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: http://fusion.net/story/199332/this-is-what-a-350000-house-in-san-francisco-looks-like/

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…..as 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't...how 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

Removing Ex-Spouses From Mortgage Liability – Part I

Subtitle: Do you have to refinance in order to remove a spouse from the liability?
Sub Subtitle: The New York Times gives more bad advice
Sub Title to the Sub Subtitle: The Elusive Assumption of Liability

Here's some very bad advice from the NYT:

Why don’t they have me write their stuff? Geez!

The title reads “Avoiding Refinancing Costs After Divorce” as if the reader is going to discover some way to avoid refinance costs after…well, it’s in the title.

Of course, when you read the “fine print” (the actual text of the article), you see that there are caveats and disclaimers like “The problem is that not all lenders or mortgage servicers offer this option” and “Still, a lender or servicer generally has no obligation to release one of the borrowers.” No kidding Sherlock.

Here’s one example of other erroneous information in the article:

“And if you are “under water,” and owe more on the mortgage than the home is currently worth, this process is not an option.”

How would the lender know if the homeowner is “underwater?” The lender would have to obtain an appraisal in order to know this. These cost $475 - $700. Sounds an awful lot like someone’s doing a refinance transaction complete with fees, etc.  But, the article starts off by saying “There is another, little-known option that can avoid refinancing and its costs…” Oh yeah? News Flash: Lenders don’t just go out and purchase appraisals at their cost so that they can release one of their borrowers from a loan. Of course, the article goes on to say that there actually are other costs; maybe not published costs at the level of refinancing costs but there are costs. Still, if you know anything about mortgage financing, you can detect these little discrepancies and chunks of misinformation.

Here’s the problem with those “assumption” programs and “release of liability” programs that promise to remove a spouse from the debt (promissory note, mortgage note): the borrower never gets a satisfaction of lien or the original note in the mail. Remember the old “mortgage-burning” ceremonies? Well, you won’t have one of those.

So when folks say that the lender is promising that they will take them “off of the mortgage” I always tell them to ask, “will you send me the original promissory note and a release or satisfaction of lien” not merely a “release of liability of borrower?”

One of the other problems with this elusive option (other than the fact that it IS elusive), is the length of time that it takes; and, the fact that there are no guarantees before final divorce.

There is a better way. My whole concept and model – virtually unique to us – is that loan approvals (for refinances or purchases) can be generated before final divorce. In the case of a refinance with an Owelty lien buyout, the divorce must be final before the loan closes. But, that does not preclude delivery of loan approval before final divorce.

You will not get this “approval” in the elusive and enigmatic (i.e. unregulated to the point of being cryptic with no guarantees for anyone) assumption or “release of liability.” It easily takes 90 days and the process cannot truly begin until final divorce.

Good luck with that.

If you are representing the grantor, ask yourself, what document can I put in their file that assures me that they are totally relieved of the liability? You might have a letter that says “Dear M’am, you are released of the liability.” Given the fact that lenders are devils, few judges would probably rule against the “borrower / former home-owner.” But what about the lender who purchased the loan after such release of liability letter was issued? That lender/servicer will have the original promissory note in the file. Moreover, the loan file itself becomes a different product on the secondary market if some previous servicer has “released” a borrower of the liability.

There is only one way for a promissory note to “go away.” It has to be paid in full; as in a refinance or a sales transaction.

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? I’m thinking….I’m thinking….
Thanks for reading.
Noel Cookman

Thursday, March 19, 2015

Exactly How An Owelty Lien Works III


Elements in an Owelty Lien

Last week, we began discussing the elements in a divorce settlement that create an Owelty – a financeable Owelty lien. I took a short "rabbit trail" to point out certain factors that would derail the proper creation of an Owelty and thus make a buyout that would be severely limited or outright impossible. It’s worth a second look.

Without each of the required elements, there is no Owelty. And here’s what that means for the client/homeowner who is seeking financing of that buyout:  

1.    Those Texas Equity limitations will be triggered, giving the borrower access to at least 15% less of his/her home’s value. (General max Loan To Value ratio in lending is 95%; legal max for cash outs in Texas is 80%; thus the 15% differential).

2.    There are no alternatives such as FHA in financing. “Cash outs” are conventional loans only; no FHA “cash out” financing allowed in Texas. This is a real problem for those who do not qualify for conventional financing. FHA accommodates a lot of borrowers who might otherwise not be able to finance a home. FHA allows lower credit scores, higher debt ratios (in many cases), slightly damaged credit, comparatively higher LTV (Loan To Value) ratios including a max LTV ratio of 96.5% (vs. the general cap of 95% in conventional). So, if the client cannot qualify for conventional financing, they are just out of luck.

3.    If parties were expecting a buyout and none is forthcoming, post-divorce trauma. So what if the decree requires the refinance and buyout by a date certain (and, in my opinion, it always should)? What happens when that date threshold is crossed and the refinance/buyout hasn’t happened? The most common remedies I’ve seen are a) forced sale (which is what the agreement was obviously trying to avoid), b) assumption by the original grantor….good luck with that and c) judge hits her gavel a bit harder on the desk, slaps grantee on the wrist, and orders the grantee to abide by the order. Motions to enforce are hardly helpful unless the grantor has just been indigent and is more highly motived by an additional trip to the courthouse. But, that’s not the situation we have. No court can order a lender to advance funds…at least not in this situation. Additionally, the failure to create a proper Owelty lien can result in a demand to sell the property by the ex-spouse or the appointment of a receiver to force the sale. As title attorney Kelly Bierig says, “most likely the parties don’t get along anyways, so once you add the stress of not being able to pay off the ex-spouse, the problems between the [former] spouses will only get worse.”

There is, of course, a cure for these problems. Make sure the client calls me before final divorce. But, that’s another paragraph.

Now, it’s time for the secret sauce - the actual creation of an Owelty agreement and lien. Those specific elements must exist in order for an Owelty lien to be properly established.

1.    Correct legal description (as opposed to merely the legal or common address) in the decree and in the Special Warranty Deed.

2.    Clear awarding of the property to the grantee, subject only to the Owelty interest.

3.    Dollar amount of the grantor’s “interest.” Yes, formulas can be used. But, generally you’re asking for confusion and ultimately the two ex-spouses will have to agree to the buyout amount as a dollar figure. Sometimes, there is no other way. But, sooner or later, the Special Warranty Deed with Encumbrance for Owelty of Partition will have to record a dollar amount.

4.    Use the word “interest” – and avoid using the word “equity” - when specifying the grantor’s agreement for a buyout. It’s not an automatic disqualifier; but, the Owelty does not represent equity; it represents “interest.”

One more tip. This one is about timing. When calendar dates are established as deadlines for the refinancing and/or buyout of an ex-spouse’s interest, make sure - in advance - that these deadlines are workable. The simplest way to do that is for the client to call me and get started on a refinance loan as soon as possible. But, that’s another paragraph.

Sometimes, when a calendar date is missed, the ability of the borrower to obtain financing is put in jeopardy. The simplest way to avoid this jeopardy is for the client to call me as soon as possible. But, that’s another paragraph.

Just one more tip. Never file a Special Warranty Deed before or without an encumbrance for Owelty of Partition. Once a spouse has granted their interest (effectively at $0 when a simple SWD – without Owelty - is filed), it is nearly impossible to change that and create, in reverse, an Owelty interest. Let’s just go ahead and say it – it ain’t gonna happen. I can show you how to make sure that never happens but, that’s another paragraph.

Now, for that paragraph…We’re out of time for today’s newsletter. Please stay tuned for more next week.

Thanks for reading.

Noel Cookman

Wednesday, March 11, 2015

Exactly How An Owelty Lien Works II

Elements in an Owelty Lien

I am going to show the basic elements that create an Owelty interest and, thus, a financeable lien on a homestead property. But first things first.
Always remember the foundational axiom - it costs you nothing for me (and my title gurus) to review your decree (or Special Warranty Deed w/ Encumbrance for Owelty) to make sure that proper language has created this enigmatic Owelty lien. If I am doing the financing for the grantee/party anyway, I have to know if this interest has been created. Otherwise, I might not be able to close the transaction – I might not be able to TURN WHITE PAPER INTO GREEN MONEY.

Watch out. It’s possible to create an Owelty interest (lien) without using the word “Owelty” in your decree. But, it’s also possible to use the word “Owelty” and still not create a valid Owelty interest (lien).

You live in a world that hinges on pronouncements and judgments from the courts. While the practical world of mortgage finance is subject to all sorts of laws, regulations and court judgments, lenders are generally not subject to a court requiring them to advance funds (except for the laws which require that they do it fairly without discrimination on account of race, color, religion, etc.). For this reason, I do not ask a judge if a decree has properly created an Owelty lien; I ask the lender. And, since the lender relies upon the title insurance company to insure the new transaction as having a valid lien, I go straight to the title insurance underwriters, all of whom are attorneys, for an answer to this question:

Do you see a valid Owelty lien in this decree/agreement; and, will you insure it as a valid lien against the homestead of the borrower (thus allowing a purchase money transaction verses a Texas Equity loan transaction)?

First, however, it is instructive to understand what factors disqualify a spouse’s (grantor’s) interest from being financed as a valid lien against the homestead. In other words, what factors derail efforts to create a financeable Owelty interest in a settlement?

1.    The existing mortgage is a Texas Equity 50(a)(6) and therefore must be refinanced as a Texas Equity 50(a)(6). [This is the common reference to a Texas “cash out” or Texas Equity loan – same thing.] Of course, the newly created Owelty lien could stand alone and separate from the existing equity lien. But, if the newly refinanced loan includes the existing equity loan – that is, if they are “rolled together” and refinanced as one loan – then the new loan must be a Texas Equity 50(a)(6) loan.

2.    As a practical matter, from the above situation when the Owelty lien is valid and is filed in addition to an existing equity lien, very few lenders will finance just the Owelty lien – that is, turn it into cash payment to the grantor. This may change. But for now, I would not recommend that a grantee, having been awarded the homestead residence, count on a lender financing just the Owelty lien behind an existing Texas Equity lien. Again, there are a few lenders that will finance this Owelty lien without Texas Equity (Cash Out) triggers but they are few in number and not so easy to find.

3.    The buyout is not created in the divorce settlement as an Owelty interest. If, for example, the decree states that husband owes wife $X for her “equity” in the house but does not award the house to husband subject to an Owelty interest in favor of the wife, the decree has created a debt in favor of the wife but not an interest in the property. This is a grey area for title underwriters. Some will see “equitable” interest as “Owelty” interest. Others may not. It depends on the language and the underwriter.

4.    The legal description is not included in the awarding of the property or is missing from the Special Warranty Deed with Encumbrance for Owelty of Partition. In some occasions, this can be corrected, generally if the Special Warranty Deed has not already been filed. The divorce decree should reference a complete and accurate lot/block or metes and bounds legal description; not merely a property address.

5.    Improper awarding/divesting. One ex-spouse should be awarded the subject property and the other ex-spouse should be divested of his/her interest in the property.

Next week - those actual “elements” that are required for the constituting of a financeable Owelty lien.