Facing foreclosure and fed up with the banks trying to take back your home? Well, a foreclosure loophole that helped an Ankeny, Ia., home construction worker and his mortgage loan originator wife win a 2009 court judgment against CitiMortgage, giving them title to their $278,000 house free and clear after only one mortgage payment, just might apply to you, too, even if you live in Arizona, Florida, Nevada or one of several other states.
The Iowa couple, Matt and Jamie Rae Danielson, are now under scrutiny from skeptics who are wondering if perhaps the couple devised a “win-a-free-home” scheme from the get-go.
There was no pre-planning, the couple told AOL Real Estate during a phone interview Monday night, but they wish they can convince their bashers who “are spreading gossip and making accusations” after they became aware of this nearly three-year-old issue when the Des Moines Register wrote about the couple twice last week.
“People are threatening to burn our house down. There are nasty blogs going around where people are outraged,” a distraught-sounding Matt, 33, said as a baby cried softly in the background. He says he and his wife didn’t seek this loophole when they purchased their house (pictured) in May 2007. “You don’t make this kind of thing happen. It happens to you.”
It all started when Matt Danielson and his broker, Jason Larson, arranged an impromptu meeting at a mall food court to sign the CitiMortgage financing documents for their new construction 3-bedroom, 2½-bath home that they had been negotiating for a while. Matt dialed his wife’s cell
phone, but didn’t reach her; so in a rushed session he signed the papers without her, finalizing a $320,000 mortgage for 100 percent of the sale price, which included an additional $50,000 to finish the basement.
It was that circumstance that got them off the hook for a defaulted mortgage loan; and you might just be surprised at how that led to them now owning the home outright without having paid but one mortgage payment. In Iowa, if only one spouse signs a mortgage document, creditors have little recourse of coming after the home. The state’s homestead law dating back nearly 125 years to 1888 — a law which might soon get rewritten — says mortgages are not valid until they are signed by both spouses.
Iowa’s law, which is meant to protect an innocent spouse from hidden assets related to refinancing a mortgage to hide the cash, or selling the home out from under one’s spouse’s nose, has the inadvertent affect of also not allowing mortgage lenders to collect on a loan if the signature of an applicant’s spouse is never obtained, but they’ve taken possession of said home. (Investment property tends not to be homesteaded, just primary residences.)
Surprised? If not, maybe you will be to learn that a similar law exists in Alaska, Arizona, Arkansas, California, Colorado, Georgia, Hawaii, and Illinois, among others. States where it doesn’t apply: Delaware, New Jersey, Pennsylvania and Rhode Island.
There are slight differences to each state’s law, and precedence from case law can also make a difference, but check out this list from Law Check to see where your state stands and to find applicable state codes. Then be sure to consult with an attorney before you try to sue your lender based on the homestead code.
Matt acknowledges that at the time they bought a larger, previous house in 2003 “we couldn’t afford the property.” But like many Americans, they say they were a product of the mortgage industry, which at the time was handing out loans to almost anyone with a pulse. And also like many Americans, they used their home like an ATM, refinancing into a larger mortgage as equity climbed with rising home prices (and the extensive remodeling they did) just so that they could have money to pay for the upgrades as well as purchase the vacant adjoining lot.
Eventually the couple was forced to put their 6,000-square-foot dream home up for sale, as well as the vacant adjoining lakefront lot they had acquired subsequently. The vacant land sold, reportedly to relatives, but the lake home was ultimately lost to foreclosure when they couldn’t find a buyer before the bank swooped in. First Horizon sold the REO property in June 2008 for $339,500, about a year after the Danielsons had last made a payment.
Not only did the foreclosure take its toll on Jamie’s credit, but it also strained her work environment, since the loan was obtained through her employer, First Horizon. “I had a conversation with HR about it,” Jamie told me during our phone conversation. It didn’t affect her employment status, as she continued on there, but it was awkward.
“I owed them money and I defaulted, so I didn’t want to pursue another loan through them again.” The 32-year-old was also embarrassed and decided it would be better to keep her personal finances separate from her workplace.
The new home — the one at the center of the court case — was a reasonable size at a reasonable price, especially for a couple who had been used to pulling in an annual joint household income in the six figures.
“We went from a position of high income to like no income,” says Jamie. “We didn’t anticipate the sharp decline in income we have. If we would’ve known that five years later our income would’ve been cut by 75 percent, we wouldn’t have done all that.”
The couple then moved into the 1,800-square-foot house, but only had time to make one mortgage payment before Matt Danielson’s business went under. Knowing they’d be faced with yet another foreclosure, the couple said they made plans to downsize even further.
“My boxes were packed and we were ready to move to an apartment,” said Jamie. Matt added, “We had moved a lot of stuff to a rental because foreclosure was coming down upon us.”
During this same time, the couple consulted with a bankruptcy attorney who pointed out the loop hole in the documents that were not signed by Jamie. Attorney Jerrold Wanek of Garten & Wanek believed as a result he could save their home, and advised the couple to move back home, so they did.
The lower court, and subsequently the appellate court, ruled that the mortgage was “invalid-that is, void-without the signature of both spouses, not merely voidable by the spouse who did not sign.”
Even though this means the Danielsons can remain in their home without paying back their mortgage, Citimortgage, if it wanted, could pursue a lien against the property in the event it ever sells. But since the May 29, 2009 judgment, Citimortgage hasn’t said anything, and the Danielsons have their home free and clear.
“I don’t like people saying we won a ‘free’ house,” says Matt. “It’s not like we entered a raffle and won. We lost practically everything we ever worked for.”
Jamie, who lost her job about a year after MetLife purchased the company in 2008 and then shut their branch down, said she had been looking for another job in the industry, but the negative media attention from the court case changed all that.
And then there is how Matt’s income has fallen to zero from the original loan application that indicated his monthly income at the time was $13,000, coming from his Car Wholesalers company at “1234 Fifth Street,” an address that the Register says doesn’t exist in Ankeny for a business that the Register reports has never been registered with the Iowa secretary of state. But, there are several home-grown businesses that don’t register with the state when they should (although something requiring a license, such as contract handyman work, you think they would. But not all do.) And when you’re practically between homes and your home is your office, as it has been with Matt and his “Time Saver Home Solutions” company, one just might put in a filler address and forget to update it.
Some may view this as a case of “sticking it to the banks,” but given Jamie Danielson’s prior position as a mortgage loan originator and how these “predicaments” of theirs started long before the housing market took a nose dive, perhaps it is just another case of homeowners overextending themselves, and feeling over confident in the market and infallible because they had seen so much growth first hand.
It’s not just the Danielsons who have learned a lesson. For its part, Iowa is working on modifying language in that law so this can’t happen again. The bill has passed the Senate and now awaits House approval. Other states just may follow, if homeowners there start catching on to the loop hole, that is.
Sheree R. Curry, who rented for two years in Iowa, and has since owned three homes, is a three-time award-winning journalist who has covered real estate for six years. During her 20-year career, her articles have appeared regularly in the Wall Street Journal, TV Week, and Fortune. She’s been writing for AOL Real Estate since 2009 from a Minneapolis-area rental. She seeks a book publisher — or at least a lender who’ll give a reasonable mortgage rate to a self-employed mom.