Opportunity Costs: Nonjudicial Foreclosure and the Subprime Mortgage Crisis in Georgia

• Citation: Vol. 25 No. 4
• Publication year: 2010

Georgia State University Law Review

Volume 25 j 6

Issue 4 Summer 2009

3-21-2012

Opportunity Costs: Nonjudicial Foreclosure and the Subprime Mortgage Crisis in Georgia

Barry Hester

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Recommended Citation

Hester, Barry (2008) "Opportunity Costs: Nonjudicial Foreclosure and the Subprime Mortgage Crisis in Georgia," Georgia State

University Law Review: Vol. 25: Iss. 4, Article 6.

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Hester: Opportunity Costs: Nonjudicial Foreclosure and the Subprime Mort

OPPORTUNITY COSTS: NONJUDICIAL FORECLOSURE AND THE SUBPRIME MORTGAGE CRISIS IN GEORGIA

Barry Hester*

Introduction

By the fifteenth of the month, Mortgage Servicing Company has not received a payment from Borrower, one of many Georgia borrowers whose subprime residential mortgage loan it services.¹ This is the third missed payment in as many months, and the two previous late payments are still delinquent. Mortgage Servicing purchased the rights to service this and many other loans from Mortgage Trust, a subsidiary of an investment banking firm which bought Borrower's loan from its originator and pooled it along with hundreds more to form Mortgage Trust.³

A Mortgage Servicing associate consults with Mortgage Trust and draws up foreclosure materials after reviewing Borrower's loan information on the MERS system.⁴ MERS is a national database maintained by the Mortgage Electronic Registration System, Inc., on which "more than half of all home mortgage loans originated in the [U.S.]" were registered by 2004.⁵ Because Borrower's loan fits the definition of a "high-cost home loan" under Georgia Code Section 7-6A-2(7),⁶ Mortgage Servicing sends Borrower a notice of default and the right to cure within thirty days in order to avoid foreclosure

* J.D. 2009, Georgia State University College of Law.

1. See Kathleen C. Engel & Patricia A. McCoy, Turning a Blind Eye: Wall Street Finance of Predatory Lending, 75 fordham L. rev. 2039, 2044-45 (2007); Christopher L. Peterson, Predatory Structured Finance, 28 cardozo L. Rev. 2185, 2210 (2007) (explaining that in corresponding with customers, loan servicers "receive monthly payments, monitor collateral, and when necessary foreclose on homes").

2. See Ohio Real Estate News, http://ohioralestatenews.wordpress.com/category/foreclosure/ (last visited Aug. 24, 2007) (suggesting that few lenders will foreclose until a borrower is more than two months behind).

3. See Peterson, supra note 1, at 2209.

4. See id. at 2211.

5. Id.

6. 0.CG.A. § 7-6A-2(7) (2007). See infra Part II.C.

1205

proceedings.⁷ Two weeks later, having heard nothing from Borrower, Mortgage Servicing forwards notice of its intent to foreclose⁸ and drafts a notice of the foreclosure sale of Borrower's property to be published in the local legal organ.⁹ After two more weeks, Borrower receives a copy of this notice,¹⁰ which Mortgage Servicing then submits for publication in the Fulton County Daily Report for the first of four required weeks.¹¹

Borrower contacts Mortgage Servicing at this time asking for leniency. He does not contest the three delinquent payments but requests additional time to come up with the money. The servicer explains that she is not authorized to make major changes to loan terms and instructs the borrower to call Mortgage Trust. Borrower tries in vain to speak to someone at Mortgage Trust about amending his loan.¹³

A month later, Mortgage Servicing conducts the foreclosure sale on the steps of the Fulton County Courthouse¹⁴ as an agent of MERS, the mortgagee of record.¹⁵ The servicer not surprisingly enters the lone bid on the property.¹⁶ Three months later, Mortgage Trust notifies Mortgage Servicing that the servicing contract for a new mortgage on the property is available. Thus, roughly two months after Borrower received notice of his third and final default, his home was sold on the courthouse steps, and a new borrower is making mortgage payments on and living in the residence within six months of that default.

7. See O.C.G.A. § 7-6A-(5X13XCX") (2007).

8. See id. §7-6A-(5)ll.

9. See O.C.G.A. §44-14-162(2007).

10. See O.C.G.A. § 44-14-162.2 (2007), amended by S.B. 531, 148th Gen. Assem. (Ga. 2008).

11. See O.C.G.A. § 9-13-141 (2007).

12. See Jeanne Sahadi, Subprime: Big Talk, Little Help, CNN Money.Com, Sept. 26, 2007, http://money.cnn.com/2007/09/26/real_estate/few_loan_modifications/index.htm (asserting that loan servicers may be restricted in the number of loans they can modify without getting the permission of loan pool investors).

13. See id. (suggesting that lenders are not staffed to handle modification requests by borrowers).

14. O.C.G.A. § 9-13-160, 161 (2007).

15. See Peterson, supra note 1, at 2212.

16. See Basil H. Mattingly, The Shift from Power to Process: A Functional Approach to Foreclosure Law, 80 Marq. L. Rev. 77,78 n.7 (1996).

2009]

This hypothetical illustrates the central tension in the law of nonjudicial foreclosure: the viability of the current secured lending model versus the protection of borrowers.¹⁷ In many states, this tension has taken on new policy dimensions in light of "predatory lending" practices¹⁸ and foreclosure on subprime mortgages, those loans offered to borrowers with the poorest credit scores.¹⁹ This Note considers whether Georgia's existing nonjudicial foreclosure law sufficiently balances the individual and institutional interests at issue in the subprime residential mortgage context.²⁰ Part I outlines Georgia's experience in the current increase in subprime mortgage foreclosure, its general nonjudicial foreclosure process, and the traditional policy justifications for nonjudicial foreclosure.²¹ Part II examines recent changes to or prohibitions on nonjudicial foreclosure in Georgia and elsewhere and extracts the policy motivations behind those changes. Part III explains that, while the factors giving rise to the proliferation of subprime lending have probably weakened the traditional policy defense of nonjudicial foreclosure and strengthened its criticisms, other factors will likely dramatically reduce Georgia borrowing opportunities in the near future.²³ In this light, nonjudicial foreclosure reform or prohibition is probably not warranted because it

17. Patrick B. Bauer, Judicial Foreclosure and Statutory Redemption: The Soundness of Iowa's Traditional Preference for Protection over Credit, 71 IOWA L. REV. 1, 7 (1985).

18. Celeste M. Hammond, Predatory Lending—A Legal Definition and Update, 34 REAL EST. L.J. 176, 178-81 (2005) (asserting that there is no uniform definition of predatory loans but all describe costs and terms that raise the costs of borrowing without adding any benefits, and discussing the many practices associated with predatory lending, such as aggressive marketing, high and changing interest rates, and prepayment penalties for paying the loan off early).

19. Id. at 176 (explaining that subprime borrowers typically have a FICO (Fair Isaac Co.) credit score of less than 570); Dennis Hevesi, ABC's (andXYZ's) of Home Buying, N.Y. TIMES, Feb. 23,2003, at 11 (suggesting that subprime loans are those available to borrowers with credit scores less than 620).

20. See infra Part HI. Not all subprime loans are predatory, but the overlap between the two is considerable. See Deanne Loonin & Elizabeth Renuart, The Life and Debt Cycle: The Growing Debt Burdens of Older Consumers and Related Policy Recommendations, 44 HARV. J. ON LEGIS. 167, 178 (2007). As a result, Although this Note focuses on the sufficiency of nonjudicial foreclosure in the context of subprime loans, predatory lending concerns are highly relevant.

21. See infra Part I.

22. See infra Part II.

23. See infra Part III.

continues to preserve borrowing opportunities in an uncertain lending future.²⁴

I. Background

A. Subprime Lending, Securitization, and Foreclosure Rates in Georgia

American residential foreclosure rates began a historic spike as early as 2005.²⁵ The national rate of foreclosure in the first quarter of 2007 was the highest it has been in fifty years.²⁶ In August, 2007, an estimated 243,947 U.S. homes, or nearly one in 500, were subject to foreclosure, public auction, or repossession.²⁷ Estimates of Georgia's foreclosure rates place it among the highest in the country. Subprime mortgage foreclosure rates are particularly startling. The Center for Responsible Lending conducted a study of more than six million subprime mortgages that were entered into between 1998 and the third quarter of 2006; the results indicated that one in five of the subprime mortgages made in 2005 and 2006 is likely to end in foreclosure.³⁰ Significantly, subprime mortgages are estimated to constitute one-quarter of today's mortgage market. Because of scheduled "resets" in adjustable rate subprime mortgages originated

24. See infra Part ffl.B.

25. David Gonzalez, Risky Loans Help Build Ghost Town of New Homes, N.Y. Times, Sept. 24, 2007, at Bl.

26. Dina ElBoghdady & Nancy Trejos, Foreclosure Rate Hits Historic High, Wash. Post, June 15, 2007, at Dl.

27. Vikas Bajaj, Foreclosures Surged 36% in August, Report Says, N.Y. Times, Sept. 18, 2007, at C3.

28. Carrie Teegardin, The Crisis of Foreclosure: A Sign of the Times, atlanta J.-const., Sept. 9, 2007, at Al (citing Mortgage Bankers Association report). But see Carrie Teegardin, Foreclosures: State 'Crisis' Figures Way Off, atlanta J.-const., Oct. 14, 2007, at Al (questioning a private company's extreme projections of Georgia foreclosures).

29. Ellen Schloemer et al., Center for Responsible Lending, Losing Ground: Foreclosures in the Subprime Market...