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Rhode Island Federal Court Ruling Could Change GSE Nonjudicial Foreclosure Process Across the Country

Posted By USFN, Monday, April 15, 2019

by Joseph A. Camillo, Jr., Esq.                                    

Brock and Scott, PLLC

USFN Member (AL, CT, FL, GA, MA, MD, ME, MI, NC, NH, OH, RI, SC, TN, VA, VT)

In August of this year, the United States District Court for the District of Rhode Island was presented two cases seeking a ruling that Fannie Mae (“FNMA”) and Freddie Mac (“FHLMC”) are government actors, and thus, violated Fifth Amendment due process rights by conducting non-judicial foreclosures. See Sisti v. Federal Housing Finance Agency (“FHFA”), 2018 WL 3655578 (D.R.I. Aug. 2018).  FHFA, FNMA and FHLMC moved for judgment on the pleadings, which was denied by Judge McConnell as “…it is not ‘beyond doubt’ that plaintiffs cannot prove their claims against the agency.”  Based on the denial, FHFA, FNMA and FHLMC filed a motion to amend the August 2, 2018 order to include the certification necessary to allow defendants to petition the U.S. Court of Appeals for the First Circuit for interlocutory review under 28 U.S.C. §1292(b).  On October 15, 2018, McConnell denied the motion allowing the case to proceed.

The case stems from two unrelated foreclosures: a 2012 foreclosure sale of Sisti’s home by FHLMC and a 2014 foreclosure sale of Boss’ home by FNMA.   In both instances, the properties sold back to the respective government-sponsored enterprises (“GSEs”) and state court actions to evict commenced.  Both borrowers seeking to defend the evictions sued FNMA, FHLMC and FHFA in separate Federal Court actions, alleging that the entities are government actors and violated the borrowers’ Fifth Amendment due process rights by conducting non-judicial foreclosures. The defendants moved for judgment on the pleadings, and the cases were consolidated for oral argument as they presented the same legal issues

In denying defendants (FHFA, FNMA and FHLMC) the motion for judgment on the pleadings, the court found that the plaintiffs could prove that FNMA and FHLMC are government actors for the purposes of constitutional claims and thus the case could proceed.  This was based on the court’s application of the three-part test articulated by the Supreme Court in
Lebron v. National Railroad Passenger Corp. 513 U.S. 374 (1995) which asked: 1) whether the government created the entity by special law; 2) whether the entity furthers governmental objectives; and 3) whether the government retains for itself “permanent authority” to appoint a majority of the directors of that entity. 

In dispute amongst the parties was the third prong of this test, namely whether the government has retained permanent authority to appoint a majority of the directors of that entity.  Many courts in the past have found, and
FNMA, FHLMC and FHFA argued, that FHFA’s conservatorship of the GSEs is temporary under the Housing and Economic Recovery Act (“HERA”).  This court however rejected this argument, concluding that FHFA “…effectively controls Fannie Mae and Freddie Mac permanently” because of its control over the duration of the conservatorship, which Judge McConnell described as “in perpetuity.

This recent ruling allows the case to move forward and is not a decision on the merits.  If GSEs are found to be government actors, then constitutional protections may apply which could trigger changes to the GSE non-judicial foreclosure process across the country.  This could range from foreclosing in the servicer’s name to protections found in judicial foreclosures, such as the opportunity to have an evidentiary hearing, to be represented by counsel, or to have a neutral hearing officer adjudicate the matter.

 

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