Requiring Mortgage Refinances in Divorce? Part 1

Should Divorce Settlements Always Require a Refinance of the Awarded (jointly-financed) Property?

 

Yes…nearly.

Part 1

First, there are obvious situations whereby an order to refinance an awarded property makes no sense. The chief reason is if/when the grantee is the only party on the promissory note. A refinance in such a case would not be necessary in order to remove another party from the credit liability. (It may be obvious but refinancing the note is not necessary in order to remove a person from title or in order to effectively remove a person from the deed. A simple Special Warranty Deed at final divorce will accomplish this). Financing may be in order so that the grantee can borrow monies for a buyout to the grantor. Or, refinancing may be in order if it simply makes economic sense (by obtaining a better rate and terms) but is unrelated to the divorce.

I am addressing scenarios wherein the divorcing husband and wife are joint borrowers on a mortgage note; and, one party will be awarded the house and assigned its debt.

The straightforward answer is “Yes, in nearly every case.” At the very least, I believe that the default answer should be “yes” and a “no” answer should require a compelling set of reasons why not.

I am not addressing this issue from a legal perspective. I am addressing it from a practical and financial perspective.

But, as we shall we, even a logical order/agreement (in the spirit of a “fair and equitable” settlement) that the grantee be required to refinance the mortgage is not the pressing issue. The looming question is can they refinance the mortgage?

But, let’s first tackle the issue of “should.”

The situation and trend by which settlements are awarding properties to parties without some requirement to finance it in their name and liability is somewhat perplexing if not troubling. It is doubtful that any judge in Texas rules so as to intentionally create a financial fiasco for the parties in the future. But, grave financial difficulty is the outcome in so many cases.

My experience tells me that judges simply do not know what to do or how to effectively order a refinance; and, when a judge believes that he/she can fairly order a refinance of the awarded property, how does this same judge do so with any confidence that the order can be followed? Many times they are presented with testimony or statements that indicate the inability in inadvisability of a refinance; or, they hear the opposite, that the party can indeed refinance the mortgage with no problems. On one occasion, a Good Faith Estimate was submitted as evidence that a party DID NOT qualify for a mortgage! (By the way, all lenders have denial letter templates and can issue them with reasons why the loan was denied; better yet, when I evaluate a loan application for a divorcing client who does not immediately qualify, I state why and what it will take in order for this client to qualify. In any case, what is a judge to do with a Good Faith Estimate? It tells him/her nothing).

So, how does the judge know? And, inasmuch as attorneys, parties and mediators might reach an agreement to the same effect, the question applies to the entire divorce settlement (whether by order or by agreement).

I have seen the following orders or agreements (in divorces) related to a property’s mortgage:

-       No requirement of any sort that the grantee refinance (even in cases wherein the grantor is on the existing mortgage note).

-       An open-ended requirement to refinance

-       A requirement to “make best efforts” to refinance by a date certain (but no requirement beyond that).

-       A requirement to “apply” for refinancing (which is different from “making best efforts”) by a date certain.

-       A requirement to refinance by a date certain or within a prescribed period of time.

 

I have a simple plan by which we could totally change the landscape of post-divorce financial difficulties. We can stop nearly all cases of derogatory credit resulting from defaulted mortgages that were not refinanced properly.

In cases wherein the grantor is an obligor on the mortgage note (whether singularly or jointly)

1.    Require – or highly advise – that the potential grantee (being awarded the house) apply as soon as possible for financing approval. If the potential grantee applies with a competent Divorce-Lending Specialist, there is never any reason that a divorce would be finalized without a clear understanding on both sides as to the likelihood, probability or surety of the refinance transaction. There would be no guess work, no warrantless hope, no disappointments and most of all no messed up credit years later when a grantor’s credit rating is ruined and there is nothing s/he can do about it. If the parties/attorneys think that a required refinance is not equitable or advisable, the following question might bring things into perspective: If the grantee cannot qualify for financing, why does anyone imagine they can afford the indebtedness? That is, if professional underwriters and the automated systems of Fannie Mae, Freddie Mac or HUD (for FHA) cannot find confidence that a debt will be repaid, on what basis do the parties/attorneys/mediators/judges find this confidence?

2.    The attorney should receive a complete, professional assessment of the grantee’s qualifying for refinance. This should be supplied by a Divorce-Lending Specialist. The good news is that you already know one. The bad news is that I only know of one. [That will be remedied in time.] This assessment could

a.    clarify exactly what is required and what can be done for the grantee to qualify for refinancing; this can include

                                          i.    required child and/or spousal support and length of continuation

                                         ii.    precisely how to document support payments

                                        iii.    maximum buyout amounts subject to appraised value, credit scores and debt ratios. (I just saw an Owelty lien for $24,850 placed on a property that appraised for $67,000 and had an existing mortgage of $65,000 against. Somebody wasn’t paying attention).

b.    specify the expected time frame that such financing will require…how long before the deal can close

c.    in cases wherein qualifying is not probable, state when it might be probable

3.    Require – except in the most extreme of cases – that the grantee finance the awarded property into his/her own, separate liability and out of the grantor’s. Again, such extreme cases should be outlined clearly and unassailable reasons - as to why a refinance is unadvisable - stated by a qualified Divorce-Lending Specialist. If we reversed assumptions – from assuming that refinancing a debt (held jointly or in the name of the grantor) is non sequitur to the awarding of a property to assuming that refinancing that debt should be required -

 

There are, indeed, cases whereby awarding a property without the requirement for an immediate refinance may be warranted. But even in these cases, such unrestricted awarding (lacking the commensurate requirement to refinance) should not be indefinite. If someone cannot qualify for financing within 24 months (maybe 36 at the very most), it is irrational to assume that they have the wherewithal to make the payments. It is a foreclosure waiting to happen.

In other words, judges/courts would be doing what nearly everyone now says caused the mortgage and financial meltdown in the first place – giving loans to people who cannot afford to pay them back. [By awarding properties and simply assigning the debt, judges are effectively giving loans to people, only guaranteed by the grantor instead of the actual person required to make the payments. It is a case of “mistakes-in-tandem.”]

In divorce, there are some cases of properties that cannot be refinanced, due to market realities related to the value of properties. The mortgages are “upside-down” and the programs that the government has created to deal with these do not apply to loans wherein a borrower is being deleted from the loan. But, even in these cases, why award the property indefinitely with absolutely no requirement for the grantee to make every effort to attempt financing for as long as it takes? What about when the market and housing prices recover?

 

I can think of one case wherein a grantor has no reasonable expectation for the grantee to refinance. That is when the grantor has been so reckless and indigent with his treatment of credit and finances, thus adding to the disqualifying elements in a loan denial for his/her spouse, that the grantee has been placed in such untenable position that he/she could not qualify for some years to come. Not making mortgage payments for 4 months is tantamount to a foreclosure and will effectively disqualify a borrower from receiving a loan for up to three or four years and longer (some lenders require a 7 year seasoning of foreclosures). Even though credit can be repaired in time, special and egregious circumstances might dictate that such a grantor has foregone reasonable expectations of the grantee refinancing.

When a house is awarded and the grantee is not required to refinance out of the grantor’s liability, the settlement is effectively hanging a grantor out to dry in terms of his/her credit rating – all at the mercy of a person they divorced; with no end in sight, might I add. If anyone wishes to wreak havoc on a party, this is certainly a sure-fire way to do it.

Would any of us consent to be a grantor under such terms?

 

The Deed of Trust To Secure Assumption

It’s not uncommon that a Deed of Trust To Secure Assumption is offered the grantor. In fact, it’s nearly universal and, in my view, a very reasonable requirement (when the grantor is on the existing mortgage note). However, I have asked many attorneys if they know of instances wherein the remedies under the Deed of Trust To Secure Assumption are acted upon. I am still unaware of any cases – although I’m sure there are some. It’s economically unfeasible, generally; and, it creates an added hardship when the grantor (grantee in the DOTTSA) must take on the obligation for a previous debt (the mortgage) when he/she has most likely replaced that indebtedness with another liability (rent or mortgage payment of their own).

Neither is the specter of increased mortgage payments an argument against the requirement to refinance. Rates are a function of the market. And no citizen or client has a right to a particular price (rate) in the market. The fact that payments go up or down is based on interest rates and loan amounts; and, is irrelevant to the grantors’ reasonable expectation that debts be removed from their liability.

I hope to do something – in the way of education - to rectify this situation in general. Next article deals with the practical realities of making these transactions happen . . . or how we “turn white paper into green money.”