Texas is a community property state. The existence of a marriage between two individuals causes the characterization of their properties into various categories. These categories are important in determining the extent of a spouse’s rights in that spouse’s assets and the rights of the other spouse (and his or her creditor) in those same assets.

Can one spouse freely pledge or mortgage his or her separate property? Can one spouse freely pledge a mortgage that is spouse’s community property? When do both spouses need to act together?

The categories are important in determining the size of the spouse’s estate and in the determination of the rights of third parties in a spouse’s assets. How does community property versus separate property affect underwriting? What assets of one spouse are exposed to the liabilities of the other spouse?

The rules discussed above allow for classification of any particular asset into the property "ownership category" (either a spouse’s separate property, or into one of the three community property categories). These categories need to be kept in mind when underwriting a loan in certain instances. If a loan is the joint application where both spouses are to be borrowers then the classifications are not as important. But if only one spouse is to qualify as a borrower, the classifications are important to determine the extent of the borrowing spouse’s assets and the extent that those assets are available to creditors of the non-borrowing spouse. These exposure are summarized in the tables below. Table 3-2 considers the exposure of the wife’s assets to the liabilities of the husband (the non-borrowing spouse). Table 3-3 considers the exposure of the borrowing husband’s assets to the liability of the non-borrowing wife. References are to applicable sections of the Family Code.

Table 3-2

Exposure of Wife’s Property to Husband’s Liabilities

Table 3-3

Exposure of Husband’s Property to Wife’s Liabilities

As stated above, a homestead is considered a form of exempt property. Exempt property can generally be pledged voluntarily to a lender to secure debt. But in the case of homestead real property, special rules in the Texas Constitution and the Texas Property Code further restrict the ability to create a valid lien on the homestead. If a debt is secured by a valid lien on the homestead, and the debt is not paid, the lender can foreclose on the homestead. Otherwise, if a lien is not a valid lien against the homestead, the creditor can sue the homeowner to collect the debt and may win the lawsuit and obtain a judgment against the homeowner. However, the unless the lien is a permitted lien against the homestead, the creditor cannot foreclose on the homestead. That is to stay, the homestead is exempt from exposure to forced sale (i.e., foreclosure) arising out of an invalid lien. Although the lien may be valid against other property that is not homestead or other non-exempt property, the lien is not valid against homestead property.

There are a very limited number of circumstances which allow a valid lien to be placed on the homestead. Permissible liens including voluntary liens and involuntary liens. Involuntary liens arise under law and without the express actions of the property owner to create same. Involuntary liens are permitted against a homestead in the following instances:

1. Federal Income Tax Liens.

If a homeowner does not pay federal income taxes, as part of the collection process, the Internal Revenue Service will assess the tax against the taxpayer and record a Notice of Federal Tax Lien. When the Notice is recorded, it becomes a valid lien against the homestead.

2. Federal Estate Tax Liens.

When a homeowner dies, federal tax law automatically created a tax lien against the taxpayer’s property to ensure the federal treasury receives its due estate taxes. This lien is automatic and is not evidenced by a recorded notice. Federal Tax Law also allows an exemption for smaller estates. If a taxpayer dies in 1999 with a taxable estate of less than $650,000.00 then no estate tax is due and there is no lien which could affect the property.

3. Property Taxes.

Texas law provides that county and local political subdivisions may assess ad valorem property taxes against real property. Under state law, a lien arises in favor of each applicable political subdivision on January 1st of each year for the taxes to assessed that year. Later that year, typically in the fall, the tax statements for that year are finally generated and mailed to the property owner or the mortgage company. The lien can be foreclosed on by the political subdivision if the property taxes are not paid. Ad valorem tax liens arise automatically each year and are considered "super priority liens" which have priority over even then existing valid mortgages on the property.

4. Property Owners’ Association Assessments.

Deed restrictions on a property may provide that each property owner may be assessed a fee each year to pay the costs of running the subdivision for such costs as common area maintenance. The deed restrictions may provide a lien in favor of the property owners’ association to ensure the annual assessments are paid. If the annual dues are not paid, the lien may be foreclosed against the homestead. [Bill Pending.]

Voluntary liens are permitted against the homestead in the following instances:

1. Purchase Money.

A lien may be placed on the homestead to secure the debt incurred in the purchase of the property. (Property Code § 41.001(b)(1)). This is referred to as a "purchase money" lien. Normally this would be a first lien deed of trust. Subordinate purchase money liens are also possible, however. The subordinate liens are also subject to the special rules of Chapter 3A of the Texas Credit Title (formerly found in Chapter 5 of the Texas Credit Code.) which are discussed elsewhere in this book.

2. Taxes on the Property.

For the sake of discussion, this paper characterizes property tax liens and federal taxes liens as "involuntary" because the property owner does not give express consent to the government to create the liens. Once such liens are created and attach to and encumber the homestead property, however, the owner of the homestead property has to satisfy the debt to the government or risk losing the homestead to foreclosure by the government. The property owner may obtain a loan from a lender and the loan can be secured by a lien on the homestead. The lien on the homestead for the benefit of the lender is in the form of a deed of trust against the property which renews and transfers the existing valid tax lien from the government agency to the lender.

3. Owelty of Partition.

Owelty is a legal fiction used to provide a method by which the selling "joint tenant" can place a lien on the entire property as a valid lien on the homestead; it is a mutation of a purchase money lien. It allows for the "buyer" to provide a lien to "cash out" the seller’s interest on the homestead in cases of divorce or probate.

1. Divorce. Owelty can best be explained by example: Husband and wife are to divorce and it is decided that he gets the house (homestead) and she will relocate. They have paid on the mortgage all those years and she wants to "cash out" her equity. But suppose the husband has no cash to give her. He must get a loan, but except for the owelty provision (and perhaps a home equity lien), there is no category under which he can grant a lien on the entire property to secure the cash out; it is purchase money as to her one-half, but not his one-half. Through the owelty fiction, he can place a valid lien on both halves of the property.
2. Probate. Similar owelty applications occur where surviving family members have homestead interest in decedent’s homestead. As an example, if husband dies survived by his spouse, and his will leaves his interest in the homestead to his daughter, then mother and daughter each own one half of the property. Suppose mother wants to buy out the daughter’s interest. A lien can easily be created on the daughter’s one half as a "purchase money" lien (mother is purchasing one half interest in the property from daughter). But except for perhaps a home equity lien, there is no category of lien that would allow mother to grant a lien on her one half interest in the property. The lender will want a lien or both halves of the property. Mother needs an owelty of partition lien in order to grant a lien to the lender on the entire house.

The owelty lien has its limitations. An owelty lien is valid only up to one-half of the value of the total equity in the property. Although the lien can be created by divorce decree or written agreement of the parties to the partition, if the divorce decree has already awarded the property, but does not mention the lien, it may be too late to partition and no owelty lien can be created.

1. Refinance of Valid Liens.

If debt is secured by one or more valid liens against the homestead, the debt can be renewed, rearranged, or extended or modified either with an existing lender or with a new refinance loan from a new lender. The renewal loan is a renewal to the extent of the current amount of the valid lien or liens already in place against the homestead. Please keep in mind that for a homestead mortgage, as a debt is paid down and the principal amount of the note is reduced, the lien against the property also decreases by a like amount. By example, suppose there is a $100,000.00 purchase money mortgage with a current principal balance of $60,000.00. The lien is no longer good for the principal amount of $100,000.00. The lien is now only valid for $60,000.00 (plus interest and collection costs as so provided by law). The valid categories of liens are described above. One can envision a loan request for a refinance on a property with an existing first lien (originally $80,000.00, current balance of $60,000.00, a second lien purchase money note (originally $20,000.00, current balance $15,000.00, and a third lien home improvement lien (originally $12,000.00, balance now $9,000.00). Disregarding the home equity law, the homeowner can obtain a valid first lien refinance loan for $84,000.00 (the sum of the current balances of the first, second and third lien loans).

2. Construction.

A valid lien is available on homestead to secure debt incurred to finance the cost of work and material used in constructing improvements (for example, initial construction, home improvement, repairs, or adding a swimming pool) on the property. There are several critical requirements with respect to construction liens which are detailed in Chapter 7 of this book.

3. Home Equity Liens.

Home equity lending first became available in 1998 in Texas as a result of an amendment to the Texas constitution which became effective as a result of the 1997 voters election. The constitution was changed by adding Article 16, Section 50(a)(6). Home equity lending in Texas is very special and very complicated with many traps for the unwary lender. It is discussed in detail in Chapter 7 of this book.

4. Reverse Mortgages.

In addition to home equity lending under Section 50 (a)(6), the constitution was further amended as a result of the 1997 election to provide for reverse mortgages in Article 16, Section 50(a)(7) of the Texas Constitution. A reverse mortgage provides a valid lien in favor of a lender. The reverse mortgage is available as a non-recourse loan to a homeowner who is fifty five years of age or older (or whose spouse is fifty five years of age or older). It may be advanced in one or more advances. The rate may be fixed or variable. Reverse mortgages may not require the payment of interest or principal by the owners until the homestead is sold or transferred. In addition, the 1998 version also restricted requirements for repayment until the borrower ceased occupying the homestead property as principal residence for more than one hundred eighty (180) consecutive days and (emphasis supplied) that the location of the owner was unknown to lender.

The inclusion of the word "and" above unintentionally created a situation whereby Fannie Mae refused to purchase Texas reverse mortgages. The 1999 Texas legislation introduced House Joint Resolution 18 and Senate Joint Resolution 18 to correct the problem. Until the constitution is amended, there will effectively be no reverse mortgages in Texas. [Pending Legislation]

1. Liens Signed by Both Spouses.

Both spouses have a homestead interest in the homestead, regardless of whether both have title to the property, or whether title is just in one spouse or whether the property is owned by one spouse alone as his or her separate property. If both spouses own the property, both must sign the deed of trust to create a lien on the homestead. If one spouse owns the property in his or her name alone, whether the property is the separate property of the owning spouse or the sole management and control community property, the non owning spouse must consent to the lien’s being placed on the property. (Family Code §5.001).

2. Homestead Rights of Surviving Spouse After the Other Spouse’s Death.

Upon the death of one spouse, regardless of who inherits the property, the surviving spouse continues to have a homestead interest for the remainder of the surviving spouse’s life so long as the surviving spouse continues to use or occupy the homestead. (Texas Constitute Article XVI, Section 52). As an example, if the deceased husband had owned the homestead as his separate property and willed it to his son by a prior marriage, the surviving spouse would have the right to continue to live there and would still need to consent to any future mortgages so long as she lived there.

In the case of a homestead that is community property, when one spouse dies without a will, the surviving spouse has certain powers under the Texas Probate Code when no one has qualified as the executor or administrator of the deceased husband’s estate, the surviving spouse has the power to sell, mortgage, lease or otherwise dispose of community property for the purpose of paying community debts. (Texas Probate Code Section 160).

3. Home Improvements Liens.