Divorce Deals

David M. Hays
Underwriting Counsel

IN ORDER TO UNDERSTAND DIVORCE

WE MUST FIRST UNDERSTAND
MARRIAGE.
(Marital Property Rights)

Marital Property Law 101:

Separate Property v. Community Property

Separate Property consist of property
owned or claimed by the spouse before
marriage, and the property acquired by
spouse during marriage by gift, devise,
or descent. (Texas Family Code 3.001)
Community Property consists of the
property other than separate property ,
acquired by either spouse during
marriage. (Texas Family Code 3.002)
Property possessed by either spouse
during or on dissolution of marriage is
presumed to be community property.
(Texas Family Code 3.003)
(This means the burden of proof is on the party claiming that the
property is not community property.)

Marital Property Law 101

Partition of Community Property:
At any time , the spouses may partition
or exchange between themselves all or
part of their community property, then
existing or to be acquired, as the
spouses may desire. Property or a
property interest transferred to a spouse
by a partition or exchange agreement
becomes that spouse separate property.
(Texas Family Code 4.102)
A partition or exchange agreement must
be in writing and signed by both parties.
(Texas Family Code 4.104)
A simple deed between from one spouse
to the other does not convert community
property in to separate property.
For insuring purposes, this document
must be filed of record and include the
legal description of the subject property.
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Marital Property Law 101

The Homestead

Whether the homestead is the separate

property of either spouse or community
property, neither spouse may sell, convey, or
encumber the homestead without the joinder
of the other spouse. (Texas Family Code 5.001)

Closing issues related to

divorce

Closing issues related to

divorce
H & W are in the process of getting a divorce.
One of the parties wants to purchase a new
home during the divorce proceedings but prior
to the final order granting the divorce and
does not want to include the soon to be exspouse on the documents.
Can we insure?

Closing issues related to

divorce
Answer:
Yes, we can insure in this scenario, even though the
divorce is not final. We would require that the
purchasing spouse take title as his/her sole and
separate property and that a vendors lien be reserved
and retained by the lender.

Authority:
Texas common law holds that the vendors lien is a
superior interest in the property, taking precedence
over even a claim of homestead rights that could be
asserted by the non-purchasing spouse.
However, we would not insure the purchase if it violated a
court order.
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Closing issues related to

divorce
H & W are in the process of getting a divorce.
One of the parties wants to sell a property
without their spouses signature.
Can we insure?

Answer:
Maybe. If we have good evidence that the property is
the separate property of the selling spouse, we may
insure this transaction. We would require the vacated
spouse to sign a non-homestead affidavit. However, if
there is any question as to the character of the house
(SP/CP) we must wait until the divorce is final and the
court has made an award of the property.
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Closing issues related to

divorce
H & W are in the process of getting a divorce.
One spouse wants to deed the homestead to
the soon to be ex-spouse so he/she can get a
home equity loan without the spouses joinder
on the loan docs.
Assuming Community Property.
Can we insure?

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Closing issues related to

divorce
Answer:
No. We will not insure this transaction.

Reason:
You are married until you are divorced, and the
Texas Constitution prohibits loans on homestead
property without the spouses signature.

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BUT WHAT IF
you have proof that the other spouse has
already moved out of the house and is not
claiming the house as his/her homestead?
Texas Law provides for one homestead per
family. Until the divorce is final, the couple
represents a family and the property is
homestead of the family.

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Closing issues related to

divorce
Divorce decree is signed on July 1, 2012. On
July 15, 2012 ex-spouse who obtained title to
the residence wants to close on a home equity
loan to fund the divorce settlement.
Can we insure?

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Closing issues related to

divorce
Answer:
No. We will not insure this
transaction.

Reason:
The divorce decree is not
final for 30 days after the
decree is signed. The
terms of the divorce and
awards of property can be
changed.
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Closing issues related to

divorce
H & W are going to get a divorce, and they
want to deed property from one to the other
prior to divorce in order to get the spouse out
of title and refinance.
Can we insure?

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Closing issues related to

divorce
No.
Again, you are married until you are divorced.
Deeds between spouses during marriage do
not create separate property unless
accompanied by a written post-marital
agreement, filed of record.

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Closing issues related to

divorce
No adjudication of title
$300.00 divorce, and decree
does not address ownership
of community real property.
One spouse is living in the
property and wants to sell or
refinance without joinder of
ex-spouse.
Can we insure?
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Closing issues related to

divorce
No. Neither spouse was awarded the
property. We require joinder of the spouses or
a deed from one to the othersomething we
couldnt do when they were married.
(Could go back to courtbut rarely happens)

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Warning!
Any Time the decree fails to award the community property
to either spouse, you must be very careful in accepting a
deed from the divested spouse to the awarded spouse.
Often times the Granting Spouse is receiving or demands
to receive equity from the sale or refinance.
You cannot disburse funds to an ex-spouse in a refinance
unless the parties create an owelty lien or unless the
vested spouse executes a home equity loan.
In the case of a sale, we would want the ex-spouse who
claims to be owed equity, to provide a signed pay-off
amount and release of claims, etc.

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What the heck is an

Owelty Lien anyway?
An Owelty Lien is used when one spouse
needs to obtain a loan to buy out the other
spouses equity, usually in connection with a
divorce.
The proper way to create an Owelty Lien is for
it to be created simultaneously with the
divorce through the language contained in the
divorce decree.

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Real World-Owelty Lien

However, if the divorce attorney fails to create an
Owelty Lien in the decree , the lien may be
created by written agreement filed of record after
the divorceONLY IF BOTH SPOUSES
REMAIN IN TITLE. Sometimes referred to as an
Owelty of Partition.
If no Owelty Lien was created in the divorce and
one spouse is awarded the property, then we
have problems. You can no longer create and
Owelty Lien because there is nothing to partition.
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Owelty Lien Created by

Divorce Decree
1) Divested spouse executes an Owelty Deed
(retaining an Owelty Lien) conveying his/her
interest to Awarded Spouse.
2) Awarded spouse executes an Owlety Note
& DOT payable to the divested spouse to
evidence the Loan to buy out the divested
spouse.
*These documents should be drafted by an
Attorney and be a part of the divorce proceeding.
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Owelty lien-Why all the fuss?

An owelty lien, secured by a owelty deed of trust can be refinanced
by the awarded spouse through a standard rate and term refinance
of the property. (Article 16, Section 50 (a) (3))
If an owelty lien is not properly retained in the decree, or if the
parties are unable to execute a written agreement for an owelty of
partition after the divorce (because one was awarded the property),
then the only way for the awarded spouse to pay-off the divested
spouse is to obtain a home equity loan.
We have a problem if there is NO owelty lien and:

One spouse was awarded the property;

Divested spouse was awarded $$$ for his/her equity in the home; or
Divested spouse claims that they are owed money; or
There is any suggestion at all in the decree that the divested spouse
could be owed money.

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Owelty Lien-Why all the fuss?

Example of a common problem:
Decree awards property to the wife and awards the divested spouse
$15,000.00 for his equity in the house but the attorneys fail to include
owelty language in the decree. A year later the ex-wife wants to
refinance the current purchase money mortgage and pay off her exhusband.

Problems:
No owelty lien retained so xH basically has an unsecured lien;
No owelty line retained AND the property was awarded in the decree so
we cannot create an owelty of partition by written agreementwife
owns the entire property so nothing to partition.
We view the $15k as a cloud to title and require a release from xH.
Wife could do a home equity loan but:
Value of Home
$100,000
1st Lien PM
$ 70,000
Available equity under HEL Laws $ 10,000 ($100,000 x .80=$80,000-$70,0001st=$10,000)
Wife doesnt have enough equity to pay xH $15K; what if he wont sign a
release of lien/claim?
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How to Payoff an Owelty Lien

Assuming there is a valid owelty lien of record you
must:
Obtain a signed payoff statement from the divested spouse;
Obtain a signed release of lien from the divested spouse.

Do not rely on a payoff statement that is unsigned.

Often times the xSpouse is taking less than was
originally awarded either due to valuation issues, or
other offsets. We need to make absolutely sure that
they are in full agreement with regard to the amount
they will be paid at closing.

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Real World
No adjudication of title You get the quickie
divorce, and decree does not address
ownership of separate real property.
If youre past the time period for appeal and the
decree is final, were going to follow the inception
of title rule, and treat it as separate property.....
Inception of Title Doctrine. We determine whether
property is separate property or community
property based on what the status was when the
property was acquired.
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Real World
Property awarded to one spouse in the decree
but there is only a street address - no real
property description.
Historically, weve turned these down and
required either the court order to be clarified by
the judge or a deed from the ex. Now, IF you
have tried and failed to get a deed from the ex,
we will look at the description and the
development and make a judgment call as to
whether the address is sufficient to avoid future
confusion.
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Real World- IRS LIens

Your Client was awarded the community
property homestead. A title search reveals
Federal Tax Liens against the ex-spouse
who is no longer in title, but the lien was
perfected prior to divorce. What Now?
An IRS lien perfected prior to divorce attaches to the
undivided interest of the debtor. The spouse who is
awarded the property takes the property subject to the
IRS Lien.
The lien should be considered during the divorce
proceedings.
Must obtain a release as to the property.
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Real World- Other Liens

Divorce does not impair the rights of creditors.
Once a lien attaches to property, the divorce
cannot and does not remove it.
Abstracts of Judgment:
Homestead- State AJs do not attach but can crate
a cloud on title;
Abandonment-If the ex-spouse abandoned the
homestead prior to the divorce (which we typically
assume), an AJ against him or her may attach to
his or her interest in the property.
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Real World ISSUES AFTER

DIVORCE
What if the decree awards the real property, but divested spouse
never files a deed of record.
We prefer to obtain a deed from the divested spouse. The deed
would typically contain recitals that it is being executed pursuant
to the divorce decree ordered under Cause Number
However, if we cannot locate the divested spouse, or if the divested
spouse is uncooperative, we will allow for a complete, certified
copy of the divorce decree to be filed of record in the real property
records.
You should have your client sign a written directive for you to
record the decree so that you have evidence that they are
comfortable with all of the information in the decree being revealed
in the property records.

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REAL WORLD-Wills
What effect does divorce have on a will?
Texas Probate Code 69
(b) If, after making a will, the testators marriage is
dissolved, whether by divorce, annulment, or a
declaration that the marriage is void, all provisions in the
will, including all fiduciary appointments, shall be read as
if the former spouse and each relative of the testator
failed to survive the testator, unless the will expressly
provides otherwise.

Dont rely on a probated will leaving property

to xSpouse.
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Real World-POWER OF
ATTORNEY
What effect does divorce have on a Durable Power of
Attorney?
Texas Probate Code 485A
If, after execution of a durable power of attorney, the principal is
divorced from a person who has been appointed the principal's
attorney in fact or agent or the principal's marriage to a person who
has been appointed the principal's attorney in fact or agent is
annulled, the powers of the attorney in fact or agent granted to the
principal's former spouse shall terminate on the date on which the
divorce or annulment of marriage is granted by a court, unless
otherwise expressly provided by the durable power of attorney.

As you can see the POA continues to be effective until

the divorce is granted, thus another reason why we
need to ratify a POA prior to closing, even between H
& W.
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REAL World-RULe 11
Agreements
Prior to a final decree of divorce your client
brings you a Rule 11 Agreement signed by the
parties and their attorneys, stating that they
agree wife will get the property. Wife wants to sell
the property with out joinder of the husband.
What is a Rule 11 Agreement:
Texas Rules of Civil Procedure-Rule 11
Unless otherwise provided in these Rules, no agreement
between attorneys or parties touching any suit pending will be
enforced unless it be in writing, signed and filed with the
papers as part of the record, or unless it be made in open
court and entered of record.
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Real World-Rule 11
Agreements
Despite the agreement of the
parties, they are still married until
divorced and we would require
joinder of both spouses.
In addition, while Rule 11
Agreements can be binding, upon
the agreement of the parties the
Rule 11 Agreement can be
changed; and there are cases
where a single party challenges a
Rule 11 Agreement based on
misrepresentation of the other
spouse.
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THATS ALL FOLKS!

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