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

817-454-4555

noel@themortgageinstitute.com

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.

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 21^st 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
817-454-4555
noel@themortgageinstitute.com

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:

http://www.nytimes.com/2011/04/10/realestate/10mortgages-refinancing-divorce.html?_r=0

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

817-454-4555