Here is an email I received from a family law attorney last week. She succinctly stated the particulars of a case and then generalized the questions - perfect for a format like this. It deals with what some people are calling Qualified Assumptions (QA's).
I hope you are doing well.
I had an old client contact me with an interesting request and I’m hoping you can educate me (if you don’t mind, of course). In the divorce last year, husband was awarded the house & we execute the usual Special Warranty Deed and Deed of Trust to Secure Assumption for him to pay the mortgage. He did not refinance and wasn’t required to under the Decree.
The wife contacted him because she wants to buy a house. They ran her credit report and found her name on the mortgage of the marital residence, so they told her she would not qualify for a loan on the residence she wants to purchase. The husband contacted his mortgage lender, and they are allowing him to do a “Qualified Assumption” to remove wife’s name on the note without a refinance. The way he explained it to me, he basically has to qualify for the mortgage by himself, pay a fee of about $1,000, and the lender will remove her name from the mortgage so that it will clear the wife’s credit report.
In the past I knew that a mortgage company could sign a Release of Lien on a mortgage for a co-borrower, but in our experience, most mortgage companies won’t sign one, and the Courts will not order a Release of Lien because they cannot obligate a third party to waive their rights. This is the first we have heard of a Qualified Assumption and this type of relief being available in a divorce matter. Historically, we have counseled our clients that the only way to remove a person’s name from the mortgage is via a refinance.
Is there any information you can give to us about Qualified Assumptions? Is this new relief available to borrowers under the changed lending laws? Are QA’s common? Is this an option with all mortgage companies? Is this something that we can begin to offer to our clients as an alternative to refinance? Can we draft closing documents and/or Order language with regard to Qualified Assumptions? I’d appreciate any guidance you can provide us.
Thank you so much.
Attorney at Law
Dear Attorney Friend,
This is an excellent and timely question.
I have a complete response to the question about “Qualified Assumptions.” But the most pressing issue is the ex-spouse who now is told she cannot purchase a house because of this liability. She is being denied, not because of this liability but, because she is not working with me. Everything else being equal, she can qualify to purchase on her own with a couple of simple things: 1) the decree, 2) the ex-husband’s cooperation to provide documentation of pay history. But, this is a transaction that must be wisely packaged and submitted – something we have been doing with regularity and success for over a decade now. The quickest resolution is for this client to call me at 817-454-4555 or email me at email@example.com.
Now, to your questions about "qualified assumptions":
Q: Is there any information you can give to us about Qualified Assumptions?
A: Not much because of reasons that will be obvious below. But, I do hope to clarify some things for you and all concerned.
Q: Is this new relief available to borrowers under the changed lending laws?
A: No. “Qualified Assumption” is the name that this bank (in question) has given to some process or program that they might have. But, we do not know as it is highly unlikely that even this bank publishes information on this program. If they did, we might grant the idea more credibility. As it is, my experience is that banks (especially the big ones that employ call-center reps to handle mortgage applications) will use any term the caller uses. If the caller says “can you modify my mortgage” the employee will say “sure, let me get some information.” If the caller says “can I get my ex-wife off the mortgage by assuming it as my own debt” the employee will say “sure, let me get some information.” In fact, the bank is taking an application to refinance the mortgage. They want to keep the customer but they effectively have to make sure that the remaining borrower is “qualified.”
Q: Are QA’s common?
A: No. But again, Qualified Assumptions are not government-prescribed programs – although the name is similar to phrases bandied about.
For example, Qualified Residential Mortgage (QRM) is a regulation term currently promised (i.e., threatened) under Dodd-Frank that refers to underwriting/qualifying standards. But, as Romney pointed out in the debate (October 3), the government still hasn’t defined a QRM although the threat of not adhering to these yet-to-be written standards looms over our collective head. An older type of mortgage(s) is the “assumable” often designated as either a “Non-Qualifying Assumable” or a “Qualifying Assumable.” These were mostly FHA (government insured) mortgages and VA loans but have gone the way of rotary dial phones. Although the contrary might seem to be obvious, the government is effectively creating “non-qualifying” programs but that’s another issue and doesn’t apply here.
Neither are QA’s industry-prescribed programs. There is no product that we know of that is characterized as a Qualifying Assumption. However, keep in mind that each bank can create programs and lend according to their own standards so long as they do it within the law and do not care whether that loan is salable to Fannie Mae, Freddie Mac or insurable by HUD or guaranteed by the VA. With respect to this fact, I cannot say that a QA does not exist, only that if they do, they are out of my sight line and probably rare.
Q: Is this an option with all mortgage companies?
No. It’s not an option with hardly any of them, maybe none of them. We have heard about a few of them but have actually seen none of them.
Q: Is this something that we can begin to offer to our clients as an alternative to refinance?
A: I hope the answer is obvious. But, offering such an alternative, even in theory, I believe would be disastrous. I see the effects of these misunderstandings all the time in my work. But consider this: Even in seemingly standard cases, only a qualified mortgage professional – really a Divorce-Mortgage Specialist in these cases – can qualify or disqualify a potential borrower. And even this professional must do diligence in order to provide such a statement of approval or denial. No amount of other parties or professionals or judges or attorneys, whether in court or in mediation or in collaboration or in settlement meetings, can make these sorts of determinations even in instances wherein it appears a borrower might be well qualified. This is why I do what I do.
Q: Can we draft closing documents and/or Order language with regard to Qualified Assumptions?
A: I certainly would not tell an attorney what she can do in regards to drafting legal documents. And I am not even close to your level of intelligence and expertise. If the time ever came when banks were issuing statements of “Qualified Assumption” approvals, I recommend that you analyze them carefully and craft agreements based only upon the strongest of commitments from these banks. As well, please call me and let me analyze these statements.
What I do as a matter of practice is take an application from a divorcing client, qualify them based on standard and special conditions, report to you, the attorney, in an Assessment/Approval these special conditions, review drafts of the decree making suggestions and follow through during the process of divorce to assure that when the decree is entered, the client-borrower will always be able to close their loan, our having already underwritten and approved it.
To expect this from a bank who claims to be transacting a “Qualified Assumption” is probably unrealistic. But, I’m all for exploring uncharted territories.
All of the above notwithstanding, I do think that there are banks that, for a fee, offer a version of this “Qualified Assumption” whereby a borrower’s name is “removed” from the note by the remaining borrower qualifying with his/her own income and assets and other qualifying features. However, a few things bother me about this:
First of all, how does the former borrower know that the lender has truly released him/her from the mortgage liability? The lender cannot send them a “paid” status on the mortgage. Even if the lender sends them a letter that says they are no longer liable – and I seriously doubt this happens without the remaining borrower actually refinancing the existing mortgage . . . in which case, the “ex” borrower would receive the “paid” status letter – the allegedly former borrower needs to understand that the lender still has their Social Security number (and can report pay histories to credit bureaus against that name and SS number) and a promissory note with their signature on it that promises to repay the debt. Nothing but full repayment of that debt releases any person who has signed that note.
Secondly, unless the note is actually being refinanced, what new deed is filed? How does the deed change? How can it be replaced? A lender can more easily change the note (to the benefit of the borrower) than it can meddle with the deed. Special Warranty Deeds do not change names on the original Deed of Trust. And of course, they never alleviate a party of a credit obligation.
Thirdly, the lien cannot be truly released (without full payment); else, the lender has no security on their collateral property. If the lien is not released, from the perspective of the borrower who is seeking the removal of this liability, it is always a contingent and real liability.
Fourthly, and this goes to motivation, why would a lender do this? They will do it for one reason only – preserving their own interests. This is a good motivation as it drives our free market and capitalism itself. But, we must wonder what a lender is up to if they actually release one half of the source of payment from the obligation. Banks make a little bit of money by upfront fees, etc. Their real money is made by collecting interest payments over a longer period of time. To endanger this income flow is contrary to a sound business model. The prospects of losing the loan may outweigh the lender’s concern about losing one of its borrower’s promises of repayment. However, if the loan is likely to be lost, as in lost to another refinancing lender, then there is usually more incentive for the borrower to refinance (possibly to a lower interest rate) than to simply “assume” sole liability for a fee.
Speaking of assumptions, unless and until either the mortgage industry or the government (God forbid) produces a product called a "Qualified Assumption," it is unwise to assume that such a program exists or that some bank can be convinced to remove an obligated borrower with a few strokes of a pen. And if that happens, guidelines will be published so that upon them we can "hang our hat."
A truly "qualified" product is a refinancing of the mortgage note.