In Sisti v. Federal Housing Finance Agency, 2018 WL 3655578 (D.R.I. Aug. 2, 2018), the United States District Court for the District of Rhode Island found that Fannie Mae and Freddie Mac are state actors, and therefore those entities’ foreclosure practices must meet constitutional due process standards. If other courts follow this ruling, Fannie Mae and Freddie Mac foreclosure practices could drastically change in nonjudicial foreclosure states.
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs), which means these companies are privately owned, but they receive support from the federal government. Fannie Mae and Freddie Mac own or guarantee most residential mortgage loans in the United States. (Learn more about how Fannie Mae and Freddie Mac play a role in the U.S. mortgage market.)
In 2008, during the financial crisis, Congress authorized the federal government to take over operating both Fannie Mae and Freddie Mac. Congress created the Federal Housing Finance Agency (FHFA) and, currently, the GSEs are under the conservatorship of the FHFA. (A “conservator” is a person or entity that has the legal authority to control a business to put it in a sound and solvent condition. The FHFA, as conservator, controls Fannie Mae and Freddie Mac’s activities.)
The Due Process Clause of the Fifth and 14th Amendments to the U.S. Constitution declares that the government shall not deprive any person of "life, liberty, or property, without due process of law." Due process requires that deprivation of a significant property interest be preceded by both adequate notice and a meaningful opportunity for a hearing.
When it comes to foreclosures, it has been argued that nonjudicial foreclosures don’t meet this standard because:
However, in the past, almost all challenges to nonjudicial foreclosures based on a due process argument have failed because the Due Process Clause applies to actions by the government (often called "state action"), while most nonjudicial foreclosure proceedings involve private parties. Private parties don’t have to meet due process requirements.
The FHFA claims that Fannie Mae and Freddie Mac are not governmental entities subject to the Due Process Clause. And for the past ten years or so, the courts have agreed that these GSEs were not government actors when they foreclosed and, therefore, not subject to due process requirements.
When is an entity a "state actor"? In Lebron v. National Railroad Passenger Corp., 513 U.S. 374 (1995), the Supreme Court laid out a three-part test to determine if an entity is considered part of the government. Specifically, the court must look at:
Courts previously said the GSEs were not state actors. In Herron v. Fannie Mae, 857 F. Supp. 2d 87 (D.D.C. 2012), the United States District Court for the District of Columbia decided that Fannie Mae didn’t meet the Lebron standards because the government did not retain permanent authority to appoint GSE directors. Instead, the court found the authority to be temporary. Many other courts agreed and treated the FHFA’s conservatorship of Fannie Mae and Freddie Mac as temporary.
The Sisti court, on the other hand, found that the FHFA is indeed a federal agency that exercises complete control over all aspects of Fannie Mae and Freddie Mac operations, the agency manages the GSEs for public purposes only, and that the FHFA's authority to appoint GSE directors was permanent—not temporary.
Ultimately, the Sisti court decided that, under the FHFA conservatorship, Fannie Mae and Freddie Mac are state actors, and therefore constitutional due process standards apply to their nonjudicial foreclosures.
Because Fannie Mae and Freddie Mac own or guarantee most residential mortgage loans in the United States, the Sisti decision could affect nonjudicial foreclosures throughout the country. But, while the Sisti court said the GSEs are state actors and must follow due process requirements, it did not state whether nonjudicial foreclosure procedures actually violate due process requirements. So, this decision doesn’t necessarily mean that a Fannie Mae or Freddie Mac foreclosure will have to go through the courts (judicial foreclosure); however, it could mean that the GSEs will have to change some of their nonjudicial procedures—at least in jurisdictions where other courts follow the Sisti decision.
For example, based on Sisti, notice of the foreclosure by publication or posting could be invalid. A foreclosure notice likely must be served personally, either by mail or by another means. Concerning the hearing requirement, an administrative hearing might be sufficient if it provides a meaningful and timely opportunity to contest the foreclosure. Or merely the ability to start a lawsuit to fight a nonjudicial foreclosure might be sufficient to meet due process requirements. Some courts have said that a borrower’s ability to bring such an action (file a lawsuit) satisfies a hearing requirement.
If you’re facing a nonjudicial foreclosure and want to learn whether the Sisti decision affects you, talk to a local foreclosure lawyer. A lawyer can also tell you which state and federal laws apply in your case and whether you have any potential defenses to the foreclosure. If you want to learn about different loss mitigation options, talk to an attorney or a HUD-approved housing counselor.