Owelty Docs: DOT, SWD, DOTSA - What Do We Need?

I love how attorneys ask questions. The facts…then, they get straight to the point.

I, on the other hand, want to expound fully on my answers so as to make them as nearly “textbook” quality as possible. Ha.

Here’s a great question from Leslie Barrows.

Noel:

Husband and Wife divorcing. Husband keeping marital residence and will pay wife $45K. She is not on the note. Do we still need Owelty, SWD and DOTSA?

Very Truly Yours,

Leslie Barrows

Attorney and Mediator

https://www.barrowsfirm.com

Leslie,

This involves at least 5 issues, all of which can affect mortgage financing.

1. Conveyancing (Property Interest)
2. Encumbering a Property (for a buy-out of spouse’s interest) and
3. Securing a Buy-Out Interest with Property
4. Current mortgage liability and
5. Protection for the Departing Spouse (DOTSA)

I will address all of these. But, not necessarily in a particular order since there are cross-affectations. That’s a word I just made up. It means one of those issues can affect another one of those issues (or more) and it could get so confusing only a lawyer could figure it out. So, I guess you guys will be figuring it out. Ha.

I do think this will help by giving some clarity. You tell me if it works.

I go into detail, painful sometimes, I know. But, if one understands these matters, one will be more likely to answer their own questions. It is still wise to do what this attorney did – ask the guys who have to make deals work. That’s how you get the most accurate and useful information.

Husband and Wife divorcing.

This is the most important statement because it is the legal action that gives rise to the opportunity for partitioning property. An Owelty (and a consequent buy-out) is a co-parcener’s interest in real property. Co-parcener could also be called co-partitioner.

This is more fully and technically explained in my upcoming books Everything a Divorce Lawyer Needs to Know About Mortgages and The Enigmatic Owelty: From Mystery to Money (projected release in 2025). Still working on the title. It will be my most difficult but enjoyable task as I want it to be useful in law schools and such).

Divorce-Lending “experts” can ultimately become Divorce-Lending Authorities but only if they understand everything pertaining to our practice. A fundamental and huge element in Divorce-Lending is how title for real estate works. This means that, before we even think about getting the right mortgage financing for a divorced homeowner, we have to know what is happening to the real property (subject property).

We know what has happened to the real property in the past by searching public records, (generally called “property records”). If it doesn’t happen in public records, there is no way to enforce ownership claims or indebtedness claims, etc.

But, real property is being partitioned (in this case as in nearly all divorce cases). In Texas, this must be reflected in title records as in any transaction on the property (e.g., refinancing its indebtedness to include an agreed/ordered payment to an ex-spouse who has been divested and departed the residence).

Husband keeping marital residence

This is legal colloquial for: husband will be awarded the entire property by virtue of receiving wife’s interest in it and wife will be divested of all interest in the property. It is the heart of the agreement regarding the residence.

This is a critical thing to understand.

First of all, the Owelty which is contemplated is only valid if it is against the entirety of the property. Such legal descriptions or legal addresses for properties are mostly straightforward. But, it is a technical detail which must be attended. If 3 (contiguous) lots are the property in the award (not an uncommon legal description to have multiple, connected lots in the same property), the awarding cannot be for 2 of those lots. Well, it could be; but, to legitimize the transaction, a different legal description would have to be created. Let’s not get sidetracked on that right now.

This is also important because an Owelty cannot be against only 50% of a property. In other words, if the property award carves out 50% of it for wife’s interest and seeks to place an Owelty on half of the property, it is not a valid lien and it becomes impossible to finance (since a lender will only accept their new lien as secured by the entirety of the property).

The answer to Leslie’s question is “yes” to the need for a Special Warranty Deed (SWD); but, since a buy-out of $45,000 is agreed, the instrument is a Special Warranty Deed with Encumbrance for Owelty of Partition.

A Special Warranty Deed conveys interest. It is a conveyancing document. Not for a deep dive right now; but, such conveyancing is in consideration of certain things and automatically subject to other things. It is in consideration of the divorce, for example. It is subject to prior/existing liens on the property. Thus, a SWD with our without Owelty encumbrance is signed by the grantee, the party who is keeping the house. It must be “accepted” mainly because with every property award comes certain responsibilities and many times, existing liens.

Question (cont’d): She is not on the note. Do we still need Owelty, SWD and DOTSA?

Not “on the note”

Wife not being on the note simply signals that a refinance of that first mortgage is not necessary for the purposes of removing wife from that liability. But, it is faulty reasoning to assume that a refinance of the first mortgage is, therefore, totally unnecessary.

First of all, the “due on sale” clause (in every deed of trust) is triggered by the new Special Warranty Deed. The lender could call the entire note “due and payable” at the time of any conveyancing (as what happens with the property award and the filing of a Special Warranty Deed).

Secondly, depending on the new set of numbers (new payment verses the current payments including other debt payments which might be “rolled in” to a new mortgage) a refinance of the first mortgage may well be advantageous. Do not assume that interest rate differences are the sole determinant of such a comparison.

What is meant by “Owelty?”

By using the one word – Owelty - it is important to know and understand what is meant. Owelty is a concept, a legal principle regarding real property. It is, simply, a co-parcener’s interest in a real property. The open questions are

1) how is that co-parcener’s real property interest legally secured? And,

2) what are the proper, clearest and most effective documents which, when filed of record, cause the property to be the security for payment?

Technically, a legal interest is secured by real property via a “deed of trust,” filed of record. That deed of trust is the lien.

When explaining liens to the folks, I use the word “satisfied.” That property, I tell them, can only be transacted (sold or used to borrow money) by satisfying every lien upon it.

Therefore, a Deed of Trust to Secure Owelty of Partition is the appropriate “Owelty lien” document. This would be signed by the husband; and, wife is named as grantee or beneficiary of the Owelty.

As discussed, the Special Warranty Deed with Encumbrance for Owelty of Partition is necessary for the conveyancing and the encumbering.

The famous DOTSA – Deed of Trust to Secure Assumption. Contrary to widespread misunderstanding, the DOTSA has nothing to do with the establishing of Owelty interest. Its chief use is to give the departing spouse (who may be on the mortgage note) some remedy in the case of default. She could save her credit rating if the ex-spouse fails to make payment by foreclosing her interest under the terms of the existing deed of trust and curing any default (pay past due payments and fees). It’s a “big hairy deal” to enact one’s remedies; but, at least, wife would not be left flapping in the breeze.

In this case, wife has no interest in receiving a DOTSA for the purpose of preserving her credit from ruination due to default on payments. Since she is not on the current loan, no such concern exists.

Other purposes for a DOTSA

However, that is only one reason for the DOTSA. There could be others. We call those other reasons “unrecorded interests.”

Here’s an example. Let’s say that the divorcing couple agrees that husband will be awarded the house and the intent is that he “keep the house in the family” so that the children will enjoy the homestead as their inheritance or, perhaps, as a source of college tuition (borrowing against it). In that case, wife may have an “unrecorded interest” in husband not allowing the property go to foreclosure sale. In such a case, the DOTSA could cite any number of trigger events (default in payments being the most common and important one) which would allow wife to “get the house back” through foreclosure under the DOTSA. It’s rare. But, it’s possible. I recommend that such a DOTSA (and other documents) be ordered through our Document Preparation Service to insure efficacy according to the agreement.

What about the money? A very important post script.

For all the intricacies and technicalities of “getting it right” in the final decrees with their accompanying deeds and such, it seems that most folks prefer green money to nice white paper. So, turning white paper into green money is really where all of this needs to go.

The Owelty is more critical as a lending matter than a legal matter.

As a mortgage financier – that’s an important-sounding word for somebody who needs to produce money for folks’ homes – the Owelty as specified in divorce settlements is a make-or-break factor. Done right, I can produce more and cheaper dollars for divorcing folks (their buy-outs and purchases and refi loans). Done wrong, all the orders from on high will not move a bank to produce those dollars. The Supreme Court cannot make a lender advance funds. Only properly worded settlements can pave the way for dollars.

And, here’s the kicker – those properly worded settlements must be constructed in concert with my divorce-lending team’s loan process. It’s a game of synchronization.

The court cannot force money from a lender. And, lenders cannot overcome badly written decrees or wrongly constructed deeds.

So, if your client or opposing client needs home financing – refi’s with or without buy-outs; even purchases – they have got to begin working with us now.

They don’t understand. You do. Tell them “divorce affects everything about a mortgage loan…and when I say ‘everything’ what I really mean is EVERY-DANG-THING. So, call America’s Premier Divorce-Lending Authority, the guys who invented this whole thing.

Call me, write me.

Noel Cookman | 972-724-2881 | [email protected]