Fannie and Freddie Foreclosures Must Meet Constitutional Due Process Standards

A federal court’s August ruling in Sisti v. Federal Housing Finance Agency, 2018 WL 3655578 (D.R.I. Aug. 2, 2018), has the potential to revolutionize Fannie Mae and Freddie Mac foreclosure procedures in the majority of states that allow nonjudicial foreclosures. By finding Fannie and Freddie to be state actors, those entities’ foreclosure practices must meet constitutional due process standards. If followed by other courts, this may radically change Fannie and Freddie foreclosure practices in nonjudicial foreclosure states.

Fannie and Freddie Are Now Under Federal Agency Conservatorship

Sisti finds Fannie Mae and Freddie Mac to be state actors because they are under conservatorship of a federal agency. In 2008, Congress authorized the federal government to take over operation of both Fannie and Freddie, known as government sponsored enterprises (GSEs). Congress created the Federal Housing Finance Agency (FHFA) to place the GSEs in receivership or conservatorship. See 12 U.S.C. § 4617(a)(2). The GSEs have remained under the FHFA’s conservatorship ever since then. Under the conservatorship FHFA controls all aspects of the GSEs’ activities. See Leon Cty. Fla v. FHFA, 700 F.3d 1273, 1279 (11th Cir. 2012). The FHFA is an agency of the federal government. As such it is subject to all requirements that apply to a federal agency, including compliance with the Administrative Procedure Act. FHFA has always claimed that its own broad governmental immunity covers the GSEs under its conservatorship as well. See, e.g., County of Oakland v. FHFA, 716 F.3d 935 (6th Cir. 2013). Yet FHFA vigorously asserts that the GSEs are not governmental entities subject to the Fifth Amendment’s Due Process Clause.

The Conservatorship Is Not Temporary

For the past decade, FHFA and the GSEs have been convincing courts that the GSEs were not government actors when they foreclosed. Herron v. Fannie Mae, 857 F. Supp. 2d 87 (D.D.C. 2012) set the standard for many later rulings. Herron applied the three part test enunciated by the Supreme Court in Lebron v. National Railroad Passenger Corp., 513 U.S. 374 (1995):

• Whether the government created the entity by special law;
• Whether the entity furthers governmental objectives; and
• Whether the government retains for itself “permanent authority” to appoint a majority of the directors of that entity.

Herron found that Fannie Mae failed to meet these criteria because the government did not retain permanent authority to appoint GSE directors. Instead that authority was found to be only temporary, in contrast to Lebron that held that the government exercised permanent control over Amtrak. Many courts have followed Herron, treating the FHFA’s conservatorship of the GSEs as temporary. These cases are collected at NCLC’s Foreclosures and Mortgage Servicing § 6.1.2.1. Well-supported analyses challenge this conclusion. See, e.g., Florence Wagman Roisman, Protecting Homeowners from Non-Judicial Foreclosure of Mortgages Held by Fannie Mae and Freddie Mac, 43 Real Estate L. J. 125 (Fall 2014). Sisti, in holding the GSEs to be state actors, first found that the FHFA undisputedly is a federal agency exercising complete control over all aspects of the GSEs’ operations and managed the GSEs for public purposes only. The GSEs were barred from earning profits for shareholders. Then it ruled that the authority to appoint GSE directors was not temporary, but permanent. The legislation authorizing the conservatorship set no date or other objective criteria for when the government control will end. Sisti refused to equate indefinite control with temporary control. As a practical matter, the government had an unfettered right to prolong its control of the GSEs for as long as it wished. Carried to its logical conclusion, any government actor could evade constitutional duties by simply stating it had a subjective intent to stop acting as a government entity someday. According to the court, “[t]he practical reality, then, is that the government can control Fannie Mae and Freddie Mac in perpetuity, even though Congress authorized a facially temporary conservatorship.” Sisti only decides that the GSEs are state actors, and thus that constitutional due process standards apply to their foreclosures. Sisti has not yet reached issues as to whether GSE foreclosures under the state’s nonjudicial foreclosure system meet those due process requirements, although it is likely they will not.

Sisti’s Broad Implications

Fannie and Freddie own or guarantee most residential mortgage loans in the United States. These GSEs consider themselves to be private lenders, and like private lenders in the majority of states that authorize nonjudicial foreclosure, the GSEs use nonjudicial foreclosure procedures in these states, with little thought to whether those procedures meet constitutional due process standards. Sisti, by finding the GSEs to be government actors, will require the GSEs to comply with similar constitutional due process standards followed by other foreclosing government entities, such as the Rural Housing Service and the VA. These standards are examined at NCLC’s Foreclosures and Mortgage Servicing § 8.4.1. It may be that due process does not require the GSEs resort to judicial foreclosures. See, e.g., Williams v. Butz, 843 F.2d 1335 (11th Cir. 1988) (USDA’s administrative procedures satisfy due process concerns). But if the GSE uses a nonjudicial foreclosure, notices and the opportunity for an evidentiary hearing before a neutral hearing officer must meet due process standards. Service by advertisement and posting may raise concerns, as will undue burdens on the mortgagor’s ability to obtain a timely and fair hearing.

Watch Out: Fannie and Freddie Foreclosures May Be in the Servicer’s Name

Fannie and Freddie typically conceal their role in foreclosures, but this does not alter the fact that these are GSE foreclosures that Sisi instructs must meet due process standards in the foreclosure. GSE servicing agreements call for transfers of promissory notes to servicers so that the servicers conduct foreclosure sales in the servicers’ names. See NCLC’s Foreclosures and Mortgage Servicing § 7.10 (describing this process). Under the standard practice, the GSE remains the “beneficiary” or “owner” of the mortgage throughout the foreclosure. The transfer to the servicers of the right to enforce the promissory note is only for administrative purposes. Upon completion of the foreclosure sale, the servicer ensures that the GSE is named transferee in the foreclosure deed. The GSE at all times controls the foreclosure. If any doubt exists about the role of a GSE as owner of the mortgage loan, the borrower should serve a “Request for Information” under RESPA on the servicer and ask for the identity of the loan’s owner. In addition, the GSEs online loan look-up portals should provide this information. Fannie Mae’s loan look up can be found at: https://www.knowyouroptions.com/loanlookup. Freddie Mac has a similar site at: https://ww3.freddiemac.com/loanlookup/.