The post-divorce mortgage limbo

Divorced couple

Tess Vigeland: The financial issues surrounding a divorce are messy under just about any circumstance -- even when it's amicable. But the housing bust is forcing some couples to sign decrees tying them together for years after the marriage is over, because the jointly owned property that's now hard to sell.

From station KJZZ in Phoenix, Peter O'Dowd reports on the pitfalls of unloading a house even after you've untied the knot.


Elle Shelley: One, two, three...

Elle Shelley leafs through a stack of papers. The anchor that's been weighing down her peace of mind since 2007 is buried on the sixth page of her divorce decree.

Shelley: There it is, right there.

A line or two of legalese, about halfway down.

Shelley: "Husband shall refinance or sell the real property awarded to him herein above at his own expense to remove wife's name from the mortgage.

O'Dowd: That hasn't happened?

Shelley: No.

In case you missed that, Shelley's husband needs to refinance the home in order to get her name off the mortgage. But this is Phoenix: More than half of all home owners here are underwater on their mortgage -- and that makes refinancing almost impossible.

What's worse, Shelley signed something called a "quit-claim deed." This common divorce agreement stripped her name off the legal documents that made her co-owner of the house. Quit-claims are often required before a bank will refinance in the other spouse's name. But it did not relieve Shelley of responsibility for the mortgage.

Shelley: I mean, I wasn't bright-eyed and bushy-tailed; I knew what was signing. My thinking on singing the quit-claim deed was that gave Ryan, my husband, the permission to take care of refinancing it.

Four years later, still nothing. Shelley makes up to 90-grand a year in the advertising industry, but her lingering mortgage entanglements continue to dog her.

Shelley: I couldn't rent a house, I couldn't buy a new car. I couldn't do anything without people going, "Hey, did you know you have a $400,000 mortgage tied to your credit?" And I'm like, "You're kidding me!" Of course, I knew.

So this is what it feels like to be married to a mortgage. When Shelley's ex tried getting a loan modification, he stopped making the loan payment. She watched helplessly as her credit score fell. At 28, she's been divorced longer than she was married.

Shelley: So while on paper, I'm divorced, am I really? No. Absolutely not. We still have a house together.

Linda Lea Viken: She's a typical example of the devastation it can cause, and she doesn't have anywhere to turn.

Linda Lea Viken heads the American Academy of Matrimonial Lawyers.

Viken: Some people are in a hurry to get divorced. And so they just agree, this is what I am going to do. And then they find out six months later that it isn't going to happen.

Viken says this reliance on signing away the deed before refinancing causes nightmares for divorcing couples everywhere. The practice is left over from the days when the nation's housing stock was worth a fortune. One spouse gave up ownership and the other quickly sold or refinanced. Everyone cashed out and moved on.

Not so in 2011, says Laurel Starks, a real estate agent who specializes in divorce.

Laurel Starks: It's like bringing a buggy whip to the Model-T. It's not going to work.

In reality, there's no easy fix for this. One Phoenix attorney told me he's never once seen a refinance in a divorce case go through since the housing market collapsed. Laurel Starks says the best hope is getting ahead of the problem: Go straight to a short sale.

Starks: Just go ahead and rip off the Band-Aid and get off that joint mortgage so that it does not come back and haunt them later.

Sound of little girl squealing and laughing

That's exactly what Kevin Saleeby is trying to do.

Kevin Saleeby: You all done? Good job, Chloe.

Friend: Good job, girlfriend!

Saleeby and his three children are washing a friend's dog in the backyard of his family home. The ink just dried on his divorce. The agreement gave him full ownership of the house, and two years to find a way to get his wife of more than a decade off the mortgage. Because that loan was $100,000 underwater, Saleeby knew refinancing was useless. He immediately put the house on the market and hoped for a short sale.

Saleeby: I just planned it out. I knew what my options were. I weighed the different options. But out of all the evils, this was definitely the lesser one.

And so far, the plan is working.

Saleeby: Got five offers the first day. Accepted the offer. So this is really the final piece of business now that the divorce is final.

But in this market there's a decent chance the short sale will fall through. Until it's final, Saleeby and his ex-wife face the potential for the kind of post-divorce limbo former spouses across the country are struggling through.

In Phoenix, I'm Peter O'Dowd for Marketplace Money.

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