Hopefully all of us know that Pennsylvania is an “increase in value state” meaning that under Section 3501(a) of the Divorce Code, the increase in value of non-marital assets during marriage (to final separation) is a marital asset subject to division. There are two sides to this equation in cases where a spouse brings a premarital home to the marriage. The first is the increase in value that may be brought about by market demand for real estate. In laymen’s terms, your spouse bought her house four years before marriage for $200,000. It was worth $225,000 on the day of marriage and at separation, it was worth $275,000. Voila, $50,000 increase in value that is subject to distribution.

The other side is increase in value brought about by reduction in the principal balance due on the mortgage of the non-marital home. This requires some documentary investigation but today more and more counties make copies of the mortgage instruments available on line. Obviously, the best way to show this is to have all of the mortgage documents including the note as the note specifies the interest rate. But our clients tend to either discard these documents or bury them deep in attics and garages.

If you can get a copy of the mortgage on line, there is a decent chance it might refer to the mortgage rate. It will tell you whether you are dealing with a 15 or 30-year term. If you cannot find the rate, try looking at a website called http://mortgage-x.com. It will provide national monthly averages for 1 year ARMS and 15/30 year conventional financings on a historic basis. Obviously, it does not have your particular mortgage but it is going to be reasonably close.

Armed with that information, then go to http://bankrate/com. and look for an amortization table. Plug in the mortgage amount, the term and the interest rate and it will give you an amortization table from which you can determine the balance due on the mortgage on the date of marriage and the date of separation. The tables default to an assumption that you are getting the mortgage the day you went to the website but print it out and then, by hand correct it for the actual dates relevant to your case.

Is this admissible in a formal sense? Well, to ask the question is to answer it but unless we start demanding that every mortgage company come to every courtroom where there is a claim for increase in value, it will get you pretty close to where you need to be.

 

This is not a money management blog but what we increasingly find is that many divorce clients simply “trusted” that their resources would be sufficient to carry them through retirement. The great awakening comes when they discover they are now splitting what looked like a comfortable retirement and that their ability to make up for lost time has been lost amidst the sands of time.

So today, lawyers need to help clients be creative, and based on an article in the March 22 Wall Street Journal, there is reason to take a second look at a device invented a few years ago called the reverse mortgage. When first introduced, they were disparaged as a kind of sleight of hand trick. The number of them issued spiked just after the Great Recession but then eased off as the economy (or at least the stock markets) recovered.

A reverse mortgage is what it sounds like. You have equity in a home that is essentially a trapped asset. A reverse mortgage involves your pledge of that equity to a lender who gives you your own trapped money. The true economist would dismiss this as absurd. If you need cash out of your home, don’t pay anyone fees or anything else to tap it; just sell, downsize and take the cash from the settlement proceeds. That’s why economics is called the dismal science.

The problem with today’s older divorced couples is that they want everything to stay the same. Sure, it’s only you living in the house that once held three or four. But you like it, you like the neighborhood, and besides, moving means dealing with 30 years of accumulated things that you call treasures and your child dismiss as “crap” when they come for Thanksgiving.

I typically advise clients that they should at least consider downsizing. The response is the same. A longing look like I told them they need to put the dog down unless his health improves and either a testy “Maybe next year” or even more challenging “Must I?” In the end, we assess matters and give clients options. No pets have met their demise on my watch but I have told several clients that unless they reduce their housing costs in the near term, they may need to consider a shorter life.

Reverse mortgages can be a way to ease the pain. At their worst, people borrow them to speculate. This is pure foolishness. But the mortgage in reverse can be a very effective tool, especially to cover late life rainy days. The best example is a sustained down market. If you are retired and drawing $4000 a month while getting $2,000 in social security, when the market tumbled, your $4,000 is coming out of a measurable smaller pool. If you had $300,000 in retirement and drew $3,000 a month in January, 2008 you had  100 months of retirement assuming no increase in value and no inflation. Your draw was 1%. By late Fall, your $300,000 was now $150,000 which mean your pool had halved and your draws were 2% a month.  The market quickly shot back up to 11,000 but if the trough had been sustained and you didn’t halve your expenses, you were burning retirement fast.

If you had a line of credit associated with a reverse mortgage, you could have reduced the impact on your portfolio by drawing on your home equity. Then you would have had more on hand to ride the market back to some form of equilibrium even though your home equity would have been reduced. There was a time when home prices could be said to keep pace with the market. But that is not a recent trend. A tract home in the Philadelphia region with 3,000 square feet  sold in July, 2008 for $400,000. Six years later it sold for $420,000 and it today draws estimates for $410-425,000.  Had you known in Fall, 2008, you could have borrowed $100,000 in home equity; stuck it in a Dow index fund and today your $100,000 would be worth $251,000. But, alas, that would require speculation.

But there are good times to draw on home equity. You sit, happily in your crap filled house burning through $3,000 a month of retirement. The roofer tells you “It’s time for me to get $20,000.” That roof can come out of home equity much more readily than an investment portfolio because the house is not really gaining value.

Now for some of the trickier strategies; tricky but solid if done in the right way. You are on a fixed income. You have $300,000 in equity but $200,000 in mortgage debt. The monthly mortgage of $200,000 plus $600 a month in real estate taxes is really crimping your ability to see the grandkids. Why not take a reverse mortgage on the equity to service the real mortgage you owe. This cuts expenses while leaving your investment portfolio intact. Yes, your real estate portfolio is going to decline but that wealth right now is trapped in housing and not really increasing.

Another strategy. We are told that if you delay drawing on Social Security from ordinary retirement to age 70, the monthly benefit payable rises by 7% a year. That’s a pretty solid return and it’s guaranteed unless you conk out along the way. But, you may look at the pension and retirement money you now have and say, I can’t really make it to 70 without tapping my social security. Why not consider a reverse mortgage to fund the “gap” of payments you might otherwise get if you applied early or at normal retirement age.

Your employer lays you off in December 2015. Because you are not a kid it is going to take time to find a job, which means that your 2016 income will be low. Financial planners will suggest that the off-year is a prime time to convert a traditional IRA to a Roth because your income will be low. But you do still have to pay the tax on the conversion. Why not take that out of a reverse mortgage to cover the taxes.

Typically, reverse mortgage payments come without tax because the payment is not income but a reduction in home equity. You are effectively getting your own money. Federal regulations now make it so that a steep decline in home equity such that the amount you took out exceeds the equity does not open the door to liability on your part. So this is now a tool and not a toy. It can be abused but it has options that can make your retirement far more comfortable.

So it’s break up time and you can’t wait to “move on” in not just the emotional but the physical sense of the word.  Even though you and your spouse can’t agree on much of anything, you both agree that it is time to sell your burdensome house and find more comfortable digs of less grandeur.  This should be easy, right?  Just ring up the realtor and make the appointment to sign the listing agreement.

Before you sign that agreement, especially if you are the financially disadvantaged spouse (i.e., you make far less or control far less) GET SOMEONE TO FIND OUT WHAT YOU OWE.  There are many exceptions to the rule, but the rule is that you can’t sell a house until you can pay off the mortgages associated with it.  Oh, you can agree to sell your house for whatever the price but to actually “close” on the transaction and convey title to the willing buyers you will need to pay off the mortgages and any other liens (e.g., tax liens, judgments etc) that may have arisen while you owned the place.

To some this would seem academic but in the rush to buy every piece of real estate in America between 2000 and 2008, the consuming public signed lots of funky mortgage paper including home equity lines of credit that nestled on top of conventional mortgages.  People also refinanced their real estate many times to cover many expenses unrelated to home acquisition and ownership.  They paid auto loans, college tuitions and consumer debt.  When they come in to meet us, they often can’t recall whether or not the loan was a mortgage, what else might have secured their debt or even what the money was used for.

Most experienced realtors actually try to do a quick lien search before taking a listing to make certain the proceeds will be sufficient to pay their commission and otherwise “clear title”.  But you must either ask the realtor or ask a lawyer to make certain that you know what debt you owe for which your house is collateral.  This is not something to wait for.  First you may find that while the house will close and the debt can be paid, you will have nothing left to put down on a new house.  Second, if your willing buyer agrees to pay your price and then invests time, effort and money into getting ready to move in only to find out that you really can’t clear the title hurdle, that buyer may be looking for a lawyer to sue you for listing and selling a property you should have known you could not successfully sell.

There are ways to negotiate around some of these problems but no transaction where debt exceeds contract price is a safe transaction.  The key however is to find out first what debt really is recorded against the property and then list for sale.

 

In the past decade, Americans have racked up a prodigious amount of debt and it is fairly common for clients in divorce to not really understand how their debt is structured.  Was the U.S. Airways VISA joint or husbands with wife designated as an authorized user?  When trying to disentangle a couple’s financial relationship it is important for lawyers to know these things. Credit cards are also a fertile ground for fraud.  We have seen several instances where a spouse without access to his/her own credit, applied for a card or credit line on behalf of their mate without the inconvenience of telling him/her.  Of course, chances are excellent that you won’t have to pay for a credit fraudulently obtained on your behalf but that is often a laborious and complicated process.

Mortgages are complicated as well.  What laypersons call a “mortgage” is actually two legal documents.  When you borrow the money you sign a promissory note to repay it.  Then the lender asks you to sign a mortgage.  The mortgage is a pledge that the lender has dibs on your house if you default in paying the note.  What sometimes occurs is that one spouse has bad credit.  The lender will lend but only to the spouse with good credit.  Meanwhile, if the house is to be jointly titled, the lender wants both owners to promise that the lender has a secured interest in the house.  The “mortgage” is the instrument that provides that security.  So, if Wife has good credit and Husband has no credit or bad credit, the lender will have Wife only sign the note but both spouses sign the mortgage.  This means that Husband has no obligation to pay the note but if Wife fails to pay, the lender can foreclose on the house and Husband has no right to object.

If you are going through a divorce, order a credit report from Equifax, TransUnion or Experian. Federal law requires credit agencies to give you a free report once per year. It won’t reveal your credit score (that you will pay for) but it does show you what the credit information compilers think you have out there in the world of debt.  Study what you get and if things look wrong, it may be time to call the lawyer.  Note there are many subscription services that will monitor you for a fee.  That is a different animal than the report itself.

 

If you have been reading or listening to the news in the past thirty days, the big economic news is that the bond market has gone to hell and mortgage rates are on the rise.  The mortgage change began in February but then just as quickly lost speed as March turned into April.  But if you look at the market in the last two weeks rates shot up 10% from 3.4 to 3.8 percent.  Most of us are not looking to buy a house this Spring so in one sense we don’t care, but if you are getting divorced and discussing the value of your home, there is an interesting collateral effect as the Federal Reserve signals that “cheap money” (they call it “quantitative easing”) comes to an end.

For the first time since 2007 buyers this Spring found that some houses were actually the subject of bidding wars while others sold at or near asking price.  Our experience is that this has not occurred across the board but principally with desirable houses in desirable neighborhoods.

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The reason for this is that buyers are nervous that as rates rise, they will no longer be able to afford the monthly cost of the higher mortgage and that they will “miss out” on the bargains of the past several years.  Fair enough.  The truth is that the huge bargains have been snapped up. And don’t be surprised that some of the folks who are buying today will be looking at their purchase a year or two from now with some sadness because demand for housing will weaken as the cost of buying rises.

But for each sale in this exuberant market there is a comp being posted on line that appraisers need to evaluate when deciding the value of a house undergoing valuation in divorce.  In theory, they could probably discount that comparable somewhat because of the sudden rush to buy homes.  They did the opposite in the down market when the only comparable might have been a house sold by a bank in foreclosure.

No appraisal can really dismiss a comparable sale because the market is “crazy” especially when it is not a distress sale but one in the open market populated with willing buyers and sellers. However, the fact that a neighborhood has a few sales at these new better prices does not portend a sustainable upswing.  People who are rushing to get what is left of 4% mortgage money better realize that they may stay in their home for several years to get the price they paid this Spring. And people going through divorce who would prefer to stay rather than move may well find that they “bought out” their spouse at a premium.

On a $100,000 loan amortized over thirty years the difference between 3.4% and 3.8 is only $23 a month or a little over $8,200 through the life of the loan.  Remember as well that this interest is typically a deduction from income for federal tax purposes.  That small amount is, of course, multiplied as the mortgage amount increases so that the $500,000 borrower is staring at a $40,000 difference.

 

We have had support guidelines in Pennsylvania since 1984.  The effort was part of a federal initiative to see that all families with similar levels of income paid comparable child support. A few years ago the Supreme Court of Pennsylvania modified the rules to give recognition to the fact that home mortgages represented a disproportionate amount of household expenses by creating what is called a high mortgage adjustment. If the mortgage including taxes and insurance exceeds 25% of household income after spousal and child support are included, the Courts have discretion to take the “excess” and add 50% of that excess onto the support order. Here’s how it works:

Husband and wife separate.  Husband has net income of $15,000 a month.  Wife has net income of $5,000 a month. Under the guidelines 2 children are entitled to $2,877 per month.  If they live with Wife, Husband pays 75% of the $2,877.  If they live with Husband, Wife will pay 25% of the $2,877.  Either way, wife is also entitled to support.  To calculate that one takes Husband’s net, subtracts Wife’s net AND the child support.  The difference is them multiplied by .3 to calculate the spousal support component.  Arithmetically, if the children live primarily with their mother, the calculation is expressed;

{15,000 – (($5,000 + (2877 x .75))} x .3 = $2,353 in spousal support.

With the high mortgage adjustment one next looks to the total household income of the spouse in the marital home and multiplies it by 0.25 to determine what mortgage is reasonable. So Wife’s income is her own net of $5,000 is added to child support of $2,158 and spousal support of $2,353 to equal $9,511.  By definition a reasonable mortgage is 25% of that amount or $2,378.  Any excess over that amount may be divided equally with the spouse out of the house paying that amount as the high mortgage adjustment.  So if the mortgage with taxes and insurance is $3,378 per month, the $1,000 excess would result in an additional $500 in support contributions.

A good idea on its face.  But, alas, the mortgage world we live in today is a different place. Folks who net $20,000 when living in the same household usually make gross income of $25,000 or more.  Even before the mortgage crisis of the past two years, a family which when residing together had $25,000 of gross monthly income could qualify for a mortgage of $7,500 a month.  Under the current rule, a $7,500 mortgage would warrant an excess mortgage payment of $2,561. The “excess” contribution would actually be greater than the child or the spousal support.  The combined obligation on the payor would be $7,072.

This is not itself a horrendous burden but it ignores the difficulty of the situation. The adjustment does recognize how tenuous the situation is.  Wife will have net income of $12,572 before looking at the taxes due on her spousal support. But fully 60% of that income buys nothing more than the mortgage itself.  It leaves precious little to pay “all other” household expenses.