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.

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