The state of Michigan has supplied the Sixth Circuit with no shortage of foreclosure-related decisions since the financial crisis, but the court's recent decision in Garcia v. Federal National Mortgage Association, No. 14-1687, — F.3d — (Apr. 7, 2015), ruled on a particularly interesting issue: whether the Federal National Mortgage Association's (Fannie Mae) foreclosure upon the plaintiffs' home violated their constitutional due process rights. The court answered, "No."
The plaintiffs obtained a home loan in 2003. In 2007, they fell behind on their payments and defaulted on the loan. In early 2011, plaintiffs received a letter about the default and potential loan modification, and they were later offered a loan modification for a three-month trial period. Bank of America, the mortgage holder, also offered them a permanent loan modification in May 2012, but the plaintiffs never executed and returned the required paperwork to do so.
Bank of America, therefore, notified plaintiffs in August 2012 that a non-judicial foreclosure would take place. Notice of the foreclosure was properly published, and the property was sold to Bank of America at a sheriff's sale in October of that year. Plaintiffs did not redeem the property during the six-month statutory redemption period under Michigan law, and Fannie Mae, having been quitclaimed the property, filed a possession action. Plaintiffs responded with a lawsuit, alleging, among other things, violation of their Fifth and Fourteenth Amendment Due process rights. The Federal Housing Finance Agency (FHFA), the federal conservator for Fannie Mae, intervened.
The panel first noted that it had not yet addressed the questions of whether the FHFA is a state actor and what restrictions the Due Process Clause may impose on it in its direction of Fannie Mae. The court's prior decisions focused on whether Fannie Mae and Freddie Mac were transformed into state actors in light of the FHFA's conservatorship. Ultimately, the court found it unnecessary to answer those questions, because the FHFA's compliance with Michigan's foreclosure-by-advertisement process did not violate the core requirements of due process: notice and the right to be heard. In particular, the panel noted, "the Due Process Clause is flexible and calls for such procedural protections as the particular situation demands. Due process is required to prevent, to the extent possible, an erroneous deprivation of property." (Emphasis in original).
With respect to notice, the court noted that the Michigan foreclosure-by-advertisement statute required both written notice and opportunities to cure default or redeem the property several times before the borrower's rights were extinguished. The borrower has a six-month statutory redemption period following the sheriff's sale, for example. In the present case, the plaintiffs had received the required statutory notice of foreclosure and sheriff's sale, and they did not claim lack of notice.
The plaintiffs' main argument was that they had the right to a judicial hearing before foreclosure. The court flatly rejected this contention, stating that "[w]here only property rights are involved, . . . the postponement of a structured judicial hearing is not a denial of due process if there is adequate opportunity after the foreclosure for such a hearing." The Michigan statute provided borrowers with adequate constitutional protection because it gave borrowers notice of the default, an opportunity to cure, and a statutory six-month redemption period after foreclosure, as well as a chance to set aside the foreclosure sale for "fraud or irregularity" in the process. The court held that the ability to bring an action before the expiration of the statutory redemption period satisfied the requirement that there be a hearing "at a meaningful time and in a meaningful manner" before permanent deprivation of property.
With this opinion, mortgage holders have another arrow in their quivers to defend against wrongful-foreclosure claims.
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