Iowa loophole voids mortgage, gives couple 'a free house'

Matt and Jamie Danielson own their $278,000 Ankeny home outright, and paid almost nothing for it.

A hasty home-loan approval and a 123-year-old law that requires mortgages be signed by both spouses helped the couple fight foreclosure all the way to the Iowa Court of Appeals. They won, and though they made only one payment to lender Citimortgage, the mortgage is now void and they get to keep the home.

"It's dumb luck that we're in this house," said Matt Danielson, 33.

The banking lobby is chagrined. The Iowa Bankers Association is backing legislation that would change the law so this never happens again.

"It's not like we're rolling on easy street," Danielson said. "We still struggle just like everybody else does in this economy."

The proposal gives judges discretion in cases like the Danielsons', instead of automatically voiding mortgages not signed by both spouses. The bill passed the Senate on Monday.

The law's original intent was to protect husbands and wives from liability if one spouse made a disastrous financial decision unbeknownst to the other or against her or his wishes.

Bob Hartwig, legal counsel for the Iowa Bankers Association, said the proposal won't remove that protection, but it would allow judges to decide what's fair.

"They got a free house," he said of the Danielsons.

The Danielsons were high-fliers in the boom years before the financial crisis.

He built houses, she originated mortgages. They worked hard and spent money when they felt like it. They lived in a house along Saylorville Lake, owned several cars, and invested in a car lot in Indianola.

When they started to lose it all as the housing market slowed, they decided to downsize and move into their current home on the northwest edge of Ankeny.

Matt Danielson finalized the $320,000 mortgage - 100 percent of the value of the home plus $50,000 to remodel the basement - in May 2007. He and the broker, Jason Larson, met at a mall food court.

Danielson asked if his wife needed to be present and Larson said no, according to the Court of Appeals decision. Danielson tried to call his wife, but couldn't reach her. He and Larson went ahead with the documents, in what Danielson told the court was a "rushed" meeting.

The mortgage was approved without Jamie Danielson's signature, and the couple with their young son moved into the house.

Danielson's home-building business went under that summer, and the family made one loan payment. Anticipating foreclosure, they rented another home and moved half their belongings there.

"We had our bags packed," Jamie Danielson, 29, said. "We know if you can't pay, you can't stay."

They went to Jerry Wanek, their lawyer, to file bankruptcy. He was the first to notice that Jamie hadn't signed the mortgage and to recognize the significance of that omission.

"He found the loophole," Matt Danielson said. "You couldn't have planned that."

Mortgage companies have been criticized for sloppy handling of mortgage documents in the lead-up to the financial crisis, which was driven by reckless home lending. Several of the nation's largest lenders stopped foreclosing on homeowners in the fall after widespread reports of flawed paperwork, and 50 state attorneys general led by Iowa's Tom Miller are investigating whether lenders broke the law.

The Iowa law invoked by Wanek in the Danielson case dates to 1888, and has its roots in a law passed in 1851. It was intended to stop one spouse from ripping off the other. It invalidates sales of — or loans on — a home, unless both spouses sign. The idea is to prevent one spouse from refinancing a mortgage and taking off with the cash.

But Hartwig said current law leaves banks vulnerable to borrowers who might knowingly get a mortgage they never plan to pay. He said Iowa courts have seen a few cases like the Danielsons' in the past decade.

"We're not trying to protect lenders that just ignore the marital status," Hartwig said. "We're just trying to give the judges some discretion, to do what's fair."

Citimortgage, the plaintiff in the case and a member of Citigroup, the nation's third-largest bank, argued in court that Matt Danielson had tried to hide his marriage in the mortgage application. The Court of Appeals rejected that claim resoundingly, saying everyone involved knew Danielson was married.

Also, the court noted that Citimortgage appears to have approved the Danielsons' mortgage even before it received a signed copy of the loan application.

Wanek, the Danielsons' lawyer, doesn't believe it's right to pass a law to protect banks from their own - or their mortgage brokers' - mistakes.

"You don't close a $300,000 transaction in that manner," Wanek said. "I think the legislation is reacting to something that rarely happens, and shouldn't have happened if there was a reasonable amount of care."

Sen. Rob Hogg, D-Cedar Rapids, agreed that banks should be responsible for proper handling of mortgage paperwork. But there are cases where the lender could legitimately perceive that borrowers are single when they are not, he said. Examples would include cases where spouses are separated, or if one is out of the country.

"We're trying to see if we can come up with a solution that works and yet doesn't create unintended consequences the other direction," Hogg said.

The Danielsons see their situation as the result of an out-of-control home lending market.

"For five years, you could basically show an ID and walk into a mortgage," Matt Danielson said.

The couple are pleased with the outcome, but didn't throw a party to celebrate.

Getting the house for free was, by comparison, a small victory next to their rapid fall from wealth, business failure, bankruptcy proceedings, a protracted court case, legal fees and ongoing struggles to pay the bills.

"It was not a fun situation," Jamie Danielson said. "I wouldn't want anybody to have to go through it."

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