No sooner had I made my case yesterday - for why I needed to speak with all 99,000 divorcing Texas homeowners each year – than I received this inquiry from a customer.
I was doing the financing for husband as he was refinancing in order to remove his wife from the liability and include a buyout to wife for her interest in the property. His wife’s attorney had responded to my recommendations for financing (in which the Owelty lien was proposed as the security instrument) – fairly standard…or so I thought – for establishing a spouse’s interest in a property. He sent me his wife’s attorney’s response and asked what I thought.
The following statement is illustrative of the severe misconceptions – within the legal community of all places – surrounding the Owelty lien. His wife's attorney said:
“I will not agree to an Owelty lien to refinance the note on the house. An Owelty lien acts as a second mortgage and does not take my client's name off the mortgage note. [Husband] should probably start looking into a "cash-out" or an actual refinance. If you need names other than Noel Cookman, please let me know.”
Here is my response [edited for this blog] to my customer, the husband.
I do not blame your wife’s attorney. She simply doesn’t know what she doesn’t know. This, unfortunately, is not uncommon. Your attorney, on the other hand, understands the purpose and function of the Owelty lien; and, most importantly, has seen the Owelty lien produce money for buyouts on many occasions. She is in a small and elite class of Texas attorneys who understand this.
But, let me – as concisely as possible – address the misinformation in your wife’s attorney’s statements.
First of all, the major misconception your wife’s attorney has expressed is that you/we are attempting to remove your wife from the liability with an Owelty agreement and lien. This has never been the purpose of the Owelty lien. Removing your wife from the existing mortgage’s liability is wholly unrelated to the function of the Owelty.
It is the fact that you are refinancing the existing mortgage IN YOUR OWN NAME that removes your wife from the existing mortgage liability – plain and simple. The Owelty is unrelated to this as a technical matter.
So, what is the Owelty? In layman’s terms, the Owelty is the buyout of your wife’s interest in the property. The Owelty – as I recommend its design – also allows for certain debts to be “rolled in” and financed, thereby qualifying you for the refinance loan while, also, providing the agreed cash dollars for your wife.
The element of truth in this attorney’s analysis is that the Owelty, indeed, functions as a second lien. This, of course, is THE reason you can obtain good financing for it without running into the limitations of Texas Home Equity Cash Outs. The technical designation is “purchase money” transaction; and, it designates it as NOT a Texas Home Equity mortgage.
Speaking of which, if you were to seek to do a Texas Home Equity Cash Out loan (as the attorney has suggested), because of Texas law, you would be able to borrow about $44,000 few dollars than how we currently have your loan prepared. It’s even more pronounced than that because, as a legal and industry standard, you would actually be limited to $58,200 fewer dollars (i.e., 15% of the appraised value) which could be borrowed against your house by going the route of a Texas Home Equity Cash Out. [This was based on a $388,000 value.]
I will go a step further. To require or even to provide for Texas Home Equity Cash Out financing in the payment of an ex-spouse’s interest borders on malfeasance; certainly as a qualified Divorce-Lending Specialist would view it. At the very least, it would be “malfeasance” for me to transact your loan that way because I know better. It is wholly and totally inappropriate and unnecessary. It’s even worse than that. In most cases, homeowners simply would not qualify for the financing and the buyout due to the legal restrictions of Texas Home Equity mortgages.
The irony is that the Owelty is the security interest (a lien/mortgage) that would establish your wife’s interest in the property. It is very likely that, if this attorney were “on her game” she would inadvertently create an Owelty interest in the decree language - without using the word “Owelty” - anyway. That is to say, any instance a dollar amount made payable to the grantor for their [her] property interest is referenced in a decree, an Owelty interest has been established. It is an inadvertent but beneficial effectus sequitur causam when no effect may have been intended. The word “Owelty” does not have to be used.
This is also to say that your wife’s attorney is arguing against her own client’s interest by refusing to establish her interest with an Owelty lien.
I don’t know how to be self-effacing or overtly humble about this. I invented the Divorce-Lending Specialty. No one in the state - and maybe the country - knows more about mortgage financing for divorcing homeowners than do I. Again, please forgive the obvious “horn-tootin’.” I don’t know a better way to say it.
My dear friends in the Family Law community - please pass this on. We are approaching critical mass on this issue. We have to get the word out. Thank you.