GSB Vol. 16, NO. 4, Pg. 10. Georgia Foreclosure Confirmation Proceedings in Today's Recessionary Real Estate World: Back to the Future.

• Author: by Craig Pendergrast and Sara LeClerc

Georgia Bar Journal

Volume 16.

GSB Vol. 16, NO. 4, Pg. 10.

Georgia Foreclosure Confirmation Proceedings in Today's Recessionary Real Estate World: Back to the Future

GSB JournalVol. 16, NO. 4December 2010Georgia Foreclosure Confirmation Proceedings in Today's Recessionary Real Estate World: Back to the Futureby Craig Pendergrast and Sara LeClercAs commercial property owners face declining cash flows and commercial mortgage-backed security pools limit lender flexibility to modify and extend loan terms, foreclosures and foreclosure confirmation practice are taking front and center among lawyers for lenders, borrowers and guarantors of loans secured by commercial real property. Appraisers are in high demand, not so much for the purpose of providing valuations for underwriting of new loans, but instead for the purpose of assisting lenders in deciding how much to bid at foreclosure and participating in the inevitable battle of appraisers at the subsequent foreclosure confirmation hearing.

This article will address the law applicable to real property foreclosure confirmation proceedings in Georgia and alert secured creditors, debtors and their counsel to potential strategies relating to foreclosure.

The Georgia Foreclosure Confirmation Statute: Then and Now

The Georgia real property foreclosure confirmation statute is found at O.C.G.A. § 44-14-161. Among its provisions is one that requires a foreclosing lender to obtain the "true market value" of the property at foreclosure or else be faced with the prospect of losing any right to pursue a deficiency judgment against the borrower or guarantor of the secured debt.(fn1) This provision was adopted in 1935 during the Great Depression and was intended to protect debtors against unscrupulous lenders who sought to take advantage of the fire sale nature of a foreclosure sale in a tremendously depressed market by bidding in a low price to maximize the amount of a deficiency judgment that the lender might then obtain and seek to recover against the debtor.(fn2) Although the present real estate market is not generally considered to be as depressed as was the market in the 1930s, and real estate prices in some sectors were arguably inflated above realistic values in the period preceding the recent meltdown, the present economic circumstances facing the real estate markets in parts of Georgia harken back to the days and concerns that gave birth to the Georgia foreclosure confirmation statute.

Pre-Foreclosure Considerations

To foreclose following default on a loan secured by real estate, the lender must provide the borrower with written notice of foreclosure and must publish a notice of the upcoming foreclosure for four consecutive weeks in the legal organ of the county in which the real property lies.(fn3) As the foreclosure sale date approaches, the lender must decide whether it wants to pursue a deficiency judgment against the borrower or any guarantors if the lender believes that the value of the property is less than the amount of the debt. If so, then the lender should retain a well-qualified appraiser, preferably with substantial testimonial experience, to provide an opinion of the value of the property on or about the date of the foreclosure.

The Appraiser's Dilemma in Today's Market

In today's real estate market, the meltdown in the financial markets in the fall of 2008, has made new loans on reasonable terms hard to obtain, with buyers looking for bargain basement pricing and sellers trying to hold on to their properties until a more rational and functional market exists. Appraisers often are faced with the problem of having few, if any, reliable modern comparable sales to rely upon in developing an opinion of value. Moreover, in attempting to determine the "true market value" of a property for purposes of anticipated testimony at a foreclosure confirmation hearing, the appraiser is faced with a dilemma: the appraiser must determine whether the few recent sales that may be located are representative of sales in which a "typically" motivated buyer and seller have been participants,(fn4) or if instead the comparable sales are atypical of a normally functioning market, with only distressed sellers, asset liquidating lenders and bargain hunting buyers occupying the field in a dysfunctional market. And if only older comparable sales can be found, then the appraiser must seek to determine whether those sales were representative of a rational market or if instead they were the product of an irrational bubble with respect to that particular sector of the real estate market.

One response of some appraisers has been to recognize the atypical nature of current markets and to perform a prospective appraisal, projecting into the future when the markets return to functionality and then discounting the anticipated pricing of that future day back to the present. Other appraisers criticize this methodology as being dependent upon too many assumptions of future conditions, including the date that the markets will return to normality and the prices, interest rates, rent terms and capitalization rates that will exist at such time. Yet even those appraisers who note the potential flaws in this approach still recognize that it is an accepted appraisal methodology,(fn5) and Georgia courts have also recognized the potential viability of this approach.(fn6)

The lawyer who is in communication with a secured lender client in advance of foreclosure should ideally be involved in the selection of a well-qualified appraiser with good testimonial demeanor and experience and should also confer with the appraiser to assure that the appraiser's data, approach and analysis are as reliable as possible. Otherwise, when it comes time for the appraiser to defend the appraisal in the face of cross-examination at a foreclosure confirmation proceeding, embarrassment and a poor outcome very well may follow.

The Lender's Dilemmas

Once the lender has its appraisal in hand, it must then decide how much to bid at the foreclosure sale. Best practice is to bid an amount that is higher than the appraised value to account for a margin of error and to demonstrate optimum good faith on the part of the lender. In other words, the lender should show that it is not trying to take advantage of the borrower by attempting to maximize the amount of a deficiency that it will pursue later. But how much of a buffer over the appraised value is enough? Should the lender attempt to anticipate the highest possible opinion of value that an opposing appraiser may reach, thereby minimizing the possibility of being barred from pursuit of a deficiency judgment, while...