New Mortgage Guidelines Squeeze Divorcing Borrowers

Perhaps the headline title doesn’t sound urgent enough. So, how about this?

 Fewer Divorced Borrowers Qualify for Home Loans

 or

Good Luck Getting A Mortgage If You’re Divorced

Highlights – ALERT – URGENT ALERT!

 

-       No more 3 months of “pay history” for child or spousal support to qualify for a mortgage

-       6 months minimum and sometimes up to 24 months now required

 

First, a definition of terms. When getting a mortgage, one must think in terms of qualifying income, not merely income.

To illustrate by hyperbole (and a touch of sarcasm), income one receives from robbing convenience stores does not count as qualifying income unless it’s reported for the past 2 years on the thief’s tax returns. “Income from Theft” reports on line 1b under Part I of Schedule C - “Gross receipts or sales not entered on line 1a (see instructions).” Remember to deduct the “split” with your get-away driver on line 11 under Part II (you should issue him/her a 1099 at the end of the year); and fees to your lawyer can be deducted on line 17 under Part II.

The point is, your qualifying income is your “Net Profit/Loss” as reported on line 31 of Schedule C and averaged over the past two years. So you see, you may have had income of $100,000 from your crime spree last year (2011); but the $50,000 you gave to your driver and the $50,000 legal fees to your attorney make your qualifying income a big fat $0. But, you say, I didn’t get caught in 2010 (the previous year) and had no legal fees and I drove my own car so of the $100,000 I “earned” from robbing convenience stores I had no expenses deducted, shouldn’t my average income for two years be . . . let’s do some math here . . . $100,00 + $0 = $100,000 divided by 2 years = $50,000?

Not really. Underwriters see a pattern (forgetting for a moment your criminality) – it’s called “declining income” and, again, you draw a big fat zero.

Think QUALIFYING income. It’s a big deal!

And these are but a few of the many guidelines for qualifying income.

Now, what of the divorcing or divorced borrower; specifically for the borrower who is trying to get approved for a mortgage and using child support or some type of spousal support to qualify. What are the rules? What makes that income qualifying income?

Until October 20^th of this year, the basic requirements were simple and straightforward. We called it the 3/36 guideline.

“3” - the borrower must have received the support for 3 months (it’s called a “pay history”) and

“36” - the underwriter has to assure its continuance for at least 36 months (easy enough to verify in a divorce decree since it specifies exactly how long support will continue). By the way, 35 months will not do – not a month less than 36 months after closing (not merely after final divorce).

Interestingly, we routinely helped divorcing borrowers develop a 3-month pay history relatively quickly. For instance, here we are at the end of November. I get a call and the applicant-client needs to qualify for a mortgage that must close at the end of December. How can we develop a 3-month history in 30 days? Very simply, the client is to receive the first support payment before the end of November for November’s support, then again on December 10^th (or thereabouts) for December’s support and for the third time on December 15^th for an early January support – *Merry Christmas! Really in about 18 days, we have created a legitimate 3-month history of support payments. Other guidelines apply. For example, it’s important which account pays the support and which account deposits it. (See me for those guidelines).

This is now a thing of the past. No longer does a 3-month pay history work. Lenders now require a minimum of 6 months of support payments received and can require as much as 24 months. Following the most aggressive pay history strategy (preceding paragraph), it will now take a minimum of about 4 months to develop this 6-month pay history. Just follow the calendar in the above example and you will see that at the end of March, the borrower might receive an early April payment to complete the 6 month history.

 

1^st payment               November 28

2^nd payment              December 1
3^rd payment               January 1
4^th payment               February 1
5^th payment               March 1
6^th payment               March 15^th for April’s payment

*This does not always work but we have closed many transactions qualifying on this pattern of support income. In other words, it can work.

Winning Strategies for Family Law Attorneys and Divorcing Clients

In light of these momentous guideline changes, I am recommending the following strategies for divorcing mortgage applicants:

1.    Speak with me as early as possible. No more of this “here’s Noel’s card, he can help so you should call him” stuff. Clients need to hear something more like “Let’s get Noel on the phone right now” or “Go into my conference room after our appointment and dial up Noel immediately – you have to speak with him NOW.” Of course this is a shameless attempt to increase my business. But, it’s really a lot more than that. If your clients do not get started immediately, they may well lose the ability to obtain any mortgage financing or their spouses may be unable to qualify for financing thereby leaving them at risk.

2.    Unless you see reasons why not, both parties should immediately open their own checking accounts. At the very least, the recipient should open his/her own sole/separate bank account. This is critical for verifying that the applicant has indeed received the funds for himself or herself.

3.    The potential borrower and recipient of support payments should begin receiving support payments, albeit informally, immediately. (Document according to my customized and specific instructions).

4.    Potential borrower and recipient of support payments should begin paying the mortgage from his/her own account. If wife is going to be awarded the house and must refinance its mortgage and husband has been paying the mortgage, the two parties should arrange between the two of them for husband to pay wife support payments and wife should then pay the mortgage.

a.    This flow of funds (previous two paragraphs) accomplishes at least two very important qualifying features in a mortgage loan.

                                          i.    First, it establishes support payments paid and received.

                                        ii.    Secondly, the potential borrower begins to develop proof that she is making payments and thus, demonstrating that she has “the ability to afford the house payments.” I didn’t mention it but one of the new guidelines allows reduced documentation of support (from as much as 24 months down to only 6 months) only if the borrower demonstrates their ability to make the payments.

5.    The amount of support should equal or exceed the minimum expectations of support. Child support is fairly straightforward in terms of minimal amounts, as I understand it. Spousal support, negotiable as it may be, is another matter. In all cases, the borrower qualifies – there’s that word again – on the lower of the decree’s ordered amount or the actual pay history amount. The decree may order $2,500/month but if payments have only been $2,000/month then only the $2,000 can be used to calculate debt/income ratios, not the $2,500. Conversely, if payments have been $2,500 and only $2,000 is ordered, then the borrower qualifies on the $2,000. But, ‘tis better to develop a pay history that is inflated above the final amount awarded than to develop a pay history that is less than the final amount awarded.

 

DO NOT TRY THIS AT HOME

LET ME DEVELOP THE APPROVAL AND OUTLINE A PRECISE STRATEGY FOR A DIVORCING BORROWER TO QUALIFY FOR THEIR OWN MORTGAGE

 

The next boom to fall . . . support income measured as a too small of a percentage against total income may no longer be qualifying. Stay tuned.

 

Noel Cookman can be reached at 817-454-4555 or by email at Noel@TheMortgageInstitute.com.

Qualified Assumptions - Is There Such A Thing?

Here is an email I received from a family law attorney last week. She succinctly stated the particulars of a case and then generalized the questions - perfect for a format like this. It deals with what some people are calling Qualified Assumptions (QA's).

Hi Noel,

I hope you are doing well.

I had an old client contact me with an interesting request and I’m hoping you can educate me (if you don’t mind, of course). In the divorce last year, husband was awarded the house & we execute the usual Special Warranty Deed and Deed of Trust to Secure Assumption for him to pay the mortgage. He did not refinance and wasn’t required to under the Decree.

The wife contacted him because she wants to buy a house. They ran her credit report and found her name on the mortgage of the marital residence, so they told her she would not qualify for a loan on the residence she wants to purchase. The husband contacted his mortgage lender, and they are allowing him to do a “Qualified Assumption” to remove wife’s name on the note without a refinance. The way he explained it to me, he basically has to qualify for the mortgage by himself, pay a fee of about $1,000, and the lender will remove her name from the mortgage so that it will clear the wife’s credit report.

In the past I knew that a mortgage company could sign a Release of Lien on a mortgage for a co-borrower, but in our experience, most mortgage companies won’t sign one, and the Courts will not order a Release of Lien because they cannot obligate a third party to waive their rights. This is the first we have heard of a Qualified Assumption and this type of relief being available in a divorce matter. Historically, we have counseled our clients that the only way to remove a person’s name from the mortgage is via a refinance.

Is there any information you can give to us about Qualified Assumptions? Is this new relief available to borrowers under the changed lending laws? Are QA’s common? Is this an option with all mortgage companies? Is this something that we can begin to offer to our clients as an alternative to refinance? Can we draft closing documents and/or Order language with regard to Qualified Assumptions? I’d appreciate any guidance you can provide us.

Thank you so much.

Attorney at Law
Houston, Texas



My response...

Dear Attorney Friend,

This is an excellent and timely question.

I have a complete response to the question about “Qualified Assumptions.” But the most pressing issue is the ex-spouse who now is told she cannot purchase a house because of this liability. She is being denied, not because of this liability but, because she is not working with me. Everything else being equal, she can qualify to purchase on her own with a couple of simple things: 1) the decree, 2) the ex-husband’s cooperation to provide documentation of pay history. But, this is a transaction that must be wisely packaged and submitted – something we have been doing with regularity and success for over a decade now. The quickest resolution is for this client to call me at 817-454-4555 or email me at noel@themortgageinstitute.com.


Now, to your questions about "qualified assumptions":

Q: Is there any information you can give to us about Qualified Assumptions?

A: Not much because of reasons that will be obvious below. But, I do hope to clarify some things for you and all concerned.


Q: Is this new relief available to borrowers under the changed lending laws?

A: No. “Qualified Assumption” is the name that this bank (in question) has given to some process or program that they might have. But, we do not know as it is highly unlikely that even this bank publishes information on this program. If they did, we might grant the idea more credibility. As it is, my experience is that banks (especially the big ones that employ call-center reps to handle mortgage applications) will use any term the caller uses. If the caller says “can you modify my mortgage” the employee will say “sure, let me get some information.” If the caller says “can I get my ex-wife off the mortgage by assuming it as my own debt” the employee will say “sure, let me get some information.” In fact, the bank is taking an application to refinance the mortgage. They want to keep the customer but they effectively have to make sure that the remaining borrower is “qualified.”


Q: Are QA’s common?

A: No. But again, Qualified Assumptions are not government-prescribed programs – although the name is similar to phrases bandied about.

For example, Qualified Residential Mortgage (QRM) is a regulation term currently promised (i.e., threatened) under Dodd-Frank that refers to underwriting/qualifying standards. But, as Romney pointed out in the debate (October 3), the government still hasn’t defined a QRM although the threat of not adhering to these yet-to-be written standards looms over our collective head. An older type of mortgage(s) is the “assumable” often designated as either a “Non-Qualifying Assumable” or a “Qualifying Assumable.” These were mostly FHA (government insured) mortgages and VA loans but have gone the way of rotary dial phones. Although the contrary might seem to be obvious, the government is effectively creating “non-qualifying” programs but that’s another issue and doesn’t apply here.

Neither are QA’s industry-prescribed programs. There is no product that we know of that is characterized as a Qualifying Assumption. However, keep in mind that each bank can create programs and lend according to their own standards so long as they do it within the law and do not care whether that loan is salable to Fannie Mae, Freddie Mac or insurable by HUD or guaranteed by the VA. With respect to this fact, I cannot say that a QA does not exist, only that if they do, they are out of my sight line and probably rare.


Q: Is this an option with all mortgage companies?

No. It’s not an option with hardly any of them, maybe none of them. We have heard about a few of them but have actually seen none of them.


Q: Is this something that we can begin to offer to our clients as an alternative to refinance?

A: I hope the answer is obvious. But, offering such an alternative, even in theory, I believe would be disastrous. I see the effects of these misunderstandings all the time in my work. But consider this: Even in seemingly standard cases, only a qualified mortgage professional – really a Divorce-Mortgage Specialist in these cases – can qualify or disqualify a potential borrower. And even this professional must do diligence in order to provide such a statement of approval or denial. No amount of other parties or professionals or judges or attorneys, whether in court or in mediation or in collaboration or in settlement meetings, can make these sorts of determinations even in instances wherein it appears a borrower might be well qualified. This is why I do what I do.

Q: Can we draft closing documents and/or Order language with regard to Qualified Assumptions?
A: I certainly would not tell an attorney what she can do in regards to drafting legal documents. And I am not even close to your level of intelligence and expertise. If the time ever came when banks were issuing statements of “Qualified Assumption” approvals, I recommend that you analyze them carefully and craft agreements based only upon the strongest of commitments from these banks. As well, please call me and let me analyze these statements.

What I do as a matter of practice is take an application from a divorcing client, qualify them based on standard and special conditions, report to you, the attorney, in an Assessment/Approval these special conditions, review drafts of the decree making suggestions and follow through during the process of divorce to assure that when the decree is entered, the client-borrower will always be able to close their loan, our having already underwritten and approved it.
To expect this from a bank who claims to be transacting a “Qualified Assumption” is probably unrealistic. But, I’m all for exploring uncharted territories.



All of the above notwithstanding, I do think that there are banks that, for a fee, offer a version of this “Qualified Assumption” whereby a borrower’s name is “removed” from the note by the remaining borrower qualifying with his/her own income and assets and other qualifying features. However, a few things bother me about this:
First of all, how does the former borrower know that the lender has truly released him/her from the mortgage liability? The lender cannot send them a “paid” status on the mortgage. Even if the lender sends them a letter that says they are no longer liable – and I seriously doubt this happens without the remaining borrower actually refinancing the existing mortgage . . . in which case, the “ex” borrower would receive the “paid” status letter – the allegedly former borrower needs to understand that the lender still has their Social Security number (and can report pay histories to credit bureaus against that name and SS number) and a promissory note with their signature on it that promises to repay the debt. Nothing but full repayment of that debt releases any person who has signed that note.


Secondly, unless the note is actually being refinanced, what new deed is filed? How does the deed change? How can it be replaced? A lender can more easily change the note (to the benefit of the borrower) than it can meddle with the deed. Special Warranty Deeds do not change names on the original Deed of Trust. And of course, they never alleviate a party of a credit obligation.


Thirdly, the lien cannot be truly released (without full payment); else, the lender has no security on their collateral property. If the lien is not released, from the perspective of the borrower who is seeking the removal of this liability, it is always a contingent and real liability.


Fourthly, and this goes to motivation, why would a lender do this? They will do it for one reason only – preserving their own interests. This is a good motivation as it drives our free market and capitalism itself. But, we must wonder what a lender is up to if they actually release one half of the source of payment from the obligation. Banks make a little bit of money by upfront fees, etc. Their real money is made by collecting interest payments over a longer period of time. To endanger this income flow is contrary to a sound business model. The prospects of losing the loan may outweigh the lender’s concern about losing one of its borrower’s promises of repayment. However, if the loan is likely to be lost, as in lost to another refinancing lender, then there is usually more incentive for the borrower to refinance (possibly to a lower interest rate) than to simply “assume” sole liability for a fee.

  Speaking of assumptions, unless and until either the mortgage industry or the government (God forbid) produces a product called a "Qualified Assumption," it is unwise to assume that such a program exists or that some bank can be convinced to remove an obligated borrower with a few strokes of a pen. And if that happens, guidelines will be published so that upon them we can "hang our hat."

A truly "qualified" product is a refinancing of the mortgage note.

Texas Cash Outs - Follow Up Questions

Thank you for the great feedback on last week’s Texas Cash Out article. A few, very good questions have come out of last week's post (http://divorce-mortgage.blogspot.com/2012/08/do-you-know-facts-about-texas-cash-out.html) and I would like to address them here.


What is the difference between an EQUITY LIEN and an OWELTY LIEN?

An EQUITY LIEN means cash has been paid to someone on title to the property.

An OWELTY LIEN is payable to someone who had an interest in the property but is granting that interest for a cash payment. This is a simultaneous transaction – tit for tat- a real estate / financial quid pro quo.


An EQUITY LIEN means that somehow Texas Equity (or “Cash Out”) laws have been triggered. This happens when (any portion of) loan proceeds are paid to the borrower as on line 303 of the HUD-1 Settlement Statement that says “Cash TO Borrower.”


This situation may best be illustrated by answering the following question:

What is the difference between an EQUITY LIEN and a HOME IMPROVEMENT LIEN?

First of all, let me give you a case study, a loan that I am refinancing right now. A homeowner has a first and a second lien on her property. I asked if the 2nd lien was an EQUITY loan. She said “No, it’s a HOME IMPROVEMENT loan.” I said “very nice, may I see the closing settlement statement, the HUD-1 from that transaction.

The actual transaction did revolve around a home improvement project; and, a HOME IMPROVEMENT LIEN had been filed and was therefore paid with loan proceeds. However, the loan officer who transacted the loan did not fix the loan amount so that it covered only the Mechanic’s Lien and Contract plus applicable closing costs. Instead, he added about $500 to the needed amount so that the borrower now had “Cash TO Borrower” which, incidentally, she didn’t really need or ask for. BIG MISTAKE. But, it’s a BIG MISTAKE that loan officers for these big banks make with great frequency. Now, the refinancing of her loan requires another Texas Equity (Cash Out) loan even though she requires or desires no cash out.

The largest part of the loan proceeds went to pay a HOME IMPROVEMENT LIEN. But a small portion went directly to the borrower. Even if that portion had been only 1¢, the effect would have been the same – cash to borrower.

So, a HOME IMPROVEMENT LIEN is payable to an entity that has filed a Mechanic’s Lien and Contract (or some comparable contract) on the property for work performed (or to be performed). This entity does not have an “interest” in the property as someone who is on title necessarily has. Their interest is limited to the work performed and the dollar amount agreed and does not extend to the “entirety of the property.”

An EQUITY LIEN is triggered because cash has gone to a person who retains their interest in the property verses cash going to someone who is granting their “undivided one half interest” to a person who retains their interest and now receives the grantor’s interest . . . as in the case of a divorce which uses a Special Warranty Deed to grant that interest.

Back to the OWELTY LIEN. When that interest (being granted) involves an agreed exchange of money for the conveyed interest, the Special Warranty Deed with Encumbrance for Owelty of Partition is used. As a lending matter, this document must state a dollar amount and should be filed on or after “funding day” when this simultaneous action occurs – the granting of interest in exchange for money.

The EQUITY LIEN is also triggered when a borrower’s other consumer credit debts are paid with (any portion of) loan proceeds. These monies are being paid on behalf of the borrower on title and not to any creditor with a valid lien against the property. Thus they are considered “cash to borrower.”


Tell me more about “Once a Cash Out, Always a Cash Out;” what does that mean?

The EQUITY LIEN is also triggered when a new loan refinances (or pays off) an existing Texas Equity (Cash Out) loan. This is true whether or not the borrower receives more funds through closing or their credit cards are paid with these new funds. In fact, the borrower might actually bring money to closing in order to close their new loan. But, the underlying mortgage being paid off is a Texas Equity loan and therefore any subsequent financing of that loan is still considered a Texas Equity (Cash Out) loan.

This is the essence of “Once a Cash Out, Always a Cash Out.”

It does not mean that the property itself is always subject to Texas Equity regulations. For example, if a homeowner sells her home to a third party buyer who then obtains their own financing to purchase this property, this buyer’s new loan is not subject to Texas Equity laws. The equity lien on title remains until the loan is paid off in cash (as in “cash” or with proceeds from a buyer’s purchase). It means that all subsequent financing (or refinancing) of that equity loan triggers another equity loan, unrelated to whether or not the borrower takes out more cash.

DO YOU KNOW THE FACTS ABOUT

TEXAS CASH OUT FINANCING?

…and how it affects divorcing homeowners…

Noel Cookman, 2012-08-22, Grapevine, Texas


Much of my time these days is consumed by two retired politicians, Dodd (retired and banned from lobbying for another few months) and Frank (finishing out his last term). I have my own nicknames for them but in the interest of good taste, I’ll treat you to silence in that regard. I am nearly consumed because when I am not complying with “Dodd-Frank” or the Wall Street Reform and Consumer Protection Act (several hours per week) I am complaining about it.


More about that in my upcoming seminar “The Truth About Dodd-Frank and How You Too Can Ruin The Financial Landscape of the Greatest Country in the World and Retire with Another Sweet Gig, a $176,000 Annual Salary, and a ‘Cadillac’ Health Plan Courtesy of the Taxpayers.”


For now, it is enough to say that while Dodd-Frank is the most comprehensive financial legislation in history, Texas Equity financing laws impact your client’s mortgage transactions more often than Dodd-Frank apparently does right now. Yet, when I ask for a show of hands at my seminars of those who believe they understand the basics of Texas Equity laws, I get a response somewhere in the zero to .0001% range. Most of us will never personally deal with these financing rules and for those of us who do, such experience is probably limited to once in lifetime. This explains the glazed-over look in the eyes of my seminar attendees when I ask the question.


Texas equity loans (or “Texas Cash Outs”) are comparatively easy to understand; but, few laws or mortgage products are more widely misunderstood. Moreover, it is important to understand a few basic features of the “Texas Equity” in order to see the necessity (and superiority) of the Owelty agreement in a divorce settlement. So, I treat you to some useful information; and, I show you how we have rescued divorcing homeowner-borrowers from the onerous restrictions placed on their properties by previous equity financing, a feat nearly all mortgage professionals will tell you is impossible.


Here is your Cheat Sheet:


1. Texas Equity financing (or “cash outs”) apply only to homestead properties (nearly always primary residences or marital residences).


2. Texas is the only state that has such legal provisions and restrictions on equity financing. There are industry guidelines and limits on equity financing but no other state has a law that so definitively limits equity financing as does Texas.


3. In Texas, “equity” (as applied to mortgage lending) means any monies that a borrower accesses in a mortgage transaction for any purpose other than to satisfy one of the following liens against a homesteaded property: a) purchase money, b) ad valorem taxes, c) Owelty of partition (generally for divorce), d) home improvement loans, and e) reverse mortgages. The other allowable lien is an equity lien; but, financing an existing equity lien triggers another equity loan or “Texas Cash Out.”


The most common use of such equity is simply “cash to borrower.” Line 303 (page 1, last line on left column) on a HUD-1 Settlement Statement most often reveals this. It will say “Cash To Borrower” or there will be some designation to indicate that borrower is receiving, not paying, monies at closing. Parents borrow money for their children’s college tuition or homeowners may simply wish to take a vacation to Aruba. Lenders cannot require borrowers to use funds for a particular purpose (such as purchasing credit life insurance) but they will most often seek to know the major use the borrower intends for the cash. (The key here is for the borrower not to express a desire to fund al Qaeda or to set up a training compound to prepare a private militia to overthrow of the U.S. government). Another common use is the paying off of credit accounts or other outstanding debts not secured by one of those liens mentioned above. Many times, borrowers can greatly alleviate monthly debt-service burdens by rolling a high interest or high monthly-payment debt into a low interest, 30 year amortized mortgage loan.


Borrowers and even mortgage professionals (to use the term lightly), often make the mistake of triggering equity financing for a buyout in a divorce. For reasons you will see, this is very damaging to the borrower and the transaction itself. And, as you have seen, there is another instrument for a divorce buyout (Owelty) provided Texas equity laws have not previously been triggered. Extracting homeowners from these restrictive equity limitations in divorce is what I discuss below in a couple of scenarios.


4. Once a Texas Cash Out lien has been placed on the property, it cannot be removed from title until the loan has been paid for in cash (verses with proceeds from another, newer loan financed by the existing homeowner). Obviously, in the case of a purchase transaction, the homeowner becomes the grantor and then another party who did not have a homestead interest in the property, may take out their own mortgage to purchase the property (hence, “purchase money” lien). [There is another case whereby homeowners may “lift” the Texas Equity restrictions from title – when they convert the property to a rental property or “non-owner occupied” by filing a Texas Homestead exemption on another real property in Texas.] This feature is commonly called “once ‘cash out,’ always a ‘cash out.’”


5. The 80% Rule. Borrowers cannot borrow more than 80% of a home’s appraised value measured at the time of financing. Since any refinancing of an existing Texas Cash Out mortgage necessarily triggers the same “cash out” law, this 80% limit continues until the loan is paid off in cash or as in a sale.


This means that if a homeowner finances $80,000 with a Texas Cash Out mortgage when the house is valued at $100,000 (by an appraisal which the lender accepts as determinant), if and when they come back to refinance that same mortgage and if that property has declined in value to, let’s say, $90,000 then the new maximum allowable loan amount will be $72,000 (80% of $90,000). Depending on what has happened in the market and how long the homeowner has had to pay down the mortgage, the mortgage balance may exceed the maximum allowable loan amount for the new mortgage.


6. The 3% limit on closing costs. Texas law limits closing costs on equity loans to 3% of the new loan amount. This doesn’t bite anybody on the back side unless their loan amount is less than about $175,000. Appraisers do not reduce their fees to inspect and report on properties being financed as equity loans. They don’t care, it’s the same amount of work. Doc prep attorneys don’t charge less – actually they charge more because of the extra work required. Underwriting fees are the same. Title policies are even higher than for regular refinances. If fees total $4,000 but your loan amount is only $100,000, where does the extra $1,000 come from? (The difference is $1,000 because the 3% limit on $100,000 is only $3,000 but the costs are $4,000). The lender must get it by charging a higher interest rate and getting “premium” from the investor to pay these extra costs. Low loan amounts create a vicious cycle of costs that are relatively too large to fit within legal limits. At floor loan amount threshold – around $80,000 or so - borrowers don’t get return phone calls from lenders who would otherwise be happy to take their application and fund their loan.


7. There are many other provisions like the 12 month rule that disallows borrowers from taking out an equity loan more frequently than once in a 12 month period. My favorite is the exception for Agricultural Exempt properties which cannot be financed with an equity loan unless it is used for milk production. This came in handy when I obtained an equity mortgage for a great Texan lady whose land was registered as “Ag exempt” but happened to have a few goats on hand. If you could only have seen her face when I informed her she would need to start milking them before we could do her loan.


This generally outlines the most common limitations we deal with in equity financing in Texas. But, how does this affect the divorcing borrower?



#1 - The Classic Buyout


First of all, when Susan calls a typical lender and says that she and John are divorcing, that she is keeping the house and that she must refinance it to get his name off the mortgage as well as get some “cash” to pay John for his “equity” most loan officers begin to drool. What do you think is their first calculation? No, it’s not debt ratios. Nope, it’s not loan to value (LTV) ratios. And it ain’t closing costs or taxes or insurance. It’s their commission check. (Because of Dodd-Frank, this calculation is quite distorted to the detriment of the consumer but, I digress).


The second calculation is probably the 80% calculation. “What is your loan balance?” “What do you think the house is worth?” (You have to start somewhere). Let’s peek in on a conversation.

[Screen play]

Susan: We owe about $150,000 and I think that the house is worth about $200,000. I need about $25,000 cash to buy him out.


Loan Officer: [some clicking sounds in the background] . . . uh, er, um, let’s see here now. $200,000 huh? I can get an equity loan for $160,000 (80% of $200,000). With closing costs of $5,000, if you waive escrows and come up with your own taxes and insurance in a few months, we can get you . . . uh, $5,000.


Susan: But, I need $25,000.


Loan Officer: Well, I’m so sorry Susan. You’ll just have to call Noel Cookman at 817-454-4555 ‘cause I have no idea how to get you the $25,000 to buy out your husband. And by the way, did your attorney not tell you about Mr. Cookman? This is odd indeed.

[The End]

The simple solution is that equity laws are not triggered by an Owelty lien. The key, of course, is to craft language in the decree that not only establishes that Owelty interest but avoids a few choice words like “equity” or “equity interest” that would then trigger an equity lien.


Susan, finally reaches Noel Cookman who constructs her loan properly, works with the attorneys to pre-underwrite the decree and brings her to the closing table a few days after final divorce. She borrows about $175,000 plus closing costs on a $200,000 property, John gets the $25,000 for his interest in the property and they are now and actually divorced, not still joined at the mortgage or the house.


#2 – The Already-Present Equity Loan


What of borrowers and properties that have already been encumbered by equity financing? The perpetual nature of equity lending now means that the 80% limit is perpetual as well. Let’s take the same situation above except a couple of years ago, John and Susan had paid their mortgage down to $125,000 but borrowed money on a 2nd home equity loan, $35,000 to finance a year or two of college for their young adult child. But, they have paid their mortgages down to a first lien balance of $120,000 and $30,000. That’s about how amortization works and the total balance of the two loans is now $150,000. Susan still needs $25,000 for a total of about $180,000 ($150,000 1st lien + $25,000 2nd lien + $5,000 closing costs). But that’s 90% of $200,000. Because of the 2nd equity lien on the property, the limit still applies. What shall we do?


I first did this (what I am about to tell you) in 2004, not knowing for sure if it would work but not seeing any rational or legal reason why it would not. And we’ve been doing it ever since.


First we had to discover $25,000 in John’s or Susan’s retirement account. (Through the years, various sources have been used but, in my first case, it was a retirement account). Susan had it and we simply constructed the transaction and terms of the divorce thusly:


1. Susan withdrew $25,000 from her 401(k) on our promise that if she did what we said, when we said to do it that we would replenish her funds.


2. Susan took this $25,000 and paid off the entire balance of the 2nd equity loan. (Remember, the equity restrictions remain until the loan is paid off in cash that is not from another mortgage loan transaction).


3. Poof – like magic, the Texas equity restrictions are gone from title. The property is now free to receive the other categories of liens so long as everyone on title agrees.


4. The buyout to John is not $25,000 but $50,000.


5. We draft a Proceeds Allocation Letter (which is consistent with the decree which also tells John what he must do with the $50,000) that reads “Dear Title Agent, please take my $50,000 and wire $25,000 to Susan’s 401(k) account and $25,000 to my checking account.”


6. The retirement funds are replenished within 60 days and no penalties or taxes are charged or subtracted because it’s considered a “rollover.” Susan listened to us and didn’t withdraw these funds until we signaled her to do so, staying within the 60-day window. (You see, there’s another 60-day window you probably didn’t know about, eh).


It’s not magic but it looks like it. And so far as I know, divorce is the only likely event wherein such a transaction can be thusly structured. There really is a silver lining in every cloud.

The Effect of Dodd-Frank on Divorcing Citizens

Part 3: Appraisals and Property Valuation

Dodd-Frank (Wall Street Reform and Consumer Protection Act) is the most sweeping legislation affecting the financial industry to come out of congress since Glass-Steagall (The Banking Act of 1933). Not even its repeal with Gramm-Leach-Bliley Act in 1999 comes close.

As Charlie Gasparino remarked in horror on his program several months ago,

“this [new bill] will change the entire financial landscape of America.”

Horror stories about the deleterious effect of Dodd-Frank on banking, mortgages and the general economy will gradually make their way into the American awareness. But, it will take years really and if the act is not repealed soon, it will so entrench itself into the fabric of society as to produce an institutional and systemic inefficiency that only a major societal shift – on the order of the fall of the Berlin wall - will unravel.

Dodd-Frank affects divorcing clients because it affects everyone. But, those who must obtain financing in the context of a divorce are especially vulnerable to its vagaries. And as every family law attorney knows, property values (not to mention clients’ sometimes irrational opinions of property values) become a significant issue. But, how do parties and their attorneys know the value of real estate property? It often appears on a spreadsheet with other assets which have statements stating a dollar amount value of a stock or a retirement fund or a checking account. It leaves the impression that someone typing the dollar value beside an address can do so with the same surety as she might enter the “total asset value” of an IRA or investment portfolio.

Clients, attorneys, judges and lenders rely upon appraisals conducted by licensed appraisers to determine the value of properties. Determining net asset value is another issue. But, suffice it to say here, most people go about it quite wrongly, usually stating the net value higher than a rational calculation would yield. That’s another article.

Here’s what you need to know about appraisals and divorce.

First, a brief case. Just a few weeks ago, I overheard one of our loan officers trying to get an appraisal ordered somewhere in South Texas. All lenders have to order appraisals through an AMC (Appraisal Management Company, more about that in a minute). 3 appraisers had already refused the order and a fourth replied thusly: I’ll do it but I cannot deliver it for at least 3 weeks and instead of the normal charge of $425, the cost will be almost $1,000. The property was a bit outside of the city or town and required a short drive to reach it.

Before the new regulations took effect (2009), we would have already had the appraisal done and delivered in the 4 days it took to receive 3 refusals and a tepid if not disgusting response from the fourth appraiser. There are two reasons appraisers treat your clients this way: 1) they can and 2) they don’t care. Furthermore, I cannot honestly say that I blame them except that my teachers have always told me “what goes around comes around.” Sooner or later, this shoddy and arrogantly dismissive (lack of) service will catch up to lazy appraisers.

In divorce . . .

1. Understand that only ONE appraisal matters and that’s the one that the lender orders through the government-required ordering system. This means that both attorneys, both clients, a mediator, a financial professional and a judge can each order their own appraisal for a total of seven appraisals. Unless one of them is willing to lend their money to the home owner, none of those appraisals matter. The one exception is if no one needs financing. In that case though, the appraiser’s “opinion of value” (the technical name for an appraisal) is anchored, not to a financial transaction but, to a divorce. This is why different appraisals can be seriously disparate in their “opinion of value.” It is, after all, an opinion.

2. Ideal timing requires an early start to application and qualifying. When an appraised value helps to determine a buyout amount, timing is crucial. Even when a buyout is not needed but merely the refinancing of the mortgage to remove a spouse from its liability is the goal, timing is still critical. The ideal timing would leave about 2 -3 weeks between our receipt of the appraisal and final divorce. This gives us time to recommend changes to any buyout agreement that could be rendered un-financeable by a lower-than-expected appraised value. It also allows time for an appeal to the appraiser for a reconsideration of value.

3. We don’t order the appraisal too early in the process. Often, parties and attorneys may order an appraisal of the residence very soon after negotiations begin. Keep in mind that appraisals age and eventually expire. After 4 months, appraisals are generally considered too old to be useful in lending. In some cases, 3-month old appraisals have aged too much. The lender may require updated comparable sales or a recertification of value or, in some cases, an entirely new appraisal. We like to make sure we can close our transactions before the appraisal is 2 months old. So, before ordering appraisals for our customers, I always try to get a feel for how close we are to settlement and final entry of the decree. It can save money by not putting the client on a time line that stretches out long enough so that a 2nd appraisal becomes necessary.

The rule of thumb is Divorce filed > Your Process > (early) Loan Application > Appraisal obtained > 2 – 6 weeks > Final Divorce

Since May 1, 2009 the property valuation market has significantly changed. No more interviewing appraisers beforehand to get an initial idea of comparables (a service that many appraisers were glad to perform for their good clients because it resulted in increased business); no more calls from an appraiser saying that his/her initial research was showing a lower-than-expected value and asking if the customer wished to proceed; no more free flow of information – just a cold appraisal at the end of a more protracted period of time with very little accountability for thorough research.

The most important thing a lawyer can do for their divorcing client is to refer them to a competent Divorce-Mortgage professional. It is very easy to find one – just call me. I will engineer their loan process so that the appraisal is useful for financing and obtained in time to inform your divorce process so that reasonable settlements might be reached.

972-724-2881