I still see confusion about the Owelty agreement and lien. It shows up from time to time in the decree and in the creation of the related real estate documents. I’m going to do a short series on how to properly create these document. Those docs are:
The Divorce Decree
The Owelty Deed of Trust
The Special Warranty Deed with Encumbrance for Owelty of Partition
The Owelty Real Estate Lien Note
The Release of Owelty Lien
The Proceeds Allocation Letter
The Check Written to You ?
Here is what these documents do (in terms of creating an Owelty interest); First,
The Divorce Decree. This can be slightly confusing; but, in my view, it’s easiest to understand it this way: the authority for creating an Owelty interest is most clearly established in the Agreed Final Decree of Divorce. The Owelty can be created in a Judgment (or Default Judgment); but, there are delays in financing (like the 30 days after final entry of decree). And, as you will see, there are other ways to create an Owelty. So, I say “most clearly” because there are several nuances to the creation of an Owelty that do not include its being created in the decree. Those variations include:
- In theory, when no Owelty is created in the decree but the two parties agree on an Owelty some time after entry of final decree. Obviously, requires cooperation of the two divorced parties. I’ve actually navigated this many times. It’s amazing what can happen when two parties agree and one or both have a financial interest at stake. “Here ma’am, sign here and you can have this check for $40,000.”
- In theory, when an Owelty is improperly created in the decree. It might be unclear or implied or stated at an amount which I will advise must change (for the purposes of using my “secret sauce” in financing). In effect, a finance-able Owelty will not have been created. Again, in order to rectify the situation, both parties will have to agree.
Further nuances. If a spouse’s interest has already been conveyed – by the filing of a Special Warranty Deed – it becomes very difficult (nearly impossible) for the Owelty interest to be created, even by agreement. I am in the middle of one doing one loan right now wherein the Special Warranty Deed has been filed and there was no clear creation of an Owelty in the decree. However, there was an implication that an Owelty interest existed.
The decree read:
Refinance of Marital Residence
The parties agree, and IT IS ORDERED, that husband shall refinance the promissory note executed by husband and wife for the marital residence located at 123 S. Main Street, Anywhere, USA to remove wife from any liability for the properly, within ninety (90) days following the entry of this Agreed Final Decree of Divorce.
Within thirty (30) days following the refinance of the marital residence as described hereinabove, husband shall pay to wife the sum of seventy-five thousand dollars and zero cents ($75,000.00). Such payment shall be made by check, cashier’s check, money order, or bank transfer.
[Emphasis mine; “husband” and “wife” substituted for real names; faux address used]
Here is exactly what the title attorney said after reviewing the decree and responding to my appeal to see an Owelty in the settlement and, most importantly, to view that the wife’s interest had been improperly conveyed (by mistake or misunderstanding or whatever) and can now properly be conveyed through a CORRECTED Special Warranty Deed with Encumbrance for Owelty of Partition:
Our UW [Underwriter] says that because the court implied an Owelty lien on page 5 of the, a correction WD [Warranty Deed] to document this implied Owelty from the DD could be prepared (as long as that specific language is in the deed regarding the implied Owelty lien). It would have to be signed by both the Grantor and Grantee.
So once that would be corrected then we could go with Owelty lien mentioned in the WD and that would allow us to refinance so ex-wife could be paid off.
Did you get that – “implied Owelty.” That’s fantastic. It has allowed me to fix up what decrees messed up by not properly creating the Owelty in the decree.
Still, it must be said that the authority for creating an Owelty interest is most clearly established in the Agreed Final Decree of Divorce.
Why? Two major reasons:
1) To effectively create the Owelty afterwards (separate from the decree) would require that two DIVORCED persons agree on something. Sometimes that works; but, why in in Sam Hill would you count on it;
2) If it’s created in the decree – especially if I have reviewed and given the “thumbs up,” then it’s safe to say that the Owelty is finance-able…which is the real test as to whether the Owelty exists.
Remember, I am not writing as a lawyer but, rather, as a financier. I have to turn your white paper into green money. So, the proper creation of an Owelty has to do with the way which lenders and title insurers view it. That is, one can argue about the legal language or procedural issues in the creation of an Owelty – and certainly a court case at high levels (appellate, Supreme) will have a direct impact on how lenders and title insurers view the Owelty – but, when it comes to actually financing and paying grantees for their interest in a marital residence, the money guys decide what is and what ain’t. (Pardon my slang).
Until recently, I’ve written virtually all of my articles and blogs with the Texas Family Law Attorney in mind. Now, I am writing to California attorneys and a larger audience nationwide. The principle is the same – “some legal document” is the standard for most underwriting engines (Fannie Mae, Freddie Mac, HUD for FHA and V. A.). So, whether this interest is created in a decree or a property settlement or separation agreement, such documents suffice for creating an interest payable to the departing ex-spouse.
Moreover, Texas is possibly the only state the allows the creation of an actual lien against the homestead property for the express purpose of Owelty interest most commonly used in divorce buyouts. [SECTION 50(a)(6), ARTICLE XVI, TEXAS CONSTITUTION.] The point here is that, in virtually all other states or all other applications, the ex-spouse’s interest in a marital residence acts like a lien on the property. That is, the property cannot be transacted (refinanced or sold) without satisfying that lien or interest.
As always, the key to understand divorce buyouts is simple…and, here it is.
CALL or WRITE ME
Next: Owelty Documents Tool Kit #2 – The Owelty Deed of Trust