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