Owelties and Mediation #2
How To Structure Buyouts in a Divorce Mediation
I need to re-state the punchline from last week even though you can read the short article right here.
When negotiating – in mediation or in any binding agreement - a buyout of a spouse’s interest in the marital residence, use the phrase “NET BUYOUT” rather than the word Owelty lien.
Of course, I understand that I have to lay out a case and give my rationale if I propose to address lawyers. Before I do, let me remind you that my specialty is
Turning White Paper Into Green Money
I am not an attorney and I do not purport to instruct the legal community on substantive issues of law...only insofar as those issues have an impact upon financing and financing affects legal issues. Moreover, before I comment on legal issues or make any prescription, I consult with up to three batteries of attorneys - 1) the legal department at my mortgage bank, 2) our title underwriters and 3) our Texas doc prep/review attorneys. I approach this part of my career with fear and trembling and high regard for those of you in law.
Why, you might ask, would I recommend that “net buyout” language be used in a binding agreement rather than Owelty Lien to specify the buyout of a spouse’s interest; isn’t the Owelty for the purpose of partitioning property and buying out that interest?
The answer to that question is the same answer to this question: Why would I recommend that the actual Owelty lien amount exceed the agreed buyout amount?
Let me explain. And, please keep in mind that I could well be the only mortgage financier in Texas (and maybe the country) who does this. Most everyone else in the mortgage industry will say that it’s not possible or they gasp in amazement when I explain it to them. I’m not a genius – I just push back when others say “no” and I ask “why not?”
In at least one half of my files wherein there is a financed buyout (presumably an Owelty lien), I recommend that the actual and final Owelty lien exceed the net buyout so as to provide for the payoff of debts or other needs for my borrower. In most of the cases, without such a structure, my borrower would not qualify for the mortgage loan. In virtually all of such cases, the borrower is dramatically better off in terms of monthly budget and cash requirements after such financing than they are before such financing or without it.
Now, it’s critical to understand that if a borrower simply borrows (or tries to borrow and usually cannot) the extra money to pay off debts or to simply gain cash, such a loan triggers equity financing restrictions. In Texas, the law limits such financing to 80% of the home’s new appraised value. In the other 49 states, the limit is currently the same; only it’s an industry limitation not a legal one. And, the new classification of such a loan affects future (re)financing of that loan in perpetuity. So, it’s a significant limitation. Other loans (“purchase money” transactions, “rate and term” refinances, AND THE FINANCING OF AN OWELTY LIEN) do not trigger equity financing laws and limitations.
So, the ability to “roll in” funds which may be needed to satisfy debts, etc. is very dramatic. Industry limits on such financing go to at least 95% of the home’s value (conventional), 97.75% in FHA and 100% in V.A. loans. That means that divorcing borrowers can access 15-20% more of their home’s value than equity financing allows.
Let me illustrate with one of the examples I promised. We shall call the husband Allan and the wife Debra, not their real names. Husband was represented by one of the most prestigious family law firms in Texas. Wife was not represented. There was a mediator.
Wife was to receive $17,500 for her interest in the property. That was the agreement and it was enshrined in a 24 page MSA.
The problem came with the husband’s financing. I recommended that the Owelty be established at $40,000 and be disbursed thusly:
Capital One Bank USA 2,000.00
Capital One Bank USA 5,800.00
Trust Account, Attorney 8,800.00
TOTAL OWELTY LIEN 40,000.00
The extra $22,500 would have cost the borrower an additional $110/month in mortgage payments but would have eliminated at least $650/month in consumer debt payments. Moreover, this particular structure of the Owelty buyout would have allowed the borrower to qualify for the loan with lower debt ratios. As it stood, not only would the borrower not qualify for the loan, he could not have accessed the extra cash he needed to satisfy debts, pay his attorney; and, he was left with higher monthly bills/payments, nudging him ever closer to financial difficulty post-divorce.
Husband was awarded the marital residence by the following language:
One-hundred (100%) interest in the real property located at [common address] including but not limited to….and title and closing documents.”
That’s it. Not “subject to an Owelty lien” or anything beyond that under “Property Awarded to Husband.”
Then under “Property Awarded to Wife” she is awarded $17,500 payable by Husband to Wife within 60 days following entry of the Final Decree of Divorce by the Court via owelty lien, in order to effectuate the division of the marital estate.”
This is a small but important aside. First of all, an MSA cannot create an Owelty. Secondly, if it could have created an Owelty, it did not in this case. This language, as transferred verbatim into the decree – AS THE ATTORNEY ASSURED ME THE STICKLER OF A JUDGE INSISTED THAT IT SHOULD – would still not have created an Owelty. It is something that I probably could have fixed, even after final entry. But, it would have had to be fixed – the Owelty was not created.
For those of you who have attended my course on The Proper Use of the Owelty Agreement and Lien, you may recall that I say “One can create an Owelty in a decree without using the term ‘Owelty’ and one can use the term ‘Owelty’ throughout and still not create an Owelty lien.” This is just such a case.
There are a few problems with this language especially as it was transferred to a decree. An Owelty is not for interest in the “marital estate” which can include numerous items or properties. It is only for interest in a homesteaded property, one property. As well, an Owelty is not legally established until it is tied to a legal description of the property.
This detail is very important because as the decree-drafting attorney insisted, the decree had to perfectly mirror the MSA, that the judge would allow nothing else. Unfortunately, the attorney also insisted that the MSA had created an Owelty lien of $17,500. I argued that my recommended construction of the Owelty ($40,000) accomplished exactly what the parties had agreed - $17,500 to the wife.
Moreover, I argued that the MSA did not specify an “Owelty lien of $17,500” but only “via Owelty lien.” The improper language, I felt, had actually left enough latitude in the settlement to create exactly what I was recommending.
No argument seemed to work. And, the attorneys (by this time, the managing attorney of the branch office had gotten involved) advised their client to have no further contact with me.
The client is now left with severely less manageable bills, over $500 more per month in payments to be exact; and, no financing for even the $17,500 buyout to wife (except possibly at very much worsened terms).
Lest we get far afield of the topic at hand, let me remind you that my recommendation – for buyouts to be cited in MSA’s as “net buyouts” rather than Owelty liens – will avert and avoid the sort of problem Allan and Debra encountered.
But – and here’s the big “but” – if the lawyers are not willing to allow the financier to recommend the actual and total Owelty amount but, rather, are stuck on the net buyout to spouse, even my advice will be fruitless.
However, at least, the framework for real solutions that actually help folks will be in place.
This can ONLY happen, though, if and when the divorce settlement is structured per my recommendations.
Hence, the need for proper language in mediation. In financing, I can depart from strict language in an MSA. But, most lawyers do not feel that they can. Actually, they can so long as they do not get stuck at “IRREVOCABLE.” Parties can agree to most anything they want – including NOT following through with the divorce and adjusting the Owelty amount stated in an MSA.
But, that’s for one of the next installments of this series.
Thanks for reading.