Insights

In 2007, an Iowa state court dismissed a foreclosure case brought by Wells Fargo because its closing agent failed to obtain the borrower’s spouse’s signature on a mortgage on homestead property. The Iowa Court of Appeals affirmed, leaving Wells Fargo with an unsecured debt. Two years later, faced with similar facts in a Minnesota case, Wells Fargo prevailed on appeal when the U.S. Court of Appeals for the Eighth Circuit reached the opposite result from the Iowa Court.

In the Iowa case, Wells Fargo Bank, N.A. v. Hudson, 2007 Iowa App. LEXIS 1117 (Iowa App. October 24, 2007), the borrower raised an affirmative defense to Wells Fargo’s foreclosure action, claiming that the mortgage was void because the property was a homestead and Jodi Hudson, the borrower’s wife, had not signed the mortgage. Wells Fargo did not dispute the fact that the property was a homestead or that Ms. Hudson had not signed the mortgage. Instead, it contended that it was entitled to an equitable mortgage or equitable lien on the property. The state trial court found in favor of the borrowers, though, holding that the mortgage was void, dismissing the foreclosure action and refusing to establish an equitable mortgage or equitable lien in favor of Wells Fargo. Wells Fargo appealed, but the Court of Appeals of Iowa affirmed the trial court’s decision. The appellate court noted that homestead rights are favored in Iowa and that a mortgage is void without both spouses’ signatures. The appellate court found that the facts clearly showed that Jodi did not sign the mortgage. As a result, the appellate court concluded that the trial court properly dismissed the foreclosure action. The appellate court also refused to grant Wells Fargo an equitable mortgage or lien, finding instead that Wells Fargo had an adequate remedy at law because it could sue Troy Hudson on the promissory note.

Despite similar facts, the Eighth Circuit case ended differently. In Karnitz v. Wells Fargo Bank, N.A., 572 F.3d 572 (8th Cir. (D. Minn.) July 17, 2009), the court overturned a federal district court decision that was in line with the Iowa decision. The court concluded that even though the state (Minnesota) statute might require both spouses to sign a security instrument for it to be valid, a borrower may not rely on that requirement to prevent a sale or conveyance of the property (as in the case of foreclosure) when: (1) the non-signing spouse consents to and has prior knowledge of the underlying loan; (2) the non-signing spouse benefits from the transaction; and (3) the lender has sufficiently changed its position in reliance either on the borrower’s spouse’s silence or misconduct (the court does not specify, which gives rise to a dissenting opinion). In this case, the borrower’s non-signing spouse knew about the mortgage her husband was applying for and wanted to get a mortgage loan. She lived in the house and enjoyed the benefit of using the loan proceeds to pay off the construction loan. Further, Wells Fargo changed its position in reliance on the validity of the mortgage loan by lending the money in exchange for a lien on the property. Accordingly, the appellate court held that the borrower and his wife were stopped from denying the validity of the mortgage, even though the non-borrowing spouse had not signed the mortgage.

In states that provide homestead rights, it is always imperative to have the signature of the non-borrowing spouse on the security instrument when state law requires it to either effectively grant the security interest or to waive the homestead rights. In the event that, despite all precautions, the security instrument comes out of closing without that signature and is recorded that way, the lender can point to the reasoning of the Eighth Circuit case – if the lender’s facts allow it – to argue that the court should enforce the mortgage notwithstanding the failure to obtain the required signature(s) on the mortgage. The case may not provide much comfort to a lender who finds itself without the required signatures, but it’s something.