Thanks to all the attorneys who have helped refine and develop my materials on these Rule 11 Agreements. I never approached Rule 11 Agreements strictly from the legal perspective. Rather, they are a means to an end; specifically, they help us “get deals done” to put it plainly.
A Sample of a Rule 11 Agreement
Since I am not an attorney, I should be quick to preface that my customized, recommended Rule 11 Agreement a) is an outline of specific features of loan approval which the underwriting lender requires for loan approval, as pertains to a pending divorce and b) should be reviewed and edited by the attorney for proper “legal language.” We prefer that no other agreements be written into the particular Rule 11 Agreement that we are recommending other than what we specify? Why is this? Because we do not wish to confuse the underwriter with ancillary agreements that do not affect loan approval but which must be taken into consideration once the underwriter sees such agreements. Beyond factors like income, debt and assets, there are few other agreements that are necessary. But, each unnecessary feature of an agreement opens up the possibility that some additional “contingent liability” will be exposed. For example, at this moment underwriters do not count the multitude of children’s expenses (like medical expenses, health insurance, scouting, hobbies and sports and many others) against the supporting/paying parent’s debt ratios. However, this is most likely to change on January 1, 2014 when the CFPB’s enforcement of new (and still enigmatic) 4 Ability To Repay (ATR) rules go into effect. Even without these rules, given the current environment in lending, it’s only a matter of time until such stricter guidelines are applied.
In any case, one of our qualified Divorce-Lending Specialists will be able to specify exactly what needs to be included in the Rule 11 Agreement in order to make the mortgage loan approval work!
This sample contemplates that the wife, Jennifer, needs to purchase her own primary residence (the reasons are usually immaterial to the mortgage itself) but either Jennifer or her husband, John, does not want John to sign the Deed of Trust at closing (or any of the 5 or 6 other documents that non-purchasing spouses – really, non-borrowing spouses – are otherwise required to sign). (I do not wish to get bogged down here with explanations as to why lenders generally require spouses to sign Deeds of Trust and other documents at closing – I will cover this in a future article (and CLE-Accredited course) about real estate forms for family law attorneys).
This sample also assumes that Jennifer will have to rely on child and/or spousal support income to qualify for her loan and that she requires a certain amount of funds for down payment and reserves in order to qualify.
Comments and notes will be bracketed.
RULE 11 AGREEMENT
Pursuant to Divorce Cause No. 00-00000, Dallas County, Texas
RE: Purchase of 123 N. Main Street, Bogusville, TX, hereafter referred to as “property” or “the property.”
Parties: JOHN SMITH and JENNIFER SMITH
Agreement of Parties
1. Divorce. The parties have filed petition for divorce;
2. Property and Purchase.
a. The parties agree that Jennifer may purchase the aforementioned property.
b. There are no agreements in place that prohibit this transaction.
c. John agrees to take no interest in the property and will execute a Special Warranty Deed to that effect upon final divorce. [There is no need to state that Jennifer is purchasing “on her own.” John’s agreement to “take no interest” addresses that concern as far as title or deeds. The fact that Jennifer alone is applying for the loan and the fact that John will not sign a promissory note is what causes Jennifer to obtain the property (and its attending mortgage) “on her own.”]
3. Support Income/Payment.
a. John will pay child support in the amount of $1,500/month.
b. The children’s ages are 12 and 16 and support will continue until the standard time of emancipation.
c. When the oldest child is emancipated, John will pay child support in the amount of $1,250 until the youngest child’s emancipation. [Such information is important because the oldest child’s support income is not considered qualifying because it will not continue for 3 years or longer. See “Credit and Mortgage Qualifying Issues in Divorce” for detailed information on qualifyingincome.]
d. John will pay Spousal Support to Jennifer n the amount of $2,500/month for a period of no less than 3 years after final divorce or closing of Jennifer’s purchase of property.
e. All informal payments of support are considered as support for the purposes of mortgage qualifying. No payments to date shall be considered as mitigating future support payments as agreed.
4. Assets– [the idea is to clearly establish use of funds for “funds to close” and for reserves; these are two major factors in loan approvals. The Divorce-Lending Specialist will advise on the minimal need of such funds. Final division of assets does not necessarily need to be stated herein. However, the purchaser’s (Jennifer’s) full access to a minimal amount must be established.]
a. Jennifer shall be awarded 100% of the following accounts and shall have full use of funds in these accounts for purchasing the property.
i. Bank of America account no. 123456789
ii. Fidelity Investments account no. 987654321
iii. J. P. Morgan Chase Retirement account no. 192837465
b. John shall be awarded 100% of the following accounts.
i. Bank of Texas account no. XYZ
ii. Edward Jones Investments account no. ABC
iii. American Funds Retirement account no. MNOPQ-RSTUV
5. Assignment of Debts – [the idea here is to establish the maximum amount of debts that will be assigned to the purchaser (Jennifer).]
a. Jennifer shall be assigned the following debts
i. CITI Card account no. 4239 XXXX XXXX 5390
ii. FORD Motor Credit account no. XZ3098AG9999-063
iii. JC Penny account no. 999111555
b. John shall be assigned the following debts
i. CapOne account no. 5398 XXXX XXXX 1277
ii. TOYOTAL Motor Credit account no. AB2377XR99832
iii. Discover account no. 6011 XXXX XXXX 8302
[It is my opinion that Rule 11 Agreementsneed to be signed by the parties and the attorneys filed with the clerk of court; initially, I had advised that since they are contracts such filing is superfluous and unnecessary. Indeed, Fannie Mae guidelines seemed indifferent to any such requirement for filing and state that the attorneys’ signatures are sufficient. This is probably because they are written to a national audience, leaving state-specific rules to be applied by the attorneys who prepare the documents for closing. However, I have come to know – thanks to one of my fine readers – that the Rule 11 Agreement is not enforceable as a contract unless it is signed by the parties and filed with the court.]
S. SMART, ATTORNEY FOR JOHN SMITH DATE
D. CRAFT, ATTORNEY FOR JENNIFER SMITH DATE
From a legal perspective, you already know that many issues can be addressed in a Rule 11 Agreement. However, the preceding example addresses ONLY those issues that are pertinent to mortgage transaction. This is why I draft the initial agreement – I know what the underwriters (lenders and title insurance) need to see and what I do not want them to see. Any superfluous information superfluous to the mortgage / real estate transaction will only potentially “open and can of worms.” Moreover, guidelines and policies change. So, any template will be in constant need of revision. Just one more reason that you and your clients need a Divorce-Lending Specialist in many of your cases.
There is an important P.S. to the entire series on Rule 11 Agreements. It involves the requirement that a non-purchasing spouse (NPS) sign the Deed of Trust (and a few ancillary documents) at closing in a refinance transaction on a primary residence (homestead property). For now, let’s not dwell on the very real possibility that homesteaded properties can be partitioned during marriage and thus, separate property created without the need for a spouse to engage any enjoinder. The reality is that, it may be some time before lenders are willing to entertain such transactions.
Remember that attorney Kelly Bierig confirmed that in refinance transactions, the title company will require enjoinder of spouse and the signature of the NPS on the Deed of Trust. The problem with this exercise – and the reason for the P.S. – is that Deeds of Trust in Texas universally refer to the spouse (as well as the true borrower) as “borrowers.” Not pro forma. But, straight up (as the kids say) “borrowers.” Lenders will not change the wording on their documents to suit any nuance in a transaction. Perhaps the time will come when they will consider this. But, for now, no dice.
So, how do we understand and explain the strange reference to a non-purchasing spouse as a borrower in the Deed of Trust when no such borrowing/lending, in fact is taking place. Remember, the joining spouse is not signing the promissory note and has not even completed a loan application.
The Deed of Trust refers to all signatories as “borrowers” because the idea behind a Deed of Trust is that the grantors (homeowners) recognize that any claim they have to the property is subject to the promissory note (filed as a lien) against it. That is, a person with interest in the property cannot simply appeal to that interest as proof of ownership free and clear. If there is an unpaid balance on the mortgage, the lender’s interest is superior and must be satisfied. The Deed of Trust allows the lender to tell such a claimant, “that’s fine – you are vested on title to the house; now, all you have to do is abide by the terms of the loan if you wish to live in it.”
Thus, if a NPS never makes a claim to the property, they are never in the position of being a borrower with an obligation to repay the debt.
Call or write me with comments or questions.
We interrupt this broadcast to bring you a special announcement...
Between the 2nd and 3rd installments of the series on Rule 11 Agreements, I thought it would be interesting to publish a few questions that came from attorneys on article #1 and the responses from a title attorney.
Question: I was always under the impression that the reason a mortgage company desired a spouses signature on a deed of trust, usually appropriately labeled as "pro forma," was to secure the deed of trust to be able to foreclose against the spouse who was not a party to the original sale deed and not a party to the mortgage note. In other words, one of the main purposes of the deed of trust is to get around homestead laws in Texas and be able to foreclose against both spouses either during the marriage or after dissolution.
Kelly Bierig: The purpose of a Deed of Trust security instrument is not to "get around" homestead laws. The Texas Constitution (Article 16, Section 50(a)) describes which types of loans are valid against a borrower's homestead. The Texas Family Code Section 5.001 also states that joinder of a spouse is necessary when the property is homestead.
With regard to purchases, Skelton v. Washington Mutual Bank is very clear that the purchase money will have priority over any homestead interest which could be claimed by the non-signing spouse.
There's even less risk when dealing with a borrower who is in the process of obtaining a divorce, since it's very likely that the divorce will be final prior to any foreclosure proceedings being initiated. I don't believe that there's any instance wherein I would refuse to insure a transaction because one spouse in the middle of a divorce was purchasing property, and the other spouse will not be joining on the security instrument. As long as there is no construction or cash back to the borrower, the risk is non-existent.
Question 2: Why would a mortgage company give up the protections of a deed of trust as to the rights of the non-purchasing spouse?
Kelly Bierig: I don't believe the mortgage company is giving up any rights. The security instrument has priority over any homestead interest the non-purchasing spouse could possibly claim, and there's an almost 100% certainty that the NPS (Non-Purchasing Spouse) will no longer be around by the time a foreclosure proceeding has been initiated. Most importantly, as long as the title insurer is willing to issue a Loan Policy which does not except to this issued, then the lender is covered under the policy if the foreclosure is challenged for this reason. The lender will never be in a position to suffer a loss.
Question 3: How does a Rule 11 Agreement enable the lender to enforce foreclosure if the non-signing spouse declares the property a homestead?
Kelly Bierig: Again, I still doubt this will ever be a problem, but the Rule 11 Agreement would act as an estoppel. In the above-referenced case, the borrower was not in the process of divorce. In order for this NPS to even claim an interest in the property, the divorce would have to be dismissed, and then the NPS would be subject to established case law and the Rule 11 Agreement.
On the other hand, if the proposed loan is a refinance or home equity, then they either need to wait until the divorce is final or require both spouses to join in the transaction.