by Eva M. Massimino, Esq.

Bendett & McHugh, P.C.

USFN Member (CT, MA, ME, NH, RI, VT)

For over a year, the legal community in Rhode Island has been monitoring multiple decisions which left in question whether Fannie Mae, Freddie Mac and FHFA would be established as government actors in the state thereby prohibiting them from completing foreclosures non-judicially as is typically permitted in the jurisdiction. This question was central in Montilla v. Fed. Hous. Fin. Agency, 20-1673 (1^st Cir. June 8, 2021) and Sisti v. Federal Home Loan Mortgage et. al., 20-2025 (1^st Cir. June 8, 2021) which were both decided by the First Circuit Court of Appeals on June 8, 2021.

In Montilla, multiple plaintiffs executed mortgages with a statutory power of sale.  These mortgages were assigned to Fannie Mae prior to the commencement of non-judicial foreclosures. A class action suit against Fannie Mae, FHFA and a loan servicer was filed in Federal District Court for the District of Rhode Island asserting that Fannie Mae and FHFA, as government actors, violated their due process rights by foreclosing non-judicially. Both Fannie Mae and FHFA moved to dismiss arguing that neither entity was a government actor in relation to the non-judicial foreclosures completed. The motion to dismiss was granted holding, “…that because FHFA stepped into Fannie Mae's shoes as its conservator and its ability to foreclose was a ‘contractual right inherited from Fannie Mae by virtue of its conservatorship,’ FHFA was not acting as the government when it foreclosed on the plaintiffs' mortgages and was not subject to the plaintiffs' Fifth Amendment claims.” See Montilla at 7. The class action plaintiffs filed an appeal to the United States Court of Appeals for the First Circuit.

Sisti was another Rhode Island District Court case in which the judge ruled that Freddie Mac and FHFA were not entitled to judgment on the borrower’s due process claims.  The court reasoned that it could be possible for the Borrower (“Sisti”) to present an argument that both Freddie Mac and FHFA are governmental actors. Following a stipulated judgment to enable it to file an appeal, FHFA and Freddie Mac filed appeals in the First Circuit.

Oral arguments for the Montilla appeal as well as the consolidated Sisti appeals were held on the same day. The weight of prior case law from other circuits faced with the same question was in favor of FHFA, Fannie Mae and Freddie Mac however, the borrowers in both cases argued that the rulings out of other circuits were wrong. Specifically, Fannie Mae, Freddie Mac and FHFA argued that Freddie Mac and Fannie Mae are private actors and when FHFA became conservator, by statute, it stepped into the shoes of each and is also a private actor.

In order for Fannie Mae, Freddie Mac or FHFA to qualify as government actors during non-judicial foreclosures, borrowers would have to show that FHFA had established permanent and structural control of Freddie Mac and Fannie Mae. In each case, the borrowers contended that the court should look at the “practical reality” of the government control over Freddie Mac and Fannie Mae and that in these cases, FHFA had complete, indefinite control over each entity that cannot end automatically. For these reasons, they argued that not only is FHFA a government actor but due to the government control asserted over Freddie Mac and Fannie Mae, they are also government actors.

The long-anticipated decisions in Montilla and Sisti were released on June 8, 2021. The First Circuit adopted the decisions of other circuits on the topic when it stated in its opinion in the Montilla appeal, “appellants argue that because FHFA is a government agency, any action it takes as conservator, like directing the GSEs to non-judicially foreclose on appellants' mortgages, is government action subjecting it to appellants' constitutional claims.  That analysis is simply wrong and contrary to law. 

We hold that, in its role as the GSE's conservator, FHFA is not a government actor because it has ‘stepped into the shoes’ of the private GSEs.” The Court also declined to categorize, Freddie Mac and Fannie Mae as government actors despite the length of FHFA’ conservatorship. “FHFA's temporary conservatorship over the GSEs does not constitute permanent authority.  FHFA controls the GSEs for the limited purpose of ‘reorganizing, rehabilitating, or winding up the[ir] affairs.’… The statutory language confirms, as other courts have held, that a conservatorship has ‘an inherently temporary purpose.’… Given the conservatorship's limited purpose, Congress is not required to assign a definite endpoint to FHFA's conservatorship to make the government's control temporary.” Id at 16-17.  The Sisti decision adopted the decision reached in Montilla without further commentary.

The resolution of these cases helps to solidify the future of non-judicial foreclosure of GSE mortgages where permissible.

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June 2021 e-Update