Homestead bill becomes law

Iowa Governor Terry Brandstad signed Senate File 400 on March 30. This changes section 561.13 of the Iowa Code, the homestead law.

With an amendment offered by the Iowa State Bar Association’s Real Estate Section, this bill preserved the presumption that a deed or mortgage for homestead property is void if not signed by both spouses. The bill also codifies a purchase money mortgage exception. The exceptions presented by the Bar will help close a “loophole” much in the news with the Hawkins and Danielson decisions. See the other posts on homestead. The bill has no special effective date, so it will be applicable on July 1, 2011.

Homestead bill approved, to governor

The Iowa House of Representatives approved SF 400, the Homestead Conveyance bill, on a 94-3 vote on March 22. This bill is on its way to the Governor. The Iowa State Bar Association vastly improved this bill with Amendment S-3102. See more about this bill here.

Homestead hits the “news”

Citimortgage, Inc., v. Danielson, suddenly hit the press today, almost two years after the fact. The Des Moines Register and Associated Press have been running the story about an Iowa Court of Appeals decision filed in May 2009. This is in conjunction with Senate File 400 approved by the Senate 48-0 on March 14.

In the Danielson case, the trial and appellate courts strictly applied Iowa Code § 561.13 to find the mortgage void because it lacked a spouse’s signature. Thus, the homeowners walked away with an “almost free house.”

This is the opposite result from that reached by the same court in JP Morgan Chase Bank v. Hawkins, decided in February 2011. For more on this, see the previous post Whither the Homestead?

Unlike the Hawkins case, the Danielson case does not discuss the antecedent debt/purchase money mortgage argument. The Danielson court does not mention this issue. Moreover, the Danielson court agreed with the homeowner that there was no evidence of fraud, which has a fairly difficult standard.

Citimortgage probably did not lose anything on the transaction. The attorney general was one of the attorneys appearing on behalf of Citimortgage, the appellant. This suggests that Iowa Title Guaranty insured title and probably was subrogated to Citimortgage’s claim. I would guess that Citimortgage received a big check to make it whole. Title Guaranty (or whoever the title insurer may have been) potentially has a cause of action against the folks that set up and closed this loan.

Homestead bill clears Iowa Senate

The Iowa Senate approved Senate File 400 48-0 on March 14. The bill was sponsored by the Iowa Bankers Association. The bill received a complete overhaul in amendment S-3102, which was offered by the Iowa State Bar Association. The ISBA’s real estate and family law sections spent many hours discussing and redrafting proposals.

This bill preserves the February 2011 ruling in JP Morgan Chase Bank v. Hawkins, decided by the Iowa Court of Appeals. Hawkins basically holds that a purchase money mortgage is an “antecedent debt,” which means that the mortgage lien trumps (or at least precedes) the rights of homestead created in Iowa Code § 561.13. The bill also preserves the presumption that an instrument that does not have the signatures of both spouses is void.

Update (2011/03/17 14:02:48) — Interestingly, the Iowa Court of Appeals reached the opposite result in Citimortgage, Inc., v. Danielson, an unpublished decision, in May 2009. This case suddenly hit the press today, almost two years after the fact. See the Des Moines Register story. The Danielson case does not discuss the antecedent debt/purchase money mortgage argument. The trial and appellate courts strictly applied Iowa Code § 561.13 and agreed with the homeowner that there was no evidence of fraud.

Whither the Homestead?

If a home is a person’s castle, the homestead is the bulwark against the person’s creditors. JP Morgan Chase Bank v. Hawkins, decided by the Iowa Court of Appeals in February 2011, put a big hole in the bulkwark.

A “homestead” is the “the house used as a home by the owner.” (Iowa Code § 561.1) Iowa law generally defines what can be a homestead and protects it against certain debts and liens. Even a non-owning spouse has rights: to occupy the homestead on the owner’s death (Iowa Code § 561.11); to retain the homestead for life in lieu of dower (Iowa Code § 561.12); and to avoid conveyances or encumbrances of the homestead (Iowa Code § 561.13). This last right has always meant that one spouse cannot sell or mortgage the homestead without the other spouse’s signature. Moreover, a deed or mortgage is simply void as against both owner and spouse. Beal Bank v. Siems, 670 N.W.2d 119, 124 (Iowa 2003).

Hawkins involved a foreclosure of a “purchase money mortgage.” Dennis Hawkins signed a mortgage listing his status as “a married man.” The mortgage had the typical language in it waiving the borrower’s homestead rights. Jan Hawkins, his wife, did not sign the mortgage. When the lender sued for foreclosure, Mr. and Mrs. Hawkins argued that the mortgage was invalid under Iowa Code § 561.13. The lender argued, and the district court ruled, that the purchase money mortgage effectively precluded the homestead.

The Iowa Court of Appeals agreed with the lender and the district court. The Court reasoned that the purchase money mortgage was an antecedent debt. With the antecedent debt, the homestead rights could not attach to the property. Consequently, the protections of Iowa Code § 561.13 did not apply for either spouse. (Slip Op. at 9)

A similar principle of the superiority of the purchase money mortgage is enshrined in statute in Iowa Code § 654.12B. This statute, which is in the foreclosure law, gives priority to the purchase money mortgage over other forms of antecedent debts.

There is a bill sponsored by the banking industry, HF 517, pending in the legislature that would effectively codify the holding in Hawkins. Although filed before Hawkins was a glimmer in the banking industry’s eye, this bill makes clear that the bankers and title insurers want to ensure the primacy of their purchase money mortgage liens. Under most circumstances, it is hard to argue that the lender should not be allowed to protect their investment. On the other hand, one might wonder why in the world a financially sophisticated lender (one who actually knows there is a spouse) gets protection for a dimwitted loan in which they failed to get all of the necessary signatures. There ought to be some middle ground between protecting negligent loan practices and fraudulent borrowing.