2.    Never specify a deadline for a buyout before final divorce. As I stated earlier, no Owelty can be financed until after final divorce. I was going to specify that the Owelty could not be financed as a purchase money transaction until after final divorce, leaving open the possibility that it could be financed as a Texas Home Equity loan. But, that’s not true because an Owelty cannot even be established until final divorce. An Owelty is established in the same action (document, The Special Warranty Deed with Encumbrance for Owelty of Partition) that divests a party of his/her interest in the property. Given community property provisions, this is established ONLY in the final decree of divorce.

I realize that, sometimes, the expectation and earnest position of opposing is that the buyout simply must happen before final divorce or on the date of final entry of the decree. While buyouts certainly can be paid prior to final divorce, my point is that they cannot be financed until after final divorce. Remember, I don’t give legal advice – I’m not a lawyer. I state limits and conditions to financing at the intersection of divorce and mortgage lending.

(I am leaving alone the debate about partitioning of properties during the marriage because, in my world – the world of mortgage underwriting and title insurance – final divorce is still required in order to finance Owelties). If the day ever comes when lenders and title insurers finance/insure Owelties before final divorce – trust me – I will know and I’ll be on that like stink on a skunk.

3.    Give it enough time after final divorce for the borrower to fully qualify. I suggest always allowing at least 45 days. But, this only works if the loan is already in process. Here again, the Divorce-Lending Specialist will tell you how much time. As we pre-process our divorcing customer’s loans, the actual “red tape” and clerical work required after final divorce amounts to very few hours plus a few days because of new regulations. In reality, it could take several days. So, for the most part, we are closing our loans within a couple of weeks after final divorce. But, here are some reasons why it could take longer.

a.    The borrower may need to repair or enhance their credit. The Divorce-Lending Specialist will advise as to how much time. Sometimes, we have recommended up to two years on cases wherein credit profiles were in dire straits. Most often, much less time is required.

b.    The borrower may need to establish a “pay history” of receiving child or spousal support. The standard time required now is 6 months (for FHA and Conventional financing). The Divorce-Lending Specialist can tell you – almost to the day – when the client’s loan can close.

c.    The borrower may need more time on the job. After significant gaps in employment (for example, a wife/mother who has been out of the job market for several years), it is becoming standard that lenders require a back-to-work period of 6 months. If the borrower is entering a new line of work for which he/she has no education or if the borrower is starting a business and will be self-employed, a two year history of income is required. There are several factors. And the astute Divorce-Lending Specialist will predict and advise regarding this.

d.    The collateral property may need seasoning time to increase in value to a required dollar amount in order to be financed. While no one can predict values with pinpoint accuracy, the fact is some properties don’t have enough value to be financed in the present; and, the only hope of having them financed is through an increase in value….which takes time.

e.    If Texas Home Equity financing has been procured within the 12 months preceding, the refinance of this equity mortgage cannot take place until at least 12 months have passed from that prior transaction.

By working with me, you won't be in the dark about either the IF or the WHEN.
You now have the advantage of knowing that an agreed buyout is not merely a fair and equitable division of property but a feat that can be accomplished…and you know by what particular date it will actually take place – when we turn white paper into green money.

Thanks for your support. Find and follow me on Periscope. Noel_Cookman 

Noel Cookman

Tuesday, September 29, 2015

3 Costly Mistakes In Divorce: Property Values and Splitting Equity

So, you thought properties were expensive where you live. Check out what $350,000 can buy you in San Francisco:

I’ve seen so much of this recently, I felt compelled to write about it. I believe we could save divorcing homeowners millions of dollars in unnecessary expenditures – specifically appraisal costs. And, it’s so simple but the knowledge is not widespread enough to actually make a dent in the following 3 costly mistakes divorcing parties make.

When negotiating the property settlement, the value of the house is sometimes a matter of great consternation. Not only are parties and attorneys spending lots of time around the table trying to agree on value and equity, but I have found that they are paying money to arrive at a settlement which, many times, cannot be financed and might be unworkable in the real world.

Here are the top three mistakes I see related to establishing the home’s value and it’s so-called “equity.”

1.  Ordering your own appraisal

How can I put this diplomatically? Your appraisal doesn’t matter. Still not clear enough? How about this – it’s totally useless. Well, maybe that’s not totally true in all cases. But, when it comes to financing a buyout (Owelty agreement and lien) in divorce, NO appraisal may be used in that lending decision other than the appraisal which is ordered by the lender. In fact, the appraiser is not even allowed to look at someone else’s appraisal. It’s called undue influence.

I am still called on cases, to procure mortgage financing for divorcing parties, wherein an appraisal has already been ordered – at a cost of several hundreds of dollars, mind you. While I understand the need to establish value of the parties’ property, the fact is if the grantee needs or wants to finance the buyout, they will have to pay for another appraisal which the lender will order. This, effectively, makes any other appraisal useless.

It’s actually worse than that. One might tend to believe that an independently ordered appraisal will, at the very least, give the parties/attorneys a ballpark figure of value. After all, it will come from a licensed, professional appraiser. Right? Here’s a little known fact: appraisals are assigned to a client. When the lender orders the appraisal, the lender is the client. When an attorney or a divorcing homeowner orders the appraisal, they are the client. The appraisals do not transfer to another client. So, what does this mean? It means that the appraiser knows whether or not an appraisal is going to be underwritten by a professional underwriter who is accountable for a lending decision he/she makes; or, simply reviewed by an amateur or attorney who is probably not well versed in reviewing and critiquing appraisals.

I have seen lender-ordered appraisals report a value 20+% lower than an independently obtained appraisal. Let’s do the math on that.

Agreed value (agreement based on an independently-obtained appraisal): $100,000
Mortgage Balance: $  70,000
Agreed Equity (another mistake which I shall correct in #3: $  30,000
Agreed 50% buyout/interest:  $  15,000

Now, let’s say there are not even any closing costs in the borrower’s new loan (to include the $15,000 buyout). Here is the new loan

First mortgage             $70,000
Owelty buyout             $15,000
Need                           $85,000

Now, we get the real appraisal which reports a value of $80,000, not $100,000. But, the homeowner needs $85,000 or 106.25% of their home’s value.

Ain’t gonna happen.

One more thing. It’s tempting to rely on an independently-obtained appraisal if there is no need for financing (buyout is not borrowed, paid out over time or the value is simply entered in a column under assets to calculate the division/awarding of total assets). You may think, what else can we do…there is no lending process whereby we can obtain this much-vaunted, underwrite-able, useful appraisal?

I suggest one of two strategies at this point. First, if the client will apply to me for a loan, I can order an appraisal through this lending process. Of course, I would like to know – in advance – if there is no intention to follow through with the financing. But, I can order the appraisal and deliver it to the client. Secondly, if you order an appraisal directly, tell the appraiser something like this: “I want this appraisal to be done as if an underwriter may review it for a lending decision. I intend to have my mortgage professional, Noel Cookman, and his staff review it for our case.” This will put them on notice that a serious review will be conducted.

These two strategies are still not as helpful as an actual lender-ordered appraisal that is underwritten by the lender making an actual lending decision. One of the reasons is that, underwriters have access to raw data and will be able to tell if other properties are “leap-frogged” over in order to find comparables that justify a higher or lower in value. I could write all day about this; but, hopefully I’ve drawn a clear enough picture of the reality of the situation.

I realize that there are multiple other factors the affect a person’s valuation of their property. For example, a divorcing homeowner may truly and rationally be willing to pay more for a property (technically a spouse’s interest in the property) than what numbers on a piece of paper say it’s worth. But, that is an intangible and non-quantifiable factor for which we can give very little guidance. In other words, I don’t tell people how much they should pay in a divorce buyout – my role is to try and make it work and inform them of limits to financing.

2. Not Receiving a Real Appraisal
…(preferring instead a realtor’s opinion (CMA, Comparative Market Analysis) or the value assigned to the property by the taxing authority (usually the county).

I don’t know which is worse. Getting a bogus appraisal or relying on CMA’s and county assessments. By the way, every county in Texas has its MIS-NAMED “appraisal district.” And, folks refer to the county’s opinion of value as its “appraised value.” After all, the government tells us that it’s an “appraisal” department and the value is listed as an “appraised” value. The county does NOT appraise ANY property – it assigns a taxable value and assesses taxes based on that assignment. Citizens generally seem to assume that their property “appraises” for a lower amount than that for which they purchased it more recently. And, in many cases, that appears to be true. But, not in all cases and – here’s the important part – no one knows what that differential is. So, there is still no way of knowing the true market value of a property without a real appraiser performing the real research in his/her report to a lender of an “opinion of value.”

Speaking of which, an appraisal is really an appraiser’s report of “opinion of value.” That’s right – it boils down to an opinion. However, from which person or entity are parties and attorneys most likely to receive a reliable, accurate, market-based opinion?

- a realtor preparing a Comparative Market Analysis based on price per square footage, etc.
- a government agency whose bureaucrats work in an office and do not visit the properties.
- a divorcing client sitting at the table arguing a certain value based on his/her neighbor’s alleged sale.
- a licensed, certified appraiser vetted by various lenders and approved to work on a panel in an Appraisal Management Company.

The point is, only an appraisal, conducted by a trained/certified appraiser, can give you and me the clearest look at a property’s market value.

3. Miscalculating Equity

I suppose it’s already implied that calculating “equity” on the wrong report of appraised value is, in itself, a miscalculation. But, there is one more important step in calculating equity – the consideration of two major factors especially when it comes to a buyout.

The first consideration is “transactional costs.” It’s important to distinguish between closing costs and “transactional costs.” A seller, for example, will have some closing costs (generally) but will have other “transactional costs,” both of which diminish their net proceeds or what is improperly called “equity” in their sold property. So long as we understand that “equity” is more of a fluid number than most people think, you can generally think of equity as the value of the property less the indebtedness (mortgage liability payoff, liens, taxes and other encumbrances) against it less the transactional costs.

I thought most people knew this. But, I’ve recently seen divorce settlements that subtract the outstanding mortgage balance from the assumed value (and I DO mean “assumed” because no appraisal had been secured on the property) and call that the equity.

The second consideration is “accessible equity.” This involves financing limits. Even though there are many ways to determine actual loan limits, I speak generally of the industry standard of “max LTV.” That is the Maximum Loan To Value ratio. And that limit is 95%....approximately. FHA’s max LTV ratio is 96.500% in purchases and 97.75% in refinances. VA does 100% financing but, it’s rare and inapplicable enough for it not to be considered in this discussion. So, 95% is a round figure and is the maximum financing generally available in “conventional” mortgages.

But, here’s the relevant application of these facts – it’s my statement to lawyers and customers: Homeowners can never access the top 5% (or more) of their home’s value – it gets eaten up in realtor fees (average of 6%) and other costs.

Therefore, I use the 95% calculation. That is, the value of the property times 95% less the indebtedness, less the transactional costs. If you use this formula, the parties will get closer to an equitable division of “accessible” equity. Here’s how it would work.

Assume the property is worth $100,000 and the indebtedness is $55,000. If the parties are seeking a 50/50 split, they might be tempted to calculate it like this:

$100,000 less $55,000 (indebtedness) less $5,000 costs equals $40,000. Half of that is $20,000. So, the grantee finances $55,000 mortgage payoff plus the $5,000 (costs) plus the $20,000 (buyout) for a total loan amount of $80,000 against a $100,000 property. We’ve already learned that equity is not merely the subtraction of the indebtedness from the value. So, we know that the new equity is not $20,000. At the very least, the equity might be $100,000 less the new loan of $80,000 less the finance costs of $5,000. That is, $15,000 which is $5,000 less than what the grantor just paid their ex-spouse for their interest. Not only that, but the principle of accessible equity means that the grantor cannot access the top 5% of the property’s value and is capped (generally speaking) at 95% LTV ratio or $95,000. So, the new “homeowner” now has only $10,000 of accessible “equity” in the property or $100,000 X 95% = $95,000 less the $80,000 mortgage less $5,000 finance costs.

Here’s how the 95% calculation works for both parties to end up with something close to equal “equity.”

$100,000 X 95% = $95,000
Less $55,000 (indebtedness), less $5,000 (costs) = $35,000. One half of that is $17,500.

Now, after the grantee obtains financing and pays the ex-spouse $17,500, here is what the new loan looks like:

$55,000 (first mortgage payoff) plus $5,000 costs plus $17,500 buyout = $77,500.

Now, how much “accessible equity” has the grantee retained in the property? Let’s see. The new loan is for $77,500 against a $100,000 property of which only 95% of its value can be accessed for financing. So $100,000 X 95% = $95,000, less $77,500 (first mortgage payoff) equals $17,500 which is the same amount the grantee just paid for their ex-spouse’s “equity” in the property.

Grant it, this is an imperfect and imprecise way to calculate even the accessible but it arrives at a figure much closer to real-world numbers than assuming that anyone can access 100% of their property’s value.

There is one simple strategy you can use to save your clients money and establish a rational value for a property. Have the client (who must finance a buyout) call me SOONER THAN LATER.

It’s really that simple. I will reinforce your bona fides in law and family law matters. I will tell the client how wise you are and how you are saving them lots of money by doing it right – that is, by following a protocol that will establish true, professional, under-writeable, accountable values.

Noel Cookman

Thursday, April 23, 2015

Removing Ex-Spouses From Mortgage Liability – Part IV

I took a little “rabbit trail” last week with the Deed of Trust To Secure Assumption – what it does and does not do.

Concerning the topic, Removing Ex-Spouse From Mortgage Liability, I have one more thought that can save the day for tens of thousands of Texans each year. And, speaking of “saving the day” for Texans, I have a committee for that. The master group is The Committee to Save the World. One of the special committees (under the Master Committee) is The Select Committee to Save the Housing and Finance Market. And, of course, there is the Sub-Committee to Save Divorced Homeowners From Post-Divorce Financial Trauma. You’re on the committee, by the way.

With 75,000 divorces each year in Texas, it’s not hard to imagine that there are tens of thousands of divorced citizens each year who experience some financial trauma. I am not going to give statistics today, only anecdotal examples. And, it’s my opinion that the miracle is that there is not more financial trauma given the fact that so many settlements leave a mortgage debt undisturbed, allowing the grantor (of the property) to remain on the mortgage liability with only a court order that the grantee service the debt.

The good news is that there is a temporary solution for grantors whose mortgage debt (assigned to spouse) remains on their credit report. The common misconception is that they cannot qualify to buy another house with that debt showing up on their credit. This is not true, for the most part. At least, it’s not true so long as the ex is servicing the debt without fail. 

First of all, a person’s qualifying depends upon several factors. This common misconception assumes that the borrower doesn’t have enough income to qualify with both payments. In fact, they might. Most don’t. But, some do. It’s all in the numbers.

Secondly, though, it’s not true because of a little known fact that such debt is “excluded” from the borrower’s debt ratios in a loan application so long as the divorce decree assigns the debt to the ex-spouse. (Freddie Mac rules are a bit more stringent and require, in addition, proof of payment on the part of the ex-spouse for 12 months; but, Fannie’s rules are more prevalent). This exclusion of debt is generally not available in bank financing of consumer and commercial debt. This helps to perpetuate the common misconception that the exclusion is not allowed in lending financing of mortgage debt. I know – it’s nearly counterintuitive. But, it’s true. This “exclusion” principle should never, in my view, be used to simply pass over the mortgage debt as having been resolved without refinancing. Here’s why…

These facts NEVER get the grantor “off the hook.” And, several things can go wrong. 1) If the loan defaults, the grantor has no control over the damage to his/her credit. At that point, there is no fix. The creditor does not remove a derogatory report just because the court told another party they were responsible for the payments. The damage is done – see last week’s article. 2) In certain cases, the grantor’s new lender may require proof of the pay history from the ex in order to exclude the debt from their debt ratios….try that one on for size. Even if the order required that the ex-spouse provide such documentation, think of the extra work, time and expense in actually getting these docs from the ex. Fun!  3) Lending rules can change and it’s possible that, in the future, the starry-eyed social engineers in Washington will hand down underwriting guidelines from “on high” which defy the current rules. Such nonsense is already taking place. 4) As well, lenders/investors can, on their own, adjust or change these rules. We are living in tumultuous times in terms of the ground rules shifting beneath our feet.

The list of potential negative consequences can go on and on.

It has been oft stated, in negotiations, that the grantee cannot “afford” or “qualify” to refinance the mortgage. This is often used as the single, un-challenged reason to skip to some other measure to “resolve” the issue.

Please do not take this question personally. But, if a lender (whose entire business practice depends upon their ability to determine if a borrower can and will make the house payments) has decided that they will not advance funds on a person’s loan application, why do we (consultants, loan officers, attorneys, parties, judges and mediators) consider it prudent to award a house and assign a debt to such a person?

I am sympathetic to such situations and hope to help folks who have difficulty qualifying. As I tell everyone – “I’ll stick with you until you get what you need.” But, economic reality does not adjust to my sympathies.

So what is the best practice to assure that mortgage debt will be refinanced and, thus, not appear as a liability against the grantor of a property?

Simply stated, agree or (ask the court to) order that the collateral be sold (listed for sale with all the ensuing remedies like the appointment of a receiver in case the parties cannot agree, etc.) in 6 to 24 months or so if the grantee of the property has not refinanced the debt. (See your friendly Divorce-Lending Specialist for the “or so” part). This, obviously, puts teeth into the requirement to refinance without ordering that a lender advance funds.

It’s probably true that one of the expectations is that a court may not be inclined to disrupt the children’s domicile especially if sympathies are with the parent who would otherwise be under compunction to do the financing. But, think about it! If the grantee/parent defaults on the mortgage debt, the lender feels no such sympathies and the solution is to, in fact, disrupt any resident and force them to move to more affordable housing. Economic realities are insensitive to children or adults for that matter.

We are back to the question – if a lender will not advance funds, why do we imagine payments can be made in a timely fashion?

I know there are always exceptions as each case is unique. But, if there are reasonable reasons why a grantee should be required to refinance debt, why not know and understand those reasons. Even though I make my living by doing loans, on many occasions, I have stated such reasons why it is not feasible for a grantee to refinance. I do not give legal advice, try to influence the negotiations, tell folks what they should or should not do, interfere in the attorney/client relationship. So, what do I do? Here’s an example of what I might state after taking an application, pulling credit and evaluating the possibilities of successful financing:

“The party has a recent 120-day late mortgage payment on their credit report. This effectively extends the time by which he/she can obtain financing by at least 3-4 years because it is viewed as tantamount to a foreclosure. Inasmuch as one or the other party is responsible for these late payments, it is unreasonable for that person to expect a refinance of the mortgage before that time.”

Even in this situation, a mortgage debt needn’t remain interminably upon the grantor. In other words, financing is very possible in about 3 to 4 years. It is simply a reality that a divorcing party who has substantially contributed to the degrading of another’s ability to obtain financing is probably being unreasonable to insist upon it.

In any case, you needn’t “try this at home.” You can always call and get a professional analysis along with, for the most part, a conditional approval. There is nearly always a path to successful financing.

Just call me. Yep! It’s that simple.

Thanks for reading.

Noel Cookman

Wednesday, April 15, 2015

Removing Ex-Spouses From Mortgage Liability – Part III

The Deed of Trust to Secure Assumption – What it does and does not do....and how to solve a conundrum

Let’s understand once and for all what a Deed of Trust to Secure Assumption (DTSA) is and is NOT.

I got in trouble while giving my course on Owelties by saying, the DTSA, while always a good idea, is not a substitute for the grantee refinancing the property and does not really resolve anything. “Don’t listen to him,” the senior attorney was heard to say, “always require the DTSA.” She was correct. And since I wasn’t in disagreement on the matter, I suppose I was as well.

However, I have to make the point again – because clients do not just deal with legal and logical matters in their divorce, they deal with credit issues in perpetuity. And a DTSA does not protect credit. Its intent may be to protect the credit of the grantor, but it does no such a thing. In fact, the DTSA can only be triggered if and when the grantee’s credit has already been damaged! Think about it. Unless the grantee of a DTSA has significant enough resources at any given point in time, the DTSA may not even protect the collateral interest it alleges to protect.

The DTSA gives its grantee (usually the same person as the grantor of the Special Warranty Deed) a mechanism whereby he/she can be spared TOTAL ruination (spell check wanted to change that to “urination”) of credit. But, there is no automatic protection of credit. In fact – and it is worthy of repetition - the single and only event that triggers the DTSA is a default on credit. So, before the grantee takes a single action to foreclose on their DTSA, a late payment has been recorded on his/her credit. One may think this a small thing but, in reality, it most often disqualifies a borrower from obtaining a mortgage for at least 6 months and easily up to 12 months.

It gets worse. I used to tell my customers that a DTSA meant that if their ex-spouse was late on a payment, the grantor (of the Special Warranty Deed; grantee of the DTSA) could knock on the front door, kick their ex-spouse to the curb and take possession of the house. You and I both know that it’s not that simple.

Here’s what happens. There is a foreclosure process that must be followed. This process could easily take months; and, unsophisticated citizens are completely unaware of that process which means days, weeks, months can pass before the required paper work is filed and action is taken. Meanwhile, during these intervening weeks/months, even more late payments will “hit” the grantor’s credit report. If the mortgage becomes “4 months down,” the grantor will be assumed to have had a foreclosure on their credit report, whether or not the lender actually forecloses.

Moreover, the DTSA’s grantee may not even be aware that his credit is damaged until months have passed. The notices for late payments are sent to the property address.

At this point, the client (who thought his interest and credit was “protected”) cannot obtain conventional financing for at least 4 year or FHA financing for 3….and that’s only if their credit scores recover in the intervening years. As I pointed out above, at the least, one late mortgage payment on an applicant’s credit report will delay a home purchase/refinance for 12 months or, at least, 6 months (in some FHA loans so long as there has been no other late payments in the preceding 6 months).

Sure the Deed of Trust to Secure Assumption protects a grantee’s interest by giving them the right to retake the collateral. But, if your client is the grantee of a DTSA, that document puts your client in the foreclosure business. There is a common misconception that banks enjoy foreclosing on properties they have financed or that they actually want to foreclose. This is wholly untrue. Banks and lenders outsource the foreclosure process because it’s complicated, expensive but mostly because foreclosing is not the business they want to conduct. The first thing they do is sell it at auction at a fire sale price. The few properties that have a “ton of equity” do not make up for the many for which they take a loss. Ask yourself how many of your clients actually want to be in the foreclosure business . . . on properties for which they have advanced their own money.

The DTSA creates a “contingent liability.” In many ways, a contingent liability is worse than a standard liability because you never know if and when you will have to service the debt. Imagine if you have to manage your finances that way – “My monthly expenses are $2,000 per month but they might be $3,500….don’t really know.”

Here’s another way to understand what the DTSA does. It provides an opportunity which, when combined with a sizeable amount of money and ongoing expense (house payments, probably the largest monthly expense in most folks’ budget), can begin to remedy a dire situation created by another party (one’s ex-spouse). People get divorced for a reason….and, it’s usually not because they want to pay for their ex-spouse’s living expenses beyond ordered support.

Here’s the rub from my view: As negotiators sit around the table and discuss these issues, as one attorney told me, the grantor (of the DTSA) will often offer the DTSA as a way to equalize the fact that they allegedly cannot finance the property in their own name. It’s treated as tit for tat. Hopefully, we all see that being granted the DTSA doesn’t put a thing in the plus column for the grantee.

Right about now, you are probably thinking “Good grief, Cookman. We know all this. We need to know how to solve the problem, not just understand it more clearly.” And, here is the simplest, most straightforward, fair solution:

Always (with so few exceptions that we could still say “always”) require the party awarded a financed property to (re)finance that debt out of the grantor’s liability. I say it this way because, many times, the option is for a friend or relative of the awarded party to perform the financing but the key feature is that the grantor is effectively relieved of the debt. And, set a time limit on it - I can advise how long for each individual case; and, it will rarely ever be more than 24 months – with the provision for the property’s sale if financing has not transpired. This means that you will probably never again have to use the phrase “[party] will make every good faith effort to refinance the mortgage….

The only way to properly and effectively do this is for the awarded party to call me….and call me sooner than later… in, before final divorce and very soon after filing petition if at all possible. Most lenders will tell your clients, “get your divorce finalized, bring us the decree and let’s see what we can do.” This is devastating to a majority of cases and transactions. And there is no good reason why lenders should wait until terms are chiseled in stone. I don’t wait. But, the fact is, most of them are not sure what to do during the process. On the other hand, I make sure that you get approvals (with specific conditions and an outline of the structure for your decrees) before final divorce. That way, there are no questions and there is no wondering what will happen to the debt.

Boom yow! You and I just saved the world….or at least an important part of it for a whole lot of people.

Wednesday, April 8, 2015

Removing Ex-Spouses From Mortgage Liability – Part II

I left you, last newsletter, with the cliff hanger…

“Next week, Part II – Is there ever a reason why the grantee (of a property mortgaged by the grantor) should not be required to refinance the debt in order to extinguish the grantor’s liability?”

Well, I’ve thought about it. Actually, I’ve thought about it a lot more than just this past week. So, here is Part II. And here’s my answer:

Only if the grantor wishes to remain on the mortgage loan in perpetuity until the loan is paid in full. Let me put it this way – only if an ex-spouse wants to retain a debt for a property in which he/she no longer retains any ownership interest (or to which he/she has no real access).

But the most commonly cited reason for not requiring a spouse to refinance the mortgage debt is

The spouse cannot qualify for a mortgage on her//his own.

Set aside, for the moment, the question – how do you know that the spouse cannot qualify? And, let’s deal with the obvious…..

Let me ask it this way: if you know that the spouse cannot qualify to make the payments, what makes you think that the ex-spouse will make the payments?

The most common retort to that question is, “well, they can’t qualify to get a mortgage but we know they can make the payments [for whatever reason].”

You’re hired. I can double your salary as an underwriter if you “know” when people will and will not make their mortgage payments. Especially if you can do it without underwriting that person’s income, credit, pay history, debts, etc. Underwriting takes hours and the fees go from $750 to $1,600; and, the only important question is – will this borrower make the payments?

Even though I have originated and closed mortgage loans for 15 years – this entire 21st century thus far (sounds like a long time, eh) – I cannot determine if a borrower will make payments; moreover, I am not allowed to – only an underwriter, on behalf of a lender advancing funds, can make that judgment.

The second most commonly cited reason for not requiring a spouse to refinance the mortgage debt is

The grantee’s credit is inferior and, therefore, they cannot qualify for a mortgage loan.

Where do people get this information? Only a qualified mortgage professional (lender) can issue this judgment. Even then, the parties and the attorney have to be aware that some mortgage professionals can be enticed to deliver a loan denial by an applicant who tells the loan originator “I don’t really want to refinance so I need you to deliver a loan denial letter.” It’s counterintuitive, I know – people seeking a loan denial when everyone assumes that applicants want a loan approval. But, it happens more than you think.

Even in the case of an applicant who cannot qualify for a loan in the present, why would anyone assume that this is the case in perpetuity? And if one assumes that the grantee will never qualify for a mortgage, why would the settlement just assume that the grantee can or will make the payments? After all, lenders who live and die by accurate underwriting are testifying that by numerous loan products and types, they will not lend.

The good news is that no lender denies loans into the future. That’s the flip side of the fact that lenders will not approve loans into the future. That is, loan approvals have an expiration date of a few months and even then, loan documents have to be up-to-date and the lender must verify that the borrower’s income and asset status has remained as it was at application.

Before I offer a solution, I need to tell you about one more lending principle. Can and will. That is, lenders concentrate on a borrower’s ability and willingness to repay debt. They may have one but not the other – and, therefore, they would be a poor risk. An applicant may have a perfect credit rating but if he has no income, how does that facilitate repayment of debt? Conversely, a borrower may have a 10% debt:income ratio (rarely seen and about 35 – 40 points below maximum thresholds) but a poor credit history of repaying debt. This person is, likewise, a poor credit risk.

So, when making your own determinations about a grantor’s debt hanging “out there” at the mercy of the grantee, at least ask the question “what is the grantee’s ability and willingness to repay debt in a timely fashion….and how can we predict this?

So here is my recommendation…

Solution. Given all the factors in divorce settlements, I recommend that all awarded properties (with mortgage liabilities in the name of the grantor) be refinanced within 24 months (maybe 30 months) or listed for sale.

Where do I get this 24-month figure? My experience tells me two important things. First, almost any applicant with damaged credit can self-repair their credit rating within 2 years. Secondly, employment requires a two-year same-line-of-work history. So, starting from scratch in a new line of work, the applicant should be able to build the required work history in 24 months. But, this is rare – that a divorcing applicant has absolutely no work history. Mostly, they have “job gaps” wherein a wife was a stay-at-home wife/mother. In these cases, 6 months back-to-work is usually enough “work history” for the lender.

I realize that there are exceptions. And the good news is that you don’t have to wonder – you can always get a professional evaluation of a client’s qualifications for mortgage financing. All you have to do is call.

In any case, leaving a debt in place for a grantor in a divorce settlement is almost a guaranty that there will be great difficulties in the future and that, one day, I'll get a call from a divorced customer who says "my ex was supposed to make the payment but they haven' can I make them refinance this out of my name?" I hate to tell them - "you can't" or "you might get a judge to order it again; so, how does that help you?" or "maybe a judge will order the sale of the home but I really have no idea - I'm not even a lawyer let alone the judge." It's not a fun conversation.

Next week, I’ll discuss the Deed of Trust to Secure Assumption; what it does and does NOT do; what really happens if a DTSA is triggered; why it is not a tit-for-tat exchange for a grantee’s unwillingness or incapacity to refinance the mortgage.

Thanks for reading. I’m honored that you do.

Noel Cookman