Wrongful Foreclosure: A Big Day for Homeowners and a Bad Day for Banks and MERS: Foreclosure Wrongful Where Notice of Foreclosure Only Identifed Loan Servicer and Not Actual Holder of Security Deed.

          Last week in Reese v. Provident Funding Associates, LLP, 2012 WL 2849700 (July 12, 2012) the Georgia Court of Appeals reversed a trial court's decision that it was permissible for a loan servicer to send a notice naming it as the holder of a security deed instead of the actual owner of the security deed, over three dissenting judges.  The result was that the homeowner won a suit for wrongful foreclosure against the loan servicer, and a route to wrongful foreclosure claims has been opened for plaintiffs.  This is a huge case because this mortgage was one of the Mortgage Electronic Registration Systems, Inc. ("MERS") deals designed to avoid County taxes.  MERS was named in the security deed as the grantee of the original security deed.  After Provident funded the loan it sold and delivered the note to the Residential Funding Company, LLC ("RFC").  Thus, RFC succeeded Provident as the holder of the note, but Provident remained in place as the loan servicer only. It is likely that RFC sold the note as well and it became part of a package of mortgages that were bundled together and made into securities to be sold to investors like so many residential mortgages were handled before the Great Recession.

        In 2009 the Reese's defaulted and eventually Provident sent notice to them that the property was going to go into foreclosure in a non-judicial sale. The foreclosure took place and the occupants of the home were evicted.  The Reeses filed a claim for wrongful foreclosure claiming that OCGA 44-14-162.2(a) required their foreclosure notice to provide the name of the secured creditor, not just an agent of the creditor, ie, the loan servicer.  The statute in question states clearly that "notice of the initiation of proceedings to exercise a power of sale in a mortgage, security deed or other lien contract shall be given by the secured creditor no later than 30 days before the date of the proposed foreclosure."  The provision then goes on to say that the notice must provide contact information of "the individual or entity who shall have full authority to negotiate, amend and modify all terms of the mortgage with the debtor."  The statute arguably is ambiguous to situations where  the secured creditor is not the only entity with full authority to do what the second sentence requires.  The plaintiff's claimed that the provision as a whole makes clear the secured creditor must be named, perhaps along with the other agent with the authority to modify or amend the note.  The defense argued that the second sentence clarifies that an agent, here Provident, is permitted to be the sole entity on the notice because it has the authority to act as much as the secured creditor.  In essence, the plaintiff's focused on the first sentence and the defendant's on the second sentence.  This was an issue of first impression to the Court of Appeals.

      This is an important question because at least tens of thousands of mortgages in Georgia are handled the way this one was, with some entity other than the ultimate secured creditor listed on the notice.  In fact in this case it is unclear just who the secured creditor was, but it is highly unlikely it was still RFC.  It is impossible to tell how many mortgages and foreclosures in Georgia were handled this way.  Nevertheless, despite the huge problem of wrongful foreclosures in the past, and current mortgages under water that were executed like this one, the court reversed the trial court's decision.  It held that the two provisions in 44-14-162.2(a), read together, provide in plain language that the secured creditor must be named in the notice, and that nothing precludes the secured creditor from being listed alongside the servicer or other nominee.

       Indeed, this notice listed Provident as the secured creditor, which simply was not true.  The court duly noted this total misrepresentation and falsehood in its ruling.  It seemed that the court found that construing the statute the way the banks do it leads to an automatic lie to the debtor that the servicer is in fact the secured creditor.  This obviously was a troubling fact for the court in the case.

     This ruling throws into question the ability to foreclose many real estate mortgages on the books and may cause many wrongful foreclosure suits over foreclosures that have already happened.  The fact is that it might be very difficult for the servicer of a mortgage note to trace back the loan all the way to its ultimate security deed holder.  Having to do this investigation will inevitably lead to transaction costs in time and money for the banks trying to untangle the complicated web of the mortgage securities that were traded all over the world.  However, this is the world the industry created by inventing MERS and RFC in the first place to allow mortgages to be flipped endlessly and lightning fast without paying County recording taxes at all for each transfer.  The rush for money that created the securities investments out of residential mortgages led to this brazen attempt to circumvent taxes and the notice requirements of the statute.  It remains to be seen how big this decision is in the long run, or whether the Georgia Supreme Court will look at the issue any time soon.  But for now, it will allow defaulted debtors to stay in their homes longer, because it will force mortgage servicers to do a lot more homework up front about who actually holds the security deed on the loan that was funded to finance the house.  All in all, it was a gutsy decision by the Court of Appeals, but one that seems obvious based on the reading the statute as a whole, as the court must in following the rules of contract interpretation in Georgia law.