Banking Law Bulletin

The Continued Importance of (and Debate Over) Homestead Rights

While invoking the term “homestead rights” harkens one back to “frontier days” when homesteaders staked their claims, a recent Appellate Court case in Illinois reminds of the continued and ongoing importance of homestead rights and of the need to understand who has those rights and when. Waiver thereof by those who have such rights when a mortgage is signed is key if and when the home loan later goes into default and collection action ensues.


In GMAC Mortgage vs. Arrigo, 2014 IL App (2d), 130938, decided April 4, 2014, the Second District Illinois Appellant Court addressed this question: Can a spouse claim a homestead exemption when that spouse is not on the title to the property but her husband is and she maintains the property as her primary place of residence? The Appellate Court answered this question: No!


This case stands for the proposition that a non-titled spouse has no homestead rights with regards to property held solely in the other spouse’s name even if he or she lives in the home as their primary residence. Residing in the marital home with the titled spouse is not enough. Put another way, living in a house with one’s spouse as one’s primary residence does not create a “homestead right” but rather one must have a formalized interest in or ownership right in the property.


GMAC Mortgage involved a mortgage foreclosure filed by GMAC Mortgage against Nicholas Arrigo, Lina Arrigo and others. Nicholas and Lina Arrigo were husband and wife and lived in the subject property as their residence but only Nicholas was the title holder. In the proceeding, Lina sought to partition the property based upon her claim to a “homestead exemption”.


Despite its “old west” connotations, homestead rights are strictly statutory and in Illinois read as follows: “Every individual is entitled to an estate of homestead to the extent in value of $15,000 of his or her interest in a farm or lot of land and buildings thereon, a condominium or personal property owned or rightly possessed by lease or otherwise (emphasis added) and occupied by him or her as a residence…”


Assuming the other criteria are met, what must one show to establish that the property is “owned or rightly possessed by lease or otherwise” so as to qualify for a homestead exemption?


In answering that question and in ruling against Lina’s claim, the Appellate Court said that a “homestead right” exists only when the spouse has a titled interest or formalized leasehold right, in the home.


In other words, the spouse must have a fee interest, estate for years, life estate or even a tenant’s interest in the property in order to have a homestead right. Otherwise, living in the house with your spouse is not sufficient. Because Lina was not on the title to the property, she had no homestead exemption.


In rendering its decision, the Appellate Court rejected, as being an insufficient interest in realty to support a homestead right, any “potential” equity interest Lina might have in the house as a divorcee under the Dissolution of Marriage Act, as a wife, under the Rights of Married Persons Act (the “Marriage Act”) or as a widow under the Probate Act if her husband, Nicholas, had passed away. As Lina was neither divorced nor her husband deceased, those potential interests were only theoretical and not real.


As to the Marriage Act, the Court noted that previous cases in Illinois had held that the rights of a spouse under the Marriage Act combined with the Release of Homestead Statute entitled a non-owner spouse to claim a homestead exemption in a marital residence owned solely by other spouse.


However, the Court went on to say that those cases which held that marriage and residence in the homestead were sufficient to create a homestead right had been abrogated and overruled by more recent cases decided over the last six years, most notably by a 7th Circuit (Fed) Court of Appeals decision in 2008 upon which the GMAC Mortgage Court relied in making its decision. As such, it rejected those earlier cases.


So, in light thereof, the question becomes, should a home loan officer require a non-titled holding spouse living in the marital home, to sign the mortgage? Despite GMAC Mortgage, the preferred practice remains to have the non-titled spouse sign the mortgage. This is because the law is not yet completely settled in this area. As such, a non-titled spouse’s potential equitable interest in the home, as a spouse, divorcee or widow could be a sufficient basis for a Judge to find a homestead exemption claim exists. Better to guard against that possibility by having both spouses sign than to risk the $15,000.00.


But what about the situation where the title holder and non-title holder are not married, but rather the latter is a “significant other”, who resides in the “marital” house. Not only does GMAC Mortgage tell us that a non-title holding “significant other” would not have a homestead exemption in the house, but also, numerous cases have held that only a married person can claim such right, if at all, by virtue of the Marriage Act, the Dissolution of Marriage Act or Probate Act.


Further, any such rights would only arise after the non-titled “significant other” got married to the titleholder which presumably would be well after the mortgage is filed.


But, should the “significant other” sign the mortgage anyway? Perhaps they will get married. Perhaps they will break up. What if the non-titled “significant other” does sign the mortgage but the “couple” splits up, the non-title holder disappears and then a foreclosure begins? Does the “significant other” by virtue of having signed the mortgage become a necessary party in the foreclosure case? What if that person cannot be found? Certainly the foreclosure case could become more complicated with delays likely.


Conversely, suppose that the non-titled “significant other” does not sign the mortgage but the couple later gets married and/or they then get divorced and/or the title holder passes away before the loan goes into default? Would the significant other’s new status as wife, divorcee or widow give rise to a homestead interest that she has not waived? Perhaps. But that right would come into being after and be behind the Bank’s mortgage on the home and so any such right would be subordinate to the Bank’s mortgage.


On balance, a Bank takes less risk if its practice is not to have a non-titled spouse, i.e. the boyfriend, girlfriend, fiancé or live-in, sign the mortgage as opposed to signing it. If he or she has no homestead right when the mortgage is signed, what right would he or she be waiving? Does the thinking change if the non-titled “other” signs the note? Not really.


So, if there is a second non-titled party involved in a relationship with the title holder, have him or her sign the mortgage if the two are married (even if it’s a civil union) but not otherwise. Married, yes; just living together, no.


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The foregoing is not intended to be legal advice, but rather, to provide accurate information regarding banking law and regulatory matters. For more information regarding any of the foregoing items, please contact any member of our banking practice group: William G. Keller, Jr. (wkeller@srnm.com), James A. Rapp (jrapp@srnm.com), William M. McCleery, Jr. (wmccleery@srnm.com), Michael A. Bickhaus (mbickhaus@srnm.com) or Christopher W. Pratt (cpratt@srnm.com), at (217) 223-3030 or visit us on the web at www.srnm.com. We invite and welcome all questions and comments.







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