Settling home ownership in a divorce – When one party refuses to let the other party “have the house”

I’ve had a rash of cases lately with the same elements.

One party did not want the other party to have the house – they “put their foot down” and said “no way” – so the court or mediator said “sell it.” The mediator or judge or attorney also agreed that one party could, then, purchase the property from the other party once the property was listed for sale.

Sorry. It can’t be done – at least it cannot be done according to the technical parameters of the MSA or order. And, you know how the court can be about technicalities.

First of all and normally, if two people own a house, one cannot tell the other that they will or will not sell. Both of them own the property and they both have to agree on the terms of sale. Both signatures are required at a traditional closing – the warranty deed to the new owners among a few other documents must be signed by all owners.

Of course, that’s where court-appointed receivers come in. Agreement of parties is no longer required. In other words, the court has to violate normal terms of free commerce in order to get the property sold. It allows its appointee to sign legally binding contracts and closing documents for the sale.

But, what if one of the parties wants the house, can afford it and can refinance the mortgage (so as to remove the other party from its liability) and can produce money for a buyout of their spouse’s interest in the property?

The philosophical question is “how can the court logically prevent a qualified party from continuing to own a property for which they can provide adequate financing and maintenance?”

In other words, by what reasonable principle does the court snatch a property away from a qualified party-owner and, effectively, place it with any member of society other than one of the two parties in a divorce?

I understand the conundrum and will provide a simple answer – both logically philosophical and practically technical – herein. Just keep reading.

For now, I just want you to ponder the inequity of the case wherein one party can qualify to “keep the house” but the other party says “no.” By what law of property rights or contracts or sanctions against “legal plunder” (about which Bastiat opined) does a court refuse the qualified party?

The courts and mediators of late have been resolving this conundrum by ruling that the property be listed for sale and that either of the parties can make an offer to purchase it from the other.

Before I provide a simple solution, consider these two important factors:

  1. A person may not purchase a property which they already own. They may refinance it. They may purchase a co-parcener’s interest in the property. But, it is not possible for them to purchase the property – they already own it.
  2. Moreover, per lending guidelines, if a person (the homeowner) applies for a mortgage loan while the subject property is listed for sale, the loan is not eligible for delivery to the agencies. That is to say, the loan application is DOA and auto-terminated. This includes the listing of a property for sale while a refinance application is being considered (processed, underwritten, cleared for close, etc.). Without committing fraud, there is no standard way to get a mortgage loan, using a purchase contract on a property wherein the borrower is the owner.

Before anyone complains about this mortgage lending guideline, one should consider what it’s like to be a lender. Contrary to bad myth, lenders are not trying to “take your house” through foreclosure.” There’s no “money in it,” it’s bad PR, and it’s more trouble than it’s worth. Lenders are structured to make money over time by collecting interest on loans they have made. They also sell loans to other investors but the value of owning a mortgage is the ability to collect payments over time – and that’s what they are selling to those investors.

Most people do not know that, for any loan we make which pays off (for example, by the homeowner selling their house or refinancing the debt with still another lender) before 6 payments are made, that investor will come back to us and reclaim all monies they paid for that loan. Boom – just like that, our profits and commissions (we call it our groceries and house payments) are gone. Why? Because, before they have had a chance to recoup their expenses and profits on the loan that was made, the lender finds itself back to “square one” with no more income (for profits) on that loan.

Put yourself in the lender’s shoes. You can’t afford to make loans if your income is turned off. Hence, they have contracts with most all originators which allows payments to be made for the originator (loan officer, branch mortgage office, lender) but which must be repaid if the loan turns out to shut off the lender-investor from receiving income (in the form of monthly mortgage payments) from the homeowner.

So, why the rule – that a lender will terminate a loan application if the house is listed for sale? Because the homeowner is signaling that they are going to sell that property and pay the mortgage off, cutting the lender off from its only source of income.

Again, lenders make money on mortgages by collecting payments over time. Listing a property for sale is the biggest signal a potential borrower can send that they will not be making those over-time payments.

These recent cases have twisted a transaction up “six ways to Sunday.” The standard ruling or agreement is that the property will be listed with a realtor or a receiver and either of the two parties can “buy” it from the other.

As I have labored the point – it simply cannot be done.

So, I’ve come up with another process – sort of a hybrid between purchasing and refinancing. It’s really not a purchase contract but it uses terms and phraseology that people might understand. Here is an “offer” I drafted and sent to a receiver last week. Sadly, the receiver had no idea that properties cannot be purchased by their owners or that mortgage loans could not be approved if a homeowner applied for a loan on a property which was listed for sale.

Nevertheless, I struggled through an explanation and sent a transaction-specific version of the following:

α α α α α α α α α α α α

OFFER TO PURCHASE SPOUSE’S OR CO-PARCENER’S INTEREST
Common Address
Herein referred to as “subject property”

This is an offer from _______________ (buyer) to _________________ (seller) to purchaser seller’s interest in the above-named subject property.

We understand that the subject property has been placed with you as the realtor or receiver and that you intend to list it for sale and accept the highest bid. On the surface, it may appear to the court and its agents that such a transaction is reasonable and possible.

Please note two important facts – in the event of either party’s attempt to “purchase” the property – which may derail the best intentions of the court, the attorneys and the parties.

  1. A person may not purchase a property which they already own. They may refinance it. They may do what the title of this document and its first paragraph indicate – purchase a co-parcener’s interest in the property. But, it is not possible for them to purchase the property – they already own it.
  2. Moreover, per lending guidelines, if a person (the homeowner) applies for a mortgage loan while the subject property is listed for sale, the loan is not eligible for delivery to the agencies. That is to say, the loan application is dead and auto-terminated. This includes the listing of a property for sale while a refinance application is being considered (processed, underwritten, cleared for close, etc.). Without committing fraud, there is no standard way to get a mortgage loan, using a purchase contract on a property wherein the borrower is the owner.

The above cited factors are no problem unless the property is listed for sale. And, no problem unless the parties attempt to sell to or purchase from the other co-owning party.

Here is the solution. To accomplish the intended goal, one or each of the two parties should offer to purchase the other’s interest. This is commonly and colloquially known as a buyout in a divorce. It should be facilitated by an Owelty lien. And, the offer should state “net proceeds” to the seller (of their interest).

Hence, Party #1, offers to purchase party #2’s interest in the subject property for net proceeds amount (payable to him/her) of $100,000.00.

The final and total Owelty lien (buyout) amount shall be determined by lender so long as there is no cost or harm to “seller” (party #2) and so long as the final mortgage loan amount is the sole and separate liability of Party #1.

Party #2’s portion of receiver fees (or other fees) will be taken from the $100,000.00.

Both parties shall timely execute Owelty documents to accommodate the transaction per the instructions of the buyer’s consultant, Noel Cookman (noel@themortgageinstitute.com; 972-724-2881) or his agents.

Loan Approval Statement. The court and its officers (receiver, attorneys) and the parties (including their agents) should know that Party #1’s loan has been processed, underwritten and approved, conditioned upon the buyout being structured per relevant instructions and agreement of parties.

We can close the transaction within _____ days of final acceptance. The events that would affect the timing are: a) appraisal – usually takes about one week to obtain; b) final updating and review of loan by underwriter usually takes less than a week; (tasks a and b run concurrent); c) clerical work and compliance put a few days of extra “space” in the transaction. Upon acceptance of this offer, I can advise the “buyer” and “seller” and the agents to the transaction – including you, of course – of expected closing and funding dates.

This offer is null and void if subject property is listed for sale as of the date of this offer or if, at any time from the date of this offer until the transaction is closed and funded, the property is listed or offered for sale.

Thank you,

Noel Cookman
noel@themortgageinstitute.com
972-724-2881

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I’m working on a self-promulgated form that will cover all the necessary elements in such a “purchase.” More later.

Thanks for reading.

Noel Cookman

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