Thursday, March 6, 2014


On Calculating Net Equity
Tips For Family Law Attorneys – How To Calculate Net Equity In Property
Part One- The Problem

Here is something I see quite frequently in divorce settlements. (I copied this example from a recent settlement).

Marital Residence
Current Fair Market Value                 136,500.00
Current Balance as of                          102,965.00     
Net Equity                                               33,535.00     

Do you see any problems with this calculation?

In the quest for equitable settlements, most often divorce settlements rely upon an Excel spreadsheet to calculate “equity” in an asset. When it comes to residential properties, the calculation breaks down in several ways.

First of all, “equity” is not the same as cash. If two parties are splitting a checking account balance of $10,000 as of a date certain and the split is 50/50, it’s easy. There are no transactional costs (to speak of). The spreadsheet is accurate. $5,000 to John and $5,000 to Mary.

Stocks, bonds, and other liquid investment assets are the same. There are no significant transactional costs; thus, a calculator or spreadsheet works just fine.

Even retirement accounts are subject to simple math when dividing an account. The QDRO mechanizes an agreed split and only if the recipient chooses are the taxes deducted (if converting to cash).  It’s a matter of their choice about the time-value of money. So, by sending 50% of a $100,000 retirement account to a new IRA or 401(k), any diminution of funds is up to the recipient and is not a requirement of the division of assets.

But, “net equity” in a residential property is entirely different; mainly, because it’s not liquid (cash or easily redeemable investments). You cannot eat it, drive it, spend it, sleep on it or use it to buy a ticket to see the Cowboys . . . as they eat, drive, sleep or watch the Super Bowl.

Secondly, in order to convert “equity” to cash, the property (which allegedly possesses this “equity”) must be sold or financed.

Thirdly, that “equity” can disappear without its owner mismanaging it. Stocks, investments, checking and savings accounts can, in theory, be managed so that they grow in value or are protected from losses. But, if the housing market is slow or takes a down-turn as we experienced in 2008 through 2013, that equity can disappear with a “poof.”

Again, it’s clear that stocks and other investments can lose their value in their own markets as well. But, they can be protected from loss by good management.

Now, a home owner can mismanage the collateral (the actual house) for the asset – let’s say, by not caring for it and maintaining it – and thereby reduce the “net equity” since the value of the asset would decrease compared to what it otherwise would have been. But, for the most part, the home’s value is the function of a market outside the control or management of the home owner.

Fourthly, to reiterate a point made earlier, “net equity” is not as liquid as other assets. One can write a check on a checking account and easily transfer funds. One can call their investment broker and sell or buy. It may take a few hours but it can be done fairly easily. Retirement accounts are governed by rules but most can be liquidated or borrowed from in about one week at the most. Homes, where this elusive “net equity” dwells, are not so easily transacted. Moreover, until a house is sold or financed it is by no means clear even if this “net equity” can be converted to cash.

HELOC?
But wait a minute – what about HELOCs, Home Equity Lines of Credit? Isn’t that like immediately accessing or mobilizing a home’s “equity?” Well . . . kinda, sorta but not exactly. In the example above, a lender in Texas could only issue a line of credit of $6,235 less the closing (transactional) costs. This would be the legal maximum because of the 80% rule.

Thus…
$136,500 X 80% = $109,200 is the maximum amount of loans that can be outstanding against that house; less the balance of 102,965. That leaves you a HELOC of $6235 less transactional costs. Other states are not much better. They do not restrict Fannie Mae’s or Freddie Mac’s maximum LTV limit of 85% (another 5% of the home’s value or $6,825). So, in 49 other states, the borrower could get a HELOC of $13,060. That’s a far cry from the published “net equity” of $33,535.

Owelty Financing
The better way to access a home’s equity in a divorce is the financing of a buyout via the Owelty Agreement and Lien. This allows for up to 95% LTV financing. So, let’s look at how much of that “net equity” can actually be accessed or converted to cash for a settlement.

Appraised Value                      $136,500
Max. Loan Amount (95%)        129,675
Balance on loan                         102,965
Finance Costs                                 5,000
Remaining                                 $21,710

That is, the maximum Owelty Lien that can fit in these numbers is about $20,000.

Sale of the property
Without refinancing, this leaves us with having to sell the property in order to convert this intangible “net equity” to usable money. Let’s stick with the example above. Here is what happens when a sale takes place:

Sales price                               $136,500
Balance on loan                      $102,965
Seller’s Title Policy                 $    1,070
Seller’s Other Costs                $   1,000
Realtor’s Commission 6%      $   8,190
Net Proceeds to Seller           $  23,275 (less prorated taxes)


Recap
The most optimistic estimate of equity that a homeowner can convert to cash is $23,275 in the case of a sale and possibly as little as $6,235 using a HELOC. The point is that these figures are not even close to the alleged “net equity” of $33,535. The real, accessible equity is anywhere from 18% of that figure to 70% at the very most.

 

So, how should a divorce settlement calculate the “net equity?”

Sell it
If the house is to be sold, no one needs to calculate the equity. Think only in terms of “net proceeds” not “net equity.” The only thing that matters is the check that is cut to the sellers at the end of the transaction after all costs have been paid.

If a house is to be refinanced in order to determine a buyout amount, I advise that the parties enter the negotiations with a rational view of market realities. Begin with the assumption that equity – by itself - has no real value. Then proceed with an appraisal that is ordered as part of a refinance process. (That’s the only appraisal that matters). Make sure a competent *Divorce-Lending Specialist is taking the loan application and processing it to completion. Then, produce a simple formula that takes into account transactional costs (aka “finance” or “closing” costs). Bear in mind that finance costs can vary quite a bit. There is no true standard of costs but there are averages. Your specialist should be able to help you with that.

Appraised Value

Before I suggest a couple of formulas to help you calculate net equity, we need to discuss Appraisals and Appraised Value (AV). The AV is the first number in the calculation and it is the hinge number upon which all others swing. (A thorough discussion of this is very important and available through my CLE-Accredited presentation “Appraisals and Property Valuation Issues in Divorce.”)

This AV number is really an opinion. In fact, that which is commonly called, simply, an appraisal is really “an appraiser’s opinion of value.” Here’s exactly what the standard appraisal form  says:

“Based on a complete visual inspection of the interior and exterior areas of the subject property, defined scope of work, statement of assumptions and limiting conditions, and appraiser’s certification, my (our) opinion of the market value, as defined, of the real property that is the subject of this report is $______.” [emphasis mine]


Here is another statement of value taken from an appraisal that was ordered privately (not through a lender) by divorcing parties:

"Based on the degree of inspection of the subject property, as indicated below, defined Scope of Work, Statement of Assumptions and Limiting Conditions, and Appraiser’s Certifications, my (our) Opinion of the Market Value (or other specified value type), as defined herein, of the real property that is the subject of this report is: $_____, as of: [date], which is the effective date of this appraisal. If indicated above, this Opinion of Value is subject to Hypothetical Conditions and/or Extraordinary Assumptions included in this report. See attached addenda." [emphasis mine]

 
Grant it, the AV is the opinion of a trained and licensed professional arrived at after prescribed research and a stubborn thing called “math;” but, it is also a function of his/her considered opinion. And, this opinion could be “subject to” Hypothetical Conditions and/or Extraordinary Assumptions.”

The appraiser’s statement (above) gives clarification to the phrase C.Y.A. (Cover Your Assumptions). But, think for a moment about the advisability of using this appraisal as any sort of operative number in divorce settlements

-          The report is NOT to a lender. This means that the appraiser knows it will not be underwritten by another real-estate or finance professional.

-          How many people know how to read an appraisal and interpret the data?

-          The STATEMENT OF ASSUMPTIONS & LIMITING CONDITIONS says thatThe appraiser will not give testimony or appear in court because he or she made an appraisal of the property in question, unless specific arrangements to do so have been made beforehand.” This means that value cannot be defended in court.

-          Most importantly, if financing is required, another entirely new and different appraisal will have to be ordered by the lender with absolutely NO reference to this current appraisal.

 
Now, on to the calculations…

Two formulas should be considered and no speculation for future value should be taken into consideration.

 
Formula 1

Appraised Value less Current Loan Balance less Finance Costs = Equity

Example:
$100,000 Value less $50,000 Loan Balance less $5,000 Finance Costs = $45,000 Equity


Formula 2

95% of Appraised Value less Current Loan Balance less Finance Costs = Maximum Accessible Equity

Example:
$100,000 X 95% = $95,000 less $50,000 Loan Balance less $5,000 Finance Costs = $40,000

The logic of using 95% of the appraised value is that no homeowner is ever likely to touch the top 5% of their home’s value in almost any case – through refinance or through sale.

 
What’s the take-away?

The point is this: If “net equity” is entered in the same column as other assets like cash and stocks and retirement funds, the calculation should at least be rational and take into account transactional costs if not also the idea of inaccessible equity (that top 5% or so of a home’s value that can never be accessed).


If a buyout is contemplated, the task is to agree on a buyout amount. Of course, so long as the buyout must be financed, more elements must be considered than just the formula. There are limitations to financing that are affected by a borrower’s credit score and debt-to-income ratios. Again, a competent Divorce-Lending Specialist should be looking at this transaction and consulting the borrower and his/her attorney.

 
*Divorce-Lending Specialist. Currently, there is no certification for this specialty. When I began in 2002, there was no training or information available. No trails had been blazed. To date, it appears that there is a dearth of such mortgage professionals. No problem. Call me. Noel Cookman 817-454-4555.
 

Tuesday, February 18, 2014

The Incredible Shrinking Mortgage Industry - What It Means To You


What does the Incredible Shrinking Mortgage Industry

mean for you and your clients?


From The National Real Estate Post (read the full report here)

“According to the Bureau of Labor Statistics there’s 218,100 real estate credit employees working in the field, and that’s a 1.9% decrease over last year and .8% down from last month. So what’s it all mean? The MBA (Mortgage Bankers Association) was predicting as much as a 32% drop in business this year.”

Workers in my industry encourage each other by saying “as more and more originators leave the industry, this situation leaves us with less competition.” In my view, this is so much “whistling in the dark” as the raw economic realities also tell us that those who are left will be competing over a smaller piece of the pie. Besides, I do not mind competition. In such an environment, disciplined and industrious workers can do well.

Add to that the animus that the CFPB (Consumer Finance Protection Bureau) has toward all mortgage industry workers and we have the principle of diminishing returns. As compliance burdens grow and the actual hours required for taking and processing a mortgage loan increase, and as the compensation (pay) for that same loan decreases or even stays the same, the modern loan originator approaches the age-old question “is it worth it?” *At some point, a less risky profession that provides any compensation becomes more attractive.


WHAT DOES IT MEAN FOR YOUR CLIENTS?

But, that’s a glimpse into what it means for me. So, what does it mean for you (the family law attorney) and your clients (really, every potential borrower out there)?

Here’s the inescapable principle – it means the same thing to you and your clients as it means to me. Less service and access to housing finance money even while new accommodations are being made for lending. In other words, the diminished access to mortgage money is not because there is less money to lend – it’s because there are fewer professionals to accommodate the need in an efficient, cost-saving manner.

Yet, I am an anomaly in this industry. While the business outlook looks grim for all but a few top-producers, I have found a service that I love performing and is continuing to grow – helping your clients through the intersection of divorce and mortgage finance. I am truly a blessed and fortunate man.


BUT…YOUR CLIENTS HAVE THE ADVANTAGE

So, while virtually all other home-owners (borrowers) are at a greater disadvantage than they were several years ago, YOUR CLIENTS ACTUALLY HAVE A STRATEGIC ADVANTAGE. They are miles ahead of their counterparts in the general society. It may not sound very modest but . . . they have me as a go-to mortgage lender. I have specialized in mortgage lending to the divorce community for nearly 12 years now.

For you clients to access this STRATEGIC ADVANTAGE IN THE HOME FINANCE MARKET they only need one thing…

for you to tell them “Call Noel Cookman today.”

It’s that simple.

Your clients respect you. They listen to what you say. They take your advice. I know it may not seem like it at times. But, trust me; you are on a professional pedestal. When you tell them – with confidence and urgency – to call me, they do it. And their demeanor is remarkably different from those potential customers who call because of a reference from anyone else, even from a friend.

 
Thanks,

Noel Cookman

 

*Here’s another thing that most people do not think of – those achievers and top producers (the industry workers who are appreciated by their customers for performing well and much sought after) are more apt to shift their talents to another enterprise that rewards them more handsomely. This creates a “brain drain” of sorts. Think of it this way – we are moving toward the mortgage industry of Barney Frank’s dreams, that of the originator who sits in a cubicle, copying information onto forms and complying with mountains of government regulations and earning $30,000/year. What level of service and performance can the consumer expect from such an arrangement? I am not speaking with tongue in cheek. Already, we here of 3 month waits for regular loan closings at the big banks….those entities who hire cubicle-workers to take phone calls and process loan applications. (And that is only one of many problems we are hearing).

Wednesday, February 5, 2014

Simple Tip For Divorce Lawyers - How To Specify Consumer Debts in the Decree


Here's a simple tip for Family Law Attorneys
 
The only attorneys that I know of who do this one simple thing are those who have referred their clients to me for mortgage financing. And, I do all the work to make it happen. It adds value to your service to clients.
 
How to specify consumer debts assigned in the decree.
 
Most divorce decrees list the last 4 digits of an account number when it is assigned under “Debts to Wife” or “Debts to Husband.” Credit cards typically have 16 digits, installment accounts have anywhere from 4 digits to well over a dozen. Still, divorce decrees will typically use the last 4 and designate as something like XXXX4506.
 
However, credit reports typically report the first 12 digits of a credit card account, leaving off the last 4 digits. They do it for much the same reason you only list the last 4 digits of an account – protection of the client’s personal account information.
 
This is a problem - more so now than in recent years. Let’s take a hypothetical case study. The husband in a divorce is being assigned the following debt in addition to others and it is designated thusly in the decree:
 
Bank of America VISA account no. ending in 4506.
 
But, husband has applied for a loan and the underwriter reads the credit report which identifies a Bank of America credit card account by the partial account no. 499912345678. It is missing 4 digits. We happen to know that VISA accounts begin with 4, MasterCard accounts begin with 5 and Discover accounts begin with 6. We’ll get to American Express in a moment. So, we assume that the credit report is reporting the first 12 digits of a VISA credit card account. So, what are the last 4 digits and how is the underwriter supposed to discover this information? In a standard loan, the borrower has to give account for all debts that appear on his/her credit report. No big deal. They are either accurate or they are not. But, in our situation – a recent divorce – all debts are up for grabs and any party could be assigned a debt that does not appear on their credit report.

Let me re-state that: When a loan applicant has recently been divorced, the underwriter now has two separate listings of debts which must be reconciled with the credit report and included in the applicant’s all-important debt ratios. In theory a borrower could have 6 debts on his credit report and another 6 which are assigned to him in the divorce decree which do NOT appear on his credit report. The point is, that underwriter must clearly discern all debts assigned to the borrower.
 
So, in the case above, the underwriter must match assigned debts with those debts which appear on the credit report or assume that there is another outstanding debt that is being assigned to the borrower/client. Thus, it is critical to know the account numbers that appear on a borrower’s/client’s credit report.
 
This is really simple if your client is working with me. It is part of my standard Assessment/Approval. I will guide you through the drafting of that part of the decree, providing the minimal account number designation.
 
For example, in the case above I would recommend that the account number be specified as “beginning with 4999 and ending in 4506.” I might recommend that it also stipulate (as is not uncommon in divorce decrees) that the approximate balance be stated. This approximate balance would be stated at exactly the dollar amount showing as the balance on the credit report. (This is helpful so long as the borrower is closing their loan very close to the date of final entry of the decree. However, as decrees and credit reports age, it is less likely that the decree’s stated “approximate balance” will match the updated credit report’s statement of the balance).
 
You might be wondering – Is this really a big thing? Can’t the underwriter find out what account is being referenced by obtaining an account statement from the borrower which would publish the account number – all 16 digits?
 
Well, yes . . . maybe. Have you seen credit card statements lately? With greater frequency, credit card companies are redacting account numbers in part. And we haven’t even talked about American Express accounts yet . . . hang on. So, the borrower/client must call the credit card companies and beg and cajole and plead their case until someone answering the phone in Pakistan promises to mail a letter that specifies the full account number. Good luck with that.
 
The most common work-around when no such statement is available is what we call a “credit supplement.” The lender’s credit repository calls the credit card company to verify the information, in this case, the full account number. They’re so nice - Especially because they charge more than $30 per tradeline per bureau to verify this information. That’s usually almost $100 for each trade line with three bureaus. We’ve seen customers pay hundreds of dollars just to get information verified and documented for loan files. Add to that the inconvenience of having to wait another 3 days or more for such information to be verified when the borrower/client is trying to close their mortgage transaction.
 
This little tip is so simple yet it saves so much time and money for your clients.
 
Now, let’s pick on American Express. They (4 or 5 managers at AMEX, 3 hours into a happy hour) figured out how to confuse underwriters and borrowers by printing the ENTIRE account number. But wait. AMEX doesn’t print the REAL account number. They make up a fake number; and, THAT’S the account number they report to the credit bureaus and the one that shows up on credit reports.
 
Time out. Did anybody at AMEX ask, why publish any account number if they would be the only ones who knew that it was tied to the account in question?
 
AMEX accounts present confusion in all of their account reporting. In the case of divorce, even if you specified the entire AMEX account number under the assignment of debts, the underwriter still could not match that debt to the ones which appear on the borrower/client’s credit report. The account numbers are totally different. They are what I call “faux account numbers.”
 
So, how do we deal with this when processing loans for divorced borrowers? Let’s take the AMEX account number ending in 9876 as it might be designated in a divorce decree. I recommend that the debt be designated as

AMEX account number ending in 9876 and also identified by [whatever] the faux account number [is; like] 3392982346925883.
 
Done! The underwriter is able to match it immediately to the proper account on the credit report.
 
So there it is. A simple tip that will add value to your service and save your clients time and money.
 
All you need to do is tell your client, “Call Noel Cookman at 972-724-2881 as soon as you leave the office.” You could also say "if you'd like to save a lot of time and frustration and up to $100 for each debt assignment in the decree, call Noel Cookman."

Noel Cookman
972-724-2881 offices
817-454-4555 mobile

Wednesday, January 22, 2014

Rule 11 Agreements - #3: Sample Agreement with Notes


Thanks to all the attorneys who have helped refine and develop my materials on these Rule 11 Agreements. I never approached Rule 11 Agreements strictly from the legal perspective. Rather, they are a means to an end; specifically, they help us “get deals done” to put it plainly.

A Sample of a Rule 11 Agreement

Since I am not an attorney, I should be quick to preface that my customized, recommended Rule 11 Agreement a) is an outline of specific features of loan approval which the underwriting lender requires for loan approval, as pertains to a pending divorce and b) should be reviewed and edited by the attorney for proper “legal language.” We prefer that no other agreements be written into the particular Rule 11 Agreement that we are recommending other than what we specify? Why is this? Because we do not wish to confuse the underwriter with ancillary agreements that do not affect loan approval but which must be taken into consideration once the underwriter sees such agreements. Beyond factors like income, debt and assets, there are few other agreements that are necessary. But, each unnecessary feature of an agreement opens up the possibility that some additional “contingent liability” will be exposed. For example, at this moment underwriters do not count the multitude of children’s expenses (like medical expenses, health insurance, scouting, hobbies and sports and many others) against the supporting/paying parent’s debt ratios. However, this is most likely to change on January 1, 2014 when the CFPB’s enforcement of new (and still enigmatic) 4 Ability To Repay (ATR) rules go into effect. Even without these rules, given the current environment in lending, it’s only a matter of time until such stricter guidelines are applied.

In any case, one of our qualified Divorce-Lending Specialists will be able to specify exactly what needs to be included in the Rule 11 Agreement in order to make the mortgage loan approval work!

This sample contemplates that the wife, Jennifer, needs to purchase her own primary residence (the reasons are usually immaterial to the mortgage itself) but either Jennifer or her husband, John, does not want John to sign the Deed of Trust at closing (or any of the 5 or 6 other documents that non-purchasing spouses – really, non-borrowing spouses – are otherwise required to sign). (I do not wish to get bogged down here with explanations as to why lenders generally require spouses to sign Deeds of Trust and other documents at closing – I will cover this in a future article (and CLE-Accredited course) about real estate forms for family law attorneys).

This sample also assumes that Jennifer will have to rely on child and/or spousal support income to qualify for her loan and that she requires a certain amount of funds for down payment and reserves in order to qualify.

Comments and notes will be bracketed.

RULE 11 AGREEMENT
Pursuant to Divorce Cause No. 00-00000, Dallas County, Texas
RE: Purchase of 123 N. Main Street, Bogusville, TX, hereafter referred to as “property” or “the property.”
Parties: JOHN SMITH and JENNIFER SMITH

Agreement of Parties
 
1.      Divorce. The parties have filed petition for divorce;

2.      Property and Purchase.

a.       The parties agree that Jennifer may purchase the aforementioned property.

b.      There are no agreements in place that prohibit this transaction.

c.       John agrees to take no interest in the property and will execute a Special Warranty Deed to that effect upon final divorce. [There is no need to state that Jennifer is purchasing “on her own.” John’s agreement to “take no interest” addresses that concern as far as title or deeds. The fact that Jennifer alone is applying for the loan and the fact that John will not sign a promissory note is what causes Jennifer to obtain the property (and its attending mortgage) “on her own.”]

3.      Support Income/Payment.

a.       John will pay child support in the amount of $1,500/month.

b.      The children’s ages are 12 and 16 and support will continue until the standard time of emancipation.

c.       When the oldest child is emancipated, John will pay child support in the amount of $1,250 until the youngest child’s emancipation. [Such information is important because the oldest child’s support income is not considered qualifying because it will not continue for 3 years or longer. See “Credit and Mortgage Qualifying Issues in Divorce” for detailed information on qualifying income.]

d.      John will pay Spousal Support to Jennifer n the amount of $2,500/month for a period of no less than 3 years after final divorce or closing of Jennifer’s purchase of property.

e.       All informal payments of support are considered as support for the purposes of mortgage qualifying. No payments to date shall be considered as mitigating future support payments as agreed.

4.      Assets[the idea is to clearly establish use of funds for “funds to close” and for reserves; these are two major factors in loan approvals. The Divorce-Lending Specialist will advise on the minimal need of such funds. Final division of assets does not necessarily need to be stated herein. However, the purchaser’s (Jennifer’s) full access to a minimal amount must be established.]

a.       Jennifer shall be awarded 100% of the following accounts and shall have full use of funds in these accounts for purchasing the property.

                                                               i.      Bank of America account no. 123456789

                                                             ii.      Fidelity Investments account no. 987654321

                                                           iii.      J. P. Morgan Chase Retirement account no. 192837465

b.      John shall be awarded 100% of the following accounts.

                                                               i.      Bank of Texas account no. XYZ

                                                             ii.      Edward Jones Investments account no. ABC

                                                           iii.      American Funds Retirement account no. MNOPQ-RSTUV

5.      Assignment of Debts[the idea here is to establish the maximum amount of debts that will be assigned to the purchaser (Jennifer).]

a.       Jennifer shall be assigned the following debts

                                                               i.      CITI Card account no. 4239 XXXX XXXX 5390

                                                             ii.      FORD Motor Credit account no. XZ3098AG9999-063

                                                           iii.      JC Penny account no. 999111555

b.      John shall be assigned the following debts

                                                               i.      CapOne account no. 5398 XXXX XXXX 1277

                                                             ii.      TOYOTAL Motor Credit account no. AB2377XR99832

                                                           iii.      Discover account no. 6011 XXXX XXXX 8302


APPROVED
[It is my opinion that Rule 11 Agreements need to be signed by the parties and the attorneys filed with the clerk of court; initially, I had advised that since they are contracts such filing is superfluous and unnecessary. Indeed, Fannie Mae guidelines seemed indifferent to any such requirement for filing and state that the attorneys’ signatures are sufficient. This is probably because they are written to a national audience, leaving state-specific rules to be applied by the attorneys who prepare the documents for closing. However, I have come to know – thanks to one of my fine readers – that the Rule 11 Agreement is not enforceable as a contract unless it is signed by the parties and filed with the court.]

 
____________________________________________              ___________
JOHN SMITH                                                               DATE

_____________________________________________             ___________
S. SMART, ATTORNEY FOR JOHN SMITH           DATE

_____________________________________________             ___________
JENNIFER SMITH                                                       DATE

_____________________________________________             ___________
D. CRAFT, ATTORNEY FOR JENNIFER SMITH  DATE

 
From a legal perspective, you already know that many issues can be addressed in a Rule 11 Agreement. However, the preceding example addresses ONLY those issues that are pertinent to mortgage transaction. This is why I draft the initial agreement – I know what the underwriters (lenders and title insurance) need to see and what I do not want them to see. Any superfluous information superfluous to the mortgage / real estate transaction will only potentially “open and can of worms.” Moreover, guidelines and policies change. So, any template will be in constant need of revision. Just one more reason that you and your clients need a Divorce-Lending Specialist in many of your cases.
 
There is an important P.S. to the entire series on Rule 11 Agreements. It involves the requirement that a non-purchasing spouse (NPS) sign the Deed of Trust (and a few ancillary documents) at closing in a refinance transaction on a primary residence (homestead property). For now, let’s not dwell on the very real possibility that homesteaded properties can be partitioned during marriage and thus, separate property created without the need for a spouse to engage any enjoinder. The reality is that, it may be some time before lenders are willing to entertain such transactions.

Remember that attorney Kelly Bierig confirmed that in refinance transactions, the title company will require enjoinder of spouse and the signature of the NPS on the Deed of Trust. The problem with this exercise – and the reason for the P.S. – is that Deeds of Trust in Texas universally refer to the spouse (as well as the true borrower) as “borrowers.” Not pro forma. But, straight up (as the kids say) “borrowers.” Lenders will not change the wording on their documents to suit any nuance in a transaction. Perhaps the time will come when they will consider this. But, for now, no dice.

So, how do we understand and explain the strange reference to a non-purchasing spouse as a borrower in the Deed of Trust when no such borrowing/lending, in fact is taking place. Remember, the joining spouse is not signing the promissory note and has not even completed a loan application.

The Deed of Trust refers to all signatories as “borrowers” because the idea behind a Deed of Trust is that the grantors (homeowners) recognize that any claim they have to the property is subject to the promissory note (filed as a lien) against it. That is, a person with interest in the property cannot simply appeal to that interest as proof of ownership free and clear. If there is an unpaid balance on the mortgage, the lender’s interest is superior and must be satisfied. The Deed of Trust allows the lender to tell such a claimant, “that’s fine – you are vested on title to the house; now, all you have to do is abide by the terms of the loan if you wish to live in it.”

Thus, if a NPS never makes a claim to the property, they are never in the position of being a borrower with an obligation to repay the debt.

Call or write me with comments or questions.

Noel Cookman
noel@themortgageinstitute.com
817-454-4555