Mortgage lenders breathed a sigh of relief on Monday as the Georgia Supreme Court issued a ruling that unties the hands of banks seeking to foreclose on borrowers in default.
The unanimous opinion effectively reverses a decision issued by a divided Court of Appeals in another case last year. Creating uncertainty over proper foreclosure practices, that opinion said a state statute required foreclosure notices to properly identify the owner of a loan, not just the servicer.
According to Atlanta lawyer David Ates, who represented the plaintiffs in both that case and the one decided on Monday, the number of foreclosure notices in Georgia dropped by 40 percent the month after the Court of Appeals issued its decision last July. But Lawrenceville attorney Denise Griffin of Shapiro, Swertfeger & Hasty, who represents national home mortgage lenders, said that although foreclosures slowed down for a period of time after last year’s decision, that wasn’t entirely due to the decision itself, citing national factors such as directions by federal regulators and consent orders with lenders that have caused periodic slowdowns over the last two years.
"I don’t think it will have any impact on volume," Griffin said of Monday’s decision. "I think it will affect litigation more than foreclosures themselves."
"It gives certainty and certainly reduces unnecessary litigation," she added.
On Monday, the justices lamented the ease with which foreclosures may proceed under their ruling. But they said Georgia law doesn’t preclude banks from foreclosing on home loans even though they do not hold the underlying note.
That decoupling of the loan from a property’s deed has become common in residential lending with the rise of mortgage securitization, according to the court’s decision. In that scenario, the note might be transferred to a mortgage-backed security or Fannie Mae, while the deed is transferred to a servicer such a bank, which later initiates foreclosure proceedings.
Distressed homeowners had filed a host of lawsuits claiming they were illegally foreclosed on. They pointed to language in O.C.G.A. § 44-14-162.2 to the effect that "the secured creditor" must give 30 days’ notice to a homeowner before foreclosing and must include contact information for "the individual or entity who shall have full authority to negotiate, amend, and modify all terms of the mortgage with the debtor."
The plaintiffs argued that only a party who holds both the deed and the note can be considered a "secured creditor." Many of the wrongful foreclosure cases proceeded in federal court, with mixed success.
The case decided by the appeals court last year, Reese v. Provident Funding Associates, was handled in Cobb County Superior Court, where Judge S. Lark Ingram dismissed the case. The Court of Appeals reversed her by a vote of 4-3, ruling that the Georgia statute requires a foreclosure notice to properly identify a secured creditor and not merely the servicer of the loan. The appeals court said that although a servicer may send a foreclosure notice on behalf of the true owner of the loan, it was "fatal" for the notice to not identify that lender. Then-Judge Keith Blackwell, now a justice on the state high court, said in dissent that the majority opinion written by Judge M. Yvette Miller, and the federal district court opinion by U.S. District Judge Amy Totenberg on which it was based, amounted to a "judicial rewriting" of the statute.
That decision was "very alarming" to lenders, according to Bryan Cave lawyer Johnny "Jay" Latzak Jr., who represents commercial mortgage lenders. But after revisiting their practices, said Latzak, lenders pressed on. "The people I talked to didn’t sit back more than a month or so," he said.
Some practitioners began including more information in notices to borrowers where it was practical, he said. Where it was impractical to identify all of the lenders, such as in the case of a securitized loan held in trust for potentially hundreds of lenders, practitioners gave borrowers relevant information such as who they needed to contact to seek modification of the loan—"all the time letting your client know this was not bulletproof," said Latzak.
The defendant that lost at the Court of Appeals asked the state Supreme Court to review that matter, but the court issued its decision on the issues in a federal district court case, You v. JPMorgan Chase Bank. In that case, Chief U.S. District Judge Julie Carnes asked the state Supreme Court to go ahead and tackle some of the legal questions before the case proceeded, because it involved unsettled questions of state—as opposed to federal—law. On Monday, the state court also granted certiorari in the Reese case, sending it back to the Court of Appeals for consideration in light of the Supreme Court’s decision in You.
In the case in which the court issued its main opinion, Chae Yi You and Chur K. Bak in 2003 purchased a home in Suwanee with a mortgage from Excel Home Loans. Sometime thereafter, the promissory note executed by the plaintiffs was sold or transferred to an unidentified entity, and the security deed was assigned to Chase Manhattan Mortgage Corp. Chase Mortgage merged into JPMorgan Chase Bank, which then held the security deed.
In 2011, after the plaintiffs defaulted on their loan, JPMorgan Chase sold the house on the steps of the Gwinnett County courthouse. As it was the highest bidder, JPMorgan Chase deeded the house to itself, then transferred the property to Fannie Mae, which initiated dispossessory proceedings against the plaintiffs.
The plaintiffs sued JPMorgan Chase and Fannie Mae in Gwinnett County Superior Court, alleging they had been wrongfully foreclosed on and evicted. The defendants had the case moved to federal district court on the grounds the parties were from different states.
Chief Justice Carol Hunstein wrote the opinion resolving the questions sent to the high court by Carnes. She said that although the plaintiffs’ arguments had "superficial appeal," they did not comport with the language and intent of the statute.
At the time the term "secured creditor" was used in the statute when the provisions requiring notice to debtors were first enacted in 1981, wrote Hunstein, Georgia courts appear to have allowed foreclosures by an entity that held legal title to the property but not the underlying note. And she said that, despite splitting note from deed becoming the norm in the age of mortgage securitization, 2008 amendments made no express reference to that practice and there’s no other evidence of an intent to change it.
Hunstein wrote that the "secured creditor" doesn’t necessarily need to be identified in the foreclosure notice, but merely whoever has the authority to modify the loan, whether that’s the deed holder, note holder or someone else such as an attorney or serving agent.
A concluding paragraph suggested the justices weren’t thrilled with the result. "This Court is not blind to the plight of distressed borrowers, many of whom have suffered devastating losses brought on by the burst of the housing bubble and ensuing recession," wrote Hunstein. "While we respect our legislature’s effort to assist distressed homeowners by amending the non-judicial foreclosure statute in 2008, the continued ease with which foreclosures may proceed in this State gives us pause, in light of the grave consequences foreclosures pose for individuals, families, neighborhoods, and society in general. Our concerns in this regard, however, do not entitle us to overstep our judicial role, and thus we leave to the members of our legislature, if they are so inclined, the task of undertaking additional reform."
Ates, who represented the plaintiffs in both You and Reese, says the Legislature needs to act. "Because there is absolutely no check on this process anymore," he said.
He said the decision leaves undisturbed practices in which distressed homeowners receive notices containing false information about who owns their loan. And, he said, even if a servicer technically has the power to modify a loan’s terms, it has no incentive to do so, whereas a lender might consider modifications. "The servicer doesn’t care," said Ates. "The servicer will get paid for foreclosing."
Paul Painter Jr. of the Savannah firm Ellis, Painter, Ratterree & Adams argued for the defendants at the Supreme Court. His co-counsel with the Atlanta firm of Wargo & French referred questions to a media contact with JPMorgan Chase, Amy Bonitatibus. "We’re pleased with the outcome," said Bonitatibus, "and we believe that it was the correct one."
The case was You v. JPMorgan Chase Bank, No. S13Q0040.