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

Noel@TheMortgageInstitute.com

817-454-4555

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.

 

Exactly How An Owelty Lien Works I

Perhaps no other topic that I address triggers the interest amongst family law attorneys as does the famous Owelty lien. I think I know why. It’s a bit of a mystery. But, why is it a mystery? Lawyers are known for their ability to understand complicated and complex issues and to, not only make sense of them but, argue them before a court.

The mystery is made somewhat more clear by the Texas Constitution Article 16, §50, (a) which allows

(3) an owelty of partition imposed against the entirety of the property by a court order or by a written agreement of the parties to the partition, including a debt of one spouse in favor of the other spouse resulting from a division or an award of a family homestead in a divorce proceeding;

I hope to clarify what may be somewhat unclear and mysterious about the Owelty lien.

 

This “Owelty of Partition” performs two very important functions:

1.    It secures the interest of the grantor in the awarding of a family homestead. This is the same way a lender secures its interest in a property when it advances money for its purchase or refinance (which is a renewal and extension of the “purchase money”). Lenders secure their interest with a Deed of Trust. The divorce settlement secures the grantor’s interest with a deed as well; a Special Warranty Deed with Encumbrance for Owelty of Partition, to be specific.

2.    Most importantly for our purposes, it allows the financing of that lien to be performed without relying on the restrictive and, sometimes, disqualifying features of the Texas Home Equity loan. In other words, for a qualified borrower, it allows us to TURN WHITE PAPER INTO GREEN MONEY.

This finance-ability of the grantor’s interest is critical in Texas because of the equity financing laws. (More on that next week). It’s critical in all other 49 states as well but even more so in Texas. In 49 states, Fannie Mae and Freddie Mac underwriting guidelines set the maximum LTV (Loan To Value) ratio at 85% when “cashing out.” State laws do not regulate equity financing in these states – as I said, underwriting guidelines do. Texas is different. The maximum LTV ratio is set by law at 80%.

Now, Fannie and Freddie may raise their maximum LTV ratio (in cash out transactions) to 90%. In fact, until just after the financial meltdown of 2008, Fannie’s max LTV for cash outs was 90%. But, state laws do not address these matters. The market and consequent underwriting standards govern these matters.

Here’s the kicker. Owelty financing is not “cash out” financing. The maximum LTV ratio is not set by state law in such a case. It is controlled by the market and underwriting standards. And that standard for LTV maximums is 95%. This means that a borrower can access 15% more of their home’s value if they avoid “cashing out” and, wisely, employ the Owelty lien for the buyout to their ex-spouse.

There are other favorable elements to Owelty financing which do not exist in equity or cash-out financing. I will discuss these in the coming articles.