The Constitution grants us the right to due process where a property interest is at issue. Part-and-parcel of due process is the right to notice and to be heard. With regard to foreclosures of real property, the question becomes whether all owners must be given notice and a reasonable opportunity to be heard, right? Wrong. The due process requirements only apply to state actors. This distinction seems fairly clear when we think of big private banks like J.P. Morgan & Chase, and governmental entities like the the NYAG. But what happens when we enter that blurry area where a so-called governmental entity is hidden under a cloak of private participation?
In 1995, in Lebron v. National R.R. Passenger Corp., the Supreme Court addressed this very issue. In determining a First Amendment violation claim, the Supreme Court established a two-prong test to determine whether a federal government corporation was a government actor. The two prongs are:
- The extent to which the corporation was formed for the furtherance of governmental objectives.
- The extent to which the federal government retains control over the corporation’s efforts to achieve its objectives.
The majority opinion, written by Justice Scalia, held
[W]here, as here, the Government creates a corporation by special law, for the furtherance of government objectives . . . the corporation is part of the Government for purposes of the First Amendment.
We faced a similar issue with Fannie Mae and Ginnie Mac. In 2008, both agencies were placed under the Federal Housing Finance Agency (FHFA) Conservancy. FHFA, although clearly a governmental entity under the first prong, operated in a way that made it difficult to establish control under prong two, since courts have argued its control is “merely the same control that Freddie Mac had before the conservatorship.”
Though many courts follow the Lebron test, others have created exceptions to the state action tests based on the interpretation of “control” in the second prong. For example, in Herron v. Fannie Mae, despite evident government control on behalf of Fannie, the court found that Fannie Mae was not a state actor because “under the Lebron framework, permanent government control is required.”
The lack of clarity regarding which entities can be established as state actors has led to widespread backlash.
In cases involving FHFA alone, mortgagors have begun challenging Fannie Mae and Freddie Mac foreclosures on due process grounds, arguing that these entities, as state actors, should have been enjoined from trying to execute power of sale foreclosures for lack of constitutional procedure.
Until the definition of “state actors,” for purposes of the due process clause, is established, foreclosed upon mortgagors will forever be in a state of limbo in guessing whether they will be given adequate notice and hearing procedures that they arguably should be entitled to.
For further reading, see the Emory Law Journal.