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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.
Special thanks to attorney Kelly Bierig, with Alliant National Title Insurance Company for his answers.
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.