An appeals court ruling this week in favor of a Cobb County couple could leave mortgage companies liable for damages for not following state law in an unknown number of Georgia foreclosures.
The 4-3 ruling probably won't undo the result of past foreclosures, lawyers say, but could open another avenue for borrowers to sue mortgage firms.
"This could breathe new life into the challenges of foreclosures that took place in late 2008 and throughout 2009," said Frank Alexander, a real estate law professor at Emory University.
The number of cases where the ruling might be applicable was not immediately clear, but could be in the tens of thousands.
The issue involves the many lenders who sell their loans to other parties such as investment trusts, but serve as stand-ins handling the paperwork in the foreclosure process and act as if they still own the loans.
The Georgia Court of Appeals held Thursday that the name of the actual owner of a mortgage must be present in foreclosure filings and notices sent to delinquent borrowers.
State law was modified in 2008 to require that foreclosure notices and legal advertisements include the name and contact information of the mortgage owner and of organizations that could negotiate a modification, short sale or other relief on lender's behalf.
"A debtor has a right to know which entity has the authority to foreclose, and there should be no confusion about the identity of that entity. The practical ramifications are troubling if it were otherwise," the court majority agreed in its opinion.
The court said that if a debtor knows a mortgage servicer no longer holds the loan, for instance, he could be "misled or confused, or simply disregard, a notice of foreclosure" that doesn't correctly identify the loan's proper owner.
David Ates, an attorney for plaintiffs Izell and Raven Reese, said mortgage servicers, stand-ins for investors who buy mortgages the original lenders have sold, often have an incentive to foreclose because of potential fee revenue.
Though banks have improved some of their practices since 2011, Ates estimated that "90 to 95 percent" of residential foreclosures in Georgia from mid-2008 to 2011 could be susceptible to a challenge based on lack of disclosure.
"We've been arguing for quite a while these notices are bad," Ates said.
Georgia's amended foreclosure law went into effect July 1, 2008, and other real estate observers said that mortgage servicers and law firms conducting foreclosures have done a better job complying with the law since early 2010. But for about 18 months that was not the case.
Alexander said the ruling is significant as an affirmation of the 2008 amendment to Georgia's foreclosure statutes.
In addition to helping borrowers under threat of foreclosure know where to turn for help, the principle of the 2008 amendment was to help ensure that the true holder of the mortgage was foreclosing.
"Even a dog in Georgia has a right to know who's kicking them," Alexander said. "Before you lose your home you have a right to know who's taking it from you."
A lawyer for Provident Funding Associates LLP, the defendant in the Reese case, did not immediately return a call seeking comment.
The Reeses were in default on their mortgage and sued in 2009 after foreclosure, claiming it was invalid because of improper notice. The couple were evicted after their legal challenges were initially dismissed, and they later appealed.
Hugh Wood, an attorney who handles foreclosure cases for lenders and defense cases for borrowers, said pending borrower cases could be amended and new ones could crop up if the Reese case survives a likely appeal to the Georgia Supreme Court.
Georgia ranked fourth in the nation in foreclosure filings in June, after topping the nation in that category in May, according to RealtyTrac.
The ruling does not address other allegedly faulty or fraudulent foreclosure documentation at the center of controversy over robo-signing, mortgage company agents approving foreclosure documents with no or little review, that roiled the nation in 2010 and led to a nationwide settlement this year with the major banks.
Georgia law in foreclosure cases affords few protections to borrowers, but the 2008 amendment was one nod to borrower's rights.
Borrower advocates have been critical of Georgia's so-called "non-judicial" foreclosure system, where lenders must only assert they have a right to foreclose, not prove to a judge basic facts such as ownership of a loan or that it is indeed in default.
Bankers say Georgia's foreclosure system is efficient, that the vast majority of borrowers are in default and that a judicial system would be costly by clogging up the repossession process.
Alexander Brown, a borrower's attorney in Atlanta, said the lender-identification issue is just another example of shoddy paperwork that overwhelmed mortgage companies and law firms used in flushing foreclosures through the system.
But he said the potential effect of the Court of Appeals ruling is covered in some ways by the $25 billion foreclosure settlement reached with the major banks earlier this year. Applying for a review of a foreclosure under the settlement might be an easier way to claim damages than suing in court, he said.
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