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

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.

Why I Preview Drafts of the Divorce Decree - Part II

This Is Why It Is Important For Me To Preview Drafts of the Divorce Decree

Last week, I discussed why every word in a borrower’s decree is read, reviewed and underwritten. The assignment of debt was the key illustration and element in the first reason why I PRE-underwrite (review prior to finalization of divorce) drafts of divorce decrees. Too much debt assignment can disqualify a potential borrower and trigger a loan denial – no matter what appears on their credit report.

Here’s a second reason I preview divorce decrees:

A decree provides underwrite-able data for loan approvals. Here’s one example of “underwrite-able data.”

Qualifying Income

Forgetting the relaxed underwriting standards of the late 1990’s through 2008, it is a nearly universal axiom that lenders must judge the risk level of a loan by a set of fixed parameters – namely: credit patterns, the collateral-property (especially the LTV or Loan To Value ratio), assets, debts and income.

Of paramount importance in this matrix is the borrower’s income; specifically, their debt/income ratio.

But, there is more than the immediately measurable income. For example, an applicant may be making $5,000 per month but she may, in fact, be self-employed as a contract laborer with only a few months remaining on the contract. Or, an entrepreneur may be making $25,000 per month in his new business but have very little experience in running his own enterprise. How prudent would it be for a lender not to consider these factors in their lending decision? This judgment is a measure of “income stability.” In other words, how likely is it that the income will continue? The loan, after all, is for a long period of time – up to 30 years – during which the lender must receive consistent installment payments.

So, what does the lender seek in terms of income stability? For how long might a lender seek to assure that their borrower will receive enough income to make these payments? For whatever reason, 3 years of continued income (whether by employment or by whatever means) is the standard underwrite-able expectation.

Here’s the problem. Only one person knows the future and He usually doesn’t spell it out in readily discernable, layman’s language. And, as everyone knows, mortgage lenders work for the devil so God isn’t inclined to tell them much anyway.

Seriously, lenders only have a few methods of predicting the likelihood of continued income. One is past performance. The metric for that is 2 years’ experience in the same line of work. There is another metric for child support and alimony which I discuss below. Another measurement is the employer’s statement.  But, employers are rarely willing to make such statements for obvious reasons. The Fannie Mae form – Verification of Employment – still has a section that asks “Probability of Continued Employment?” Most employers leave it blank or enter “Does not comment.” And a lender cannot force a commitment one way or the other from an employer.

There is one instance wherein the lender can predict – very accurately – the likelihood of continuance of income: Divorce. Think about it. A divorce decree tells a lender exactly how long support is ordered to continue….to the day, month and year.

So that we don’t get lost in nuances of underwriting standards – snooze time – let’s review. I PRE-underwrite divorce decrees because they reveal to the lender exactly how long support income will continue and, therefore, how much of that income is considered “qualifying” for loan approval purposes.

I said that there was a different metric for “past performance” when it comes to child or spousal support. When it comes to employment, the look-back is 2 years. But, when documenting support income, the requirement is only 3 months (for FHA financing) or 6 months (for conventional financing).

Here’s an example of how PRE-underwriting can save the day for a divorcing borrower.

Jane had documented receipt of child support (for her 10, 12 and 14 year old children) for the required 6 months. We planned to close the loan in July. Her 14 year old would turn 15 in June and was currently in the 9^th grade. As is usually the case, when the oldest child turns 18 or graduates from high school, support for the remaining two children drop (in this case from $2250/month to $1725/month as an example only). She had planned on qualifying with $2250/month; but, because of the three year continuance can only use the $1725/month as qualifying income.

We advised that support continue at the higher amount for an additional 2 months (a difference of only $1050) and that accommodations be made to adjust for the difference in the division of assets. The paying husband/father just agreed to do it in order to help the wife/mother qualify so not adjustments had to be made. The point is that these minor adjustments could be made and that they made all the difference between qualifying for a mortgage and not.

This happened only because 1) we knew how to apply the rules for qualifying income and 2) we previewed the decree, offering suggestions for minor but NOT substantial changes in the settlement.

Such a solution cannot occur when divorcing clients do what virtually all mortgage lenders tell them to do – “get your divorce, bring us the decree and let’s see what we can do.”

My friends, that method is a formula for disasters and loan denials. There is a better way. That’s what I do.

Thanks for reading.

Noel Cookman

817-454-4555

noel@themortgageinstitute.com

Why I Preview Drafts of the Divorce Decree - I

Why I Preview Drafts of the Divorce Decree

Part I

 

In my Assessment/Approval – my report to you about a client’s qualifications and conditions for mortgage financing – I always include the following paragraph in red

URGENT and CRITICAL

Please copy us on drafts of the decree before they are executed by the parties. We will pre-underwrite this draft to assure a smooth transaction. Pertinently, divorce decrees are universally underwritten as part of a loan file for any applicant who has been divorced. In any case, the client’s decree will most certainly be underwritten in this instance. ‘Tis better to pre-underwrite than to be caught by surprise.

The paragraph provides a brief explanation as to why I want to review the decree before its execution. And I will discuss other reasons and benefits to a divorcing borrower (immediately or in the future) in future newsletters on the subject.

The major reason I need to preview the divorce decree – and a lot of folks do not know this – is because an underwriter will read every word of it. Not only will the underwriter review it but he/she will consider everything in it as relative to the loan file.

Here’s a good example. A divorcing husband purchased a car for his soon-to-be ex-wife in his own name and credit – NOT using her name/credit to obtain the loan. In their thinking, this would help the wife qualify to refinance the mortgage in her own name, the debt not showing on her credit report. (The liability, obviously, did not appear on our borrower’s credit report). But, the proposed divorce decree assigned the debt to wife.

When I discussed this with the husband – and why the wife might not qualify with that extra debt – he eventually understood but initially had a difficult time comprehending that a debt which does not appear on a credit report still counts against the borrower.

You see, in every other situation – in normal circumstances – the only way to know what debts must be counted against the all-important debt ratio is for the lender to examine the borrower’s credit report. This couple thought they could “game the system” by simply getting a loan in the other’s name, thereby exempting it from the borrower’s credit report.

This is a major reason lenders require the entire, conformed divorce decree when underwriting a file – the detection of all debts.

And this is why I preview or PRE-underwrite the decree before its execution. As you know, I will have already been processing the loan for the client – way before every other lender wants to even take an application.

And this, my friends, is how we assure successful closings – we do not throw things to the wind and hope for the best. We give the entire settlement meticulous review and make recommendations accordingly.

Thanks for reading.

 

Noel Cookman

817-454-4555

noel@themortgageinstitute.com

What Is An Assessment in a Divorce Settlement?

One of the greatest values you can give your divorcing clients is a set of tools to implement their settlement and agreements.

Think of it this way – if your client (or opposing) is ordered to refinance the recently-awarded marital residence and include a buyout to their former spouse, how beneficial would it be if everyone in the process (clients, attorneys, the court/mediator, children) knew, in advance, that this would actually happen? What if you knew – BEFORE FINAL DIVORCE – that they could actually turn white paper (decree) into green money (buyouts, payoffs)?

Well, there’s a way to achieve that. That’s what my Assessment tells you.

In as concise a form as possible – usually less than two pages – my Assessment

1.       analyzes the situation,

2.       offers brief explanations of how mortgage finance affects the settlement (and vice versa) and

3.       makes clear recommendations for decree language and settlements.

As a note to #3, I adhere to the principle of non-interference. That is, I do not see my role as trying to affect terms of the settlement. I strongly believe that this is between the parties and their attorneys. My concern is to accommodate, as much as possible, the agreements that are contemplated. However, certain features of a settlement will either allow or disallow loan approval. Therefore, some tweaking is sometimes called for.

Here’s an example. A wife wishes to be awarded the marital residence under the proviso that she refinance its mortgage and, thus, relieve the husband of its credit liability. She needs support income to qualify for this mortgage. The wife tells me that spousal support is contemplated at $2,000 per month for two years. Well, one of the mortgage rules is that such income must continue for 3 or more years after loan closing. So I ask, “can you live with $1,333 per month for 3 years?” If so, all $1,333/month is qualifying income while $0 of the $2,000/month could be counted as her qualifying income (because it does not extend for 3 years or more after loan closing). There are usually a few other adjustments to be made but that’s the general idea.

Thus, I have not affected the actual dollar amount that is to be paid/received; I have simply recommended that it be structured in such a way as to allow the client to get financing. And, incidentally, the payer benefits as well when he needs financing – instead of $2,000/month counting against his debt ratio, now only $1,333 counts against it. It’s almost always a win-win.

Also, I have to advise regarding (what I call) limits to financing. That is, while I never tell a party “you should get this much or they should pay this much,” I do have to say one of two things

-          “It will take this many dollars to qualify” or

-          “For that amount of support, your loan amount cannot exceed $X.”

This is all in a concise Assessment. And by the way, the Assessment is as fluid as a divorce settlement process is. That is, it requires updating and refinement. This is because everything about a divorce settlement affects loan approval. That means I have to update the Assessment.

Here’s how you get my dynamic, award-winning, stupendous (well, pretty important anyway) Assessment for your case: Tell your client to call me. Or ask opposing to have their client call me. The one who needs financing (whether refinancing or purchasing in the foreseeable future) needs to make that call.

“Hi Noel; my attorney gave me your number” is the beginning of a dramatically and substantially better settlement with the advantage of my Assessment about

TURNING WHITE PAPER INTO GREEN MONEY!

 

Noel Cookman

817-454-4555

noel@themortgageinstitute.com