Affordable Housing Institute : US

Homes are great when we’re sessile, but when we’re mobile, the equity is a millstone – too valuable to abandon without a fight, yet incredibly difficult to liquefy, as illustrated in this revealing slice-of-life divorce drama from The New York Times:

 

When Marci Needle and her husband began to contemplate divorce in June, they thought they had enough money to go their separate ways.  

 

Legally, you see, divorce is ‘financial death’ – the death of a legal entity known as the marriage.  Although (thankfully!) never divorced myself, I’ve done some divorce-related expert-witness and valuation work and have always been struck by its phraseology.  In divorce, the couple’s aggregate property is called the ‘marital estate.’   The marriage, which is a legal entity (one reason why supporters of gay marriage want it), is legally dead, and its corpus is being divided. 

 

Dividing property is sometimes hard to do

 

Unlike a testamentary estate, where the benefactor is dead and hence bequests are governed by a written instrument (the will or a trust), a marital estate’s benefactors and beneficiaries are the same, and both very much alive and contributing to the economic aggregate.  Because they don’t like each other, the divorcing parties are bound and determined to assure that they get their ‘fair share,’ and with the moral parallax that always accompanies such dissolutions, tussles arise.

 

They owned a million-dollar home near Atlanta and another in Jacksonville, Fla., as well as investment properties.

 

[For the rest of this post, I'm going to set aside questions of fairness, the impoverishing consequences of shuttling children between two separated parents, and principles of equity surrounding 'who contributed what' to the marriage.  All of that is the stuff of many a divorce battle, but it's all irrelevant to the housing finance elements, so we will thankfully pretend that both parties are acting as purely rational dividers of the marital cake. – Ed.]

 

I want the bigger half!

 

Setting aside questions of fairness, the marital division is easy when every asset has a liquid value, and when every asset has equity above debt. 

 

In a typical divorce, the starting point for legal posturing usually revolves around two basic questions:

 

1. What is the aggregate estate value (E)?

2. What share should each spouse receive?

 

Add up the numbers, maximize E (after-tax, of course), and then multiply by H% and W% for Husband and Wife, and you’re done. 

 

Or are you?

 

In the real world, asset values are arguable, and asset equity is often unrealizable:

 

Now the market for both houses has crashed, and the couple are left arguing about whether the homes are worth what they owe on them, and whether there are any assets left to divide, Ms. Needle said.

 

“We’re really trying very hard to be amicable, but it puts a strain on us,” said Ms. Needle, the friction audible in her voice.

 

 

From the NYT: Ms. Needle trying hard to be amicable.

 

“I want him to buy me out. It’s in everybody’s interest to settle quickly. That would be my only income. It’s been incredibly stressful.”

 

Ms. Needle’s choice of phrases tips us off to further hidden complexity in a marital dissolution – not all assets are equally useful to each spouse, so they are not freely tradable between the divorcing parties. 

 

Each asset can be considered as having these additional dimensions:

 

 

It’s all a matter of raising your perspective

 

1.  Liquidity.  Can the asset be sold easily, with difficulty or not at all?  Some assets, like the earning spouse’s partnership share in a law or accounting firm, or restricted stock in a pre-IPO company, may not be sold at all.  But they obviously have value.

 

2.  Penalties of liquidation.  It’s easy to sell a stock – but when you do, you pay a capital gains tax (or take a capital loss).  It’s hard to sell a house – and even when it goes smoothly, you have brokerage commissions, closing costs, and dozens of other fees.  All this financial entropy drains money out of the marital estate. 

 

(We’ll pass lightly over the legal bills incurred by each side in fighting out personal and equitable-settlement issues; they’re a consequence of divorce, not of dissolution.)

 

You’re not leaving until you pay your legal bills

 

3.  Benefit mix.  Some assets – stocks and bonds – have a market value based mainly on their potential to generate future cash flows to investors and holders.  Other assets – like the family home – have a high market value but represent ongoing cash obligations – negative cash flow.  If one spouse has a lot of earning power and the other doesn’t, who receives which asset mix depends in part on who needs cash flow after the divorce.

 

Indeed, it gets even tougher when you own an asset you can’t use and can’t sell:

 

With nearly one in six homes worth less than the mortgage owed on it, according to Moody’s Economy.com, divorce lawyers and financial advisers around the country say the logistics of divorce have been turned around. “We used to fight about who gets to keep the house,” said Gary Nickelson, president of the American Academy of Matrimonial Lawyers. “Now we fight about who gets stuck with the dead cow.”

 

 

I don’t want it, you take it

 

Long ago – 1994, to be precise – I published an enormous article in the AAML Journal with the mouth-watering title, Valuation of Real Estate Interests in Non-Transactional Situations – ‘non-transactional’ meaning that the property itself wasn’t being sold or refinanced, rather it was just sitting there.

 

Wrote an enormous article about partnership interests for the AAML.

 

As a result, divorce has become more complicated and often more expensive, with lower prospects for money on the other side. Some divorce lawyers say that business has slowed or that clients are deciding to stay together because there are no assets left to help them start over.

“There’s an old joke,” said Randall M. Kessler, Ms. Needle’s lawyer. “Why is a divorce so expensive? Because it’s worth it. Now it better really be worth it.”

 

I’m worth it

 

Two do live more cheaply as a team.  Divorce increases their aggregate ecosystemic expenses, plus it costs money to accomplish.  It’s no surprise that divorce correlates with poverty; destroying the family unit increases everyone’s costs, and the parties pay a surcharge to do it.

 

For couples already under stress, the family home has become a toxic asset.

 

I’ve previously posted that you are what you live in.  Because more bedrooms means more babies, most people buy a house when they are starting a family (our euphemism devaluing marriages without children), so that first home purchase becomes fused in their minds with the family and the children.  If the spouse who helped you make the babies has become hateful to you, so does the house in which the babies have been growing into children.  You want to get away from it as fast as you can.

 

“It’s much harder to move on with their lives,” said Alton L. Abramowitz, a partner in the New York firm Mayerson Stutman Abramowitz Royer.

 

Mr. Abramowitz said he was in the middle of several cases where the value of the real estate could not be determined.

 

Riddle me this: what’s your real estate worth?

 

Entirely unsurprising, and made more difficult because the divorcing spouses can’t decide whether they want the price to be high (if they’re planning on having the house sold) or low (if they’re hoping to live there after the divorce and moveout).

 

“All of a sudden,” he said, “prices are all over the place, people aren’t closing, and it becomes virtually impossible to judge how far the market has fallen, because nothing is selling.”

 

For John and Laurel Goerke, in Santa Barbara, Calif., the housing market crashed in the middle of what Mr. Goerke said had been an orderly legal proceeding. At the height of the market, Mr. Goerke said, they had their house appraised at $2.3 million, which would have given them about $1 million to divide after paying off the mortgage.  But by the time they sold last year, the value had fallen by $600,000, cutting their equity by more than half.

 

From the NYT: John says it was so much more orderly when we had enough money to split

 

The irrationality of divorcing parties is so well known as to be virtually a cliche.  Trust has broken down, so the teamwork that makes a good marriage successful is turned against itself.  The result is duplicative expenditure of money, time, and emotional investment:

 

“That changed everything,” said Mr. Goerke, who is now nearly two years into the divorce process, with legal and other fees of several hundred thousand dollars. “The prospect of us both being able to buy modest homes was eliminated. The money’s not there.”

 

Maybe it would have been there had the parties settled sooner, or devised an equity-sharing arrangement to cope with the vast uncertainty.

 

Now, with both spouses living in rental properties –

 

Echoes of Jarndyce v. Jarndyce, the infinite chancery case:

 

 

Jarndyce and Jarndyce drones on. This scarecrow of a suit has, in course of time, become so complicated that no man alive knows what it means. The parties to it understand it least, but it has been observed that no two Chancery lawyers can talk about it for five minutes without coming to a total disagreement as to all the premises. Innumerable children have been born into the cause; innumerable old people have died out of it.  

 

Free advice to anyone embroiled in a divorce: never let the lawyers run the case. 

 

– their lawyers still cannot agree on what their remaining assets are worth.

 

That’s your job as litigants, not the lawyers’ job.  But then, divorce can be irrational:

 

Their wealth is ticking away at $350 an hour, times two.

 

“It’s got to end,” Mr. Goerke said, “because at some point there’s nothing left to argue about.”

 

 

 

Except ‘divorce granted’

  

So wrote Dickens:

 

Scores of persons have deliriously found themselves made parties in Jarndyce and Jarndyce without knowing how or why; whole families have inherited legendary hatreds with the suit. The little plaintiff or defendant who was promised a new rocking-horse when Jarndyce and Jarndyce should be settled has grown up, possessed himself of a real horse, and trotted away into the other world. Fair wards of court have faded into mothers and grandmothers; a long procession of Chancellors has come in and gone out; the legion of bills in the suit have been transformed into mere bills of mortality; there are not three Jarndyces left upon the earth perhaps since old Tom Jarndyce in despair blew his brains out at a coffee-house in Chancery Lane; but Jarndyce and Jarndyce still drags its dreary length before the court, perennially hopeless.

 

 

As long as there are lawyers, there will be writs

 

Is there no alternative to a debilitating and impoverishing divorce?

 

[Continued tomorrow in Part 2.]

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