Why Avoid Using an Owelty Lien to Secure Interest?

I have committed to providing real-world, real-time, real-case answers to family law attorneys’ questions regarding home financing and divorce.  It’s a labor of love. But, it’s how I “pay it forward.” Attorneys will often, then, refer their clients to me so that they can actually close their loan (for refinancing with or without buyouts and purchases).

Here is a question I received a few days ago from one of Texas's finest family law attorneys. 

QUESTION

Noel,

I have a case where we agreed to pay Wife $55,000.00 out of the equity in the marital residence via refinance. The equity is approximately $100,000.00. My client has informed me that the bank is wanting an Owelty lien to refinance. Part of our agreement was to not have an Owelty lien.

My understanding of the rules and regs relating to Cash Out was that an Owelty lien is only needed to access more than 80% of the equity. So, I’m not sure why the bank is wanting an Owelty lien. Your thoughts would be appreciated.

Sincerely,

Family Law Attorney

ANSWER

Good to hear from you. Apologies for the lengthy reply but I like to be thorough.

The Owelty lien will actually help your client (or any homeowner) borrowing money to pay an ex for their interest in a homesteaded property.

Exceeding the 80% LTV (Loan To Value) limitation is merely one of the benefits of financing with an Owelty. Your client has much to gain and nothing to lose by affixing an Owelty to the property. It’s a superior type of lien (in my opinion) because it’s the same class of lien (vendor’s) which was used to purchase the house – it’s still a purchase money transaction; the interest rate is lower, it has none of the typical limitations in financing going forward (only somewhat mitigated by the new amendment to the equity laws in the Constitution), other loan types can be used in financing an Owelty (FHA, VA, not just conventional as would be the case in “cash out” financing), etc.

Moreover, the grantee of an Owelty interest would be in a superior position on the property. Without an Owelty, she has no security other than the court order to be paid money by a certain time. Numerous things could go wrong. But, if she has an Owelty in place, she has the same type of lien that the first mortgage holder has on the house. Like her ex-husband, she has nothing to lose and everything to gain by having her interest filed as an Owelty lien. (First lien holders don’t have to go back to court in order to be paid when their collateral property is sold or refinanced, etc. They hold a lien and title insurance insures that all lien holders are satisfied).

So….what to do if the settlement agreement says “no Owelty.” This is where the following statement applies; and, it’s what I say in my course on Owelties:

1. It’s possible to use the word Owelty in a decree and, still, never actually create an Owelty lien; as well,
2. It’s possible to create an Owelty lien without every using the word Owelty in the decree.

So, there is simple language that may already have created an Owelty (if the decree is final) or could create an Owelty without the word actually being used. Here are the three elements that clearly establish an Owelty in a decree:

1. Grantor of [Owelty] interest is clearly awarded the property and Grantee of [Owelty] interest is clearly divested
2. The legal description of the property
3. The dollar amount is tied to wife’s interest in the property. (Even something like “Wife will receive $55,000 from her interest in the marital residence upon husband’s refinance…”). It’s not my favorite way of citing an Owelty but if that language is used, the decree has created an Owelty.

However, the title company (or bank if they self-insure) will still (most likely) want to obtain and file two (really, three) “Owelty” documents:

1. The Owelty Deed of Trust, signed by the person who is awarded the house and is financing the buyout (he can sign at closing)
2. The Special Warranty with Encumbrance for Owelty of Partition; and, of course,
3. The Release of Lien

So, there would be no way of getting around the opposing side at least not knowing that an Owelty is filed. But, the word “Owelty” could be left out of the decree.

I say all this in theory because I do not know how the bank and/or their title company would interpret the matter. I can only say what we would do.

Here’s how I would handle the situation (if the insistence from the other side was that no Owelty be created).

1. I would try to explain to the other side that in any situation – an Owelty is the surest form of security for their client. (See above).
2. We would process and underwrite the loan as a refinance which pays off the existing first lien, the Owelty interest and the closing costs).
3. I would get the ex-wife in direct contact with the title agent (the person who will have her check/funds).
4. Between closing and funding day (after the 3-day right of rescission period) our title agent would have been in contact with the ex-wife asking how she wishes to receive her funds. As part of the transaction, she would have received from - the title agent – the Special Warranty Deed and Release of Lien for her to sign, have notarized and returned. Basically, on funding day, the title agent says “please sign her and you get your money.”

I use the title agent as the communicator at that point because it takes me out of the equation – it becomes very simple and seamless. Speaking of seamless, the Owelty lien is filed and released in the same nano-second, on funding day. (Some banks and lenders want the Owelty lien in place before they close. But, we have trained our title agent partners and underwriters to assume that the Owelty will be filed on funding day…).

[If there are nuances in the settlement – and this might be one of those nuances wherein an Owelty is explicitly to be avoided – I would make the adjustments. Worst case scenario, we would perform a cash out transaction for the client/customer. In fact, if the underlying first lien is a cash out, we would do what is now called an (f)(2) under Section 50 as opposed to a 50(a)(6) (which is a Texas Home Equity Cash Out). This is brand new and is basically a conversion of a Texas Equity loan to a regular loan while still requiring an 80% LTV limit on the financing. But, that’s another story.]

It’s true, we have refined the process to make it seamless like this. But, it illustrates exactly how an Owelty lien works. It is created (decree). It is perfected (the Owelty Deed of Trust). The property interest is conveyed (Special Warranty Deed). Owelty interested is financed – (i.e., satisfied in a refinance transaction). Grantee is paid. Everyone lives happily ever after.

Thank you.

Noel Cookman
America’s Premier Divorce-Lending Specialist
office 972-724-2881 † fax 866-295-0567
www.TheMortgageInstitute.com
601 W. NW Highway † Suite 200 † Grapevine, TX 76051