Quick Tutorial on the Owelty Lien for Lawyers: Answers from my correspondence

BRIEF TUTORIAL ON THE OWELTY LIEN

• What is the substance and essence of the Owelty lien?
• How and when is it created?
• Does it need to be recorded in public records?
• Does it exist – is it enforceable – if liens are not recorded?
• Is the Owelty financeable – AS AN OWELTY and NOT as a Cash-Out – if the lien is not recorded?
• In other words, HOW DO PEOPLE (beneficiaries of divorce buy-outs) GET PAID?

Sometimes, it’s simpler for me to just share my interactions with attorneys in the crafting of their decrees for their clients who are seeking the financing of their Divorce Buy-Out Refinances. We pre-underwrite all decree drafts. It’s critical to loan approval and delivering on our promise to “turn white paper into green money.”

I did this brief review on just one aspect of a decree for a divorcing homeowner we are financing.

Here is the pertinent language in a decree draft sent by one of our finer attorneys which I just reviewed (pre-underwriting review, not legal review). Names and addresses are redacted or altered to protect privacy; and, some literary license was taken to clarify.

Before I give my feedback, I would like to highly recommend a phrase that this attorney inserted into her decree – THAT VIRTUALLY EVERY DECREE SHOULD HAVE if there is a refinance with a buy-out contemplated. [I will give credit later if/when the attorney allows.]  It has nothing to do with this topic today but it is PERFECT.

In the method of determining of the buy-out amount, the value calculation is settled with:

“…from the value of the house shown on the appraisal done by the refinance mortgage company during the refinance process.”

Do you remember from my CLE webinars? The ONLY value that the lender can consider is that which is reported on the appraisal which it orders pursuant to a very prescribed process established in federal law.

Back to the Owelty topic. Here’s my feedback.

Dear Attorney,

Thanks again for connecting us with your client. It’s always a pleasure to work with you and your clients.

Here is my feedback after pre-underwriting the draft of the decree.

Deeds

Under Transfer and Delivery of Property, Respondent/Wife would sign the Special Warranty Deed with Encumbrance for Owelty of Partition. Currently, it reads that Respondent/Wife will sign a Special Warranty Deed.

We could have that document prepared along with the Deed of Trust to Secure Owelty of Partition (for Petitioner/Husband’s signature) and Release of Lien (for Respondent/Wife’s signature upon payment to her).

Noel Cookman

The Attorney wrote back with a familiar and rational question/suggestion.

Noel,

Regarding the deed documents, I do not believe we need to include any encumbrance for the owelty since Respondent/Wife will be getting paid immediately upon the transfer.

Thank you,

Attorney for Petitioner

My Response

Dear Attorney,

Thank you.

The nature of the Owelty (of Partition) is that it exists (that is, it is created) by three elements in the decree.

1. Awarding and divestiture of the real property
2. The affixing of an amount in favor of the divested party (Respondent/Wife in this case); and, connecting it with
3. The legal description of the property

The use of the word or phrases Owelty or Owelty of Partition – in the text of a decree of divorce - are not necessary for the creation of an Owelty of Partition.

It is possible to use those Owelty words in a decree and still not create an Owelty of Partition; it is equally possible to have no mention of these words yet still create an Owelty of Partition. The latter is the case herein.

Moreover, the title company will require a Special Warranty Deed with Encumbrance for Owelty of Partition (signed by Wife) and a Deed of Trust to Secure Owelty of Partition (signed by Husband) in order to insure the loan transaction.

The Release of Owelty lien recorded in public records is necessary so that Petitioner/Husband will be able, afterwards, to sell or negotiate his property without the Owelty encumbrance. Note: As mentioned, the Owelty encumbrance will exist – even without the filing of the SWD w/Owelty and the DOT to Secure Owelty – because it will exist in the decree; and, a title company in a future transaction will underwrite the decree and require satisfaction of that “lien” in favor of wife.

Thank you.

Noel Cookman

 I love the response from the attorney.

Perfect. Thank you for that clarification. I have updated the draft to refer to the specific property documents needed and I will send this to Wife’s attorney now with this information.

Follow up question:

So, if an Owelty exists in a decree even without filing the SWD w/Owelty and the DOT to Secure Owelty, what is the purpose of filing deeds in property records?

• It’s a lien. Just because a lien is created by signature of parties doesn’t mean it has a claim to be paid. Its claim is in the filing. But you already knew that.
• Title companies require it or they cannot insure the transaction as NOT a Texas Home Equity refinance. This brings up the most important reason,
• It’s a lending/loan issue. Without the lien recorded on title, the homeowner would have an inferior loan product - the Texas Home Equity “cash out refi” – if they could even get that. They would have to “cash out” rather than pay off a lien on title. And, that particular loan product would disqualify many homeowners while placing onerous restrictions on their current and future financing for those who would qualify for it.

FYI

“By The Way” Department

Some of the onerous restrictions, limitations, and elements of a Texas Home Equity “cash out” loan:

1. Cannot finance the top 20% of the home’s value. I.e., 80 LTV (Loan To Value) ratio maximum financing. This includes adding together all of loans against the property.
2. No subsequent financing of that TX Home Equity cash out loan for at least 12 months after closing. Even if rates plummet in 6 months and you would like to refi before rates go back up.
3. In subsequent refinancing of that TX Home Equity cash out loan, max LTV ratio is 80% even though the homeowner is not taking any new cash out. [Fun fact: A divorce buy-out is NOT a cash-out…if the loan officer and lender know what they’re doing…good luck with that.]
4. Interest rate is relatively higher because of a Loan Level Pricing Adjustment.
5. Title policy is 25% higher premium rate.
6. Here’s one that even most mortgage folks don’t think about: Because of fee restrictions measured as a percentage, lower loan amounts are at a disadvantage because the lender has to “clear” a fixed dollar amount on most of its fees/expenses meaning that the borrower’s final rate will be relatively even higher (to create more “yield” for the lender). I can draw it out on a napkin better than I can explain it with words.

Just so you know.

Thanks for reading. 

Noel Cookman