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.