In states that allow a nonjudicial foreclosure through a power of sale clause in a deed of trust, homeowners find that their properties are sold out from under them without a hearing or chance to defend themselves. In fact, it is up to the borrowers to bring a lawsuit into court against the lender and they then have the burden of proof in showing that the foreclosure should not go forward.
Although the courts have ruled that, in order to take away someone’s significant interest in property, notice and a hearing are required, only a bit of notice is given to homeowners facing nonjudicial foreclosure. No meaningful hearing is given to the borrowers. State laws in nonjudicial states allow the sale of a property to satisfy a foreclosure as long as the trustee follows the regulations concerning notice.
And while this issue may seem to violate the due process protections given to individuals under the United States Constitution, the Supreme Court has found that due process protections only come into play when there is a state actor in the deprivation of property. Because a deed of trust and promissory note are executed between two private parties (homeowners and lenders), there is no automatic due process protection.
In the court case Flagg Brothers, Inc. v. Brooks, the Supreme Court found that there is no due process violation if there is no state action. Settlement of disputes between a lender and a borrower through a forced sale of property does not create state action. This is true even in the case of a sheriff sale or trustee sale of a property — the fact that state laws determine how the foreclosure proceeds does not create state action.
However, homeowners facing foreclosure may have a defense against nonjudicial proceedings in two situations. The first is if a government agency is the foreclosing mortgagee. For instance, if HUD, the FHA, the VA, or a similar agency of the government owns the mortgage and is suing for foreclosure, then a state actor is involved in the deprivation of property, and the borrowers should be given due process protection.
The second situation in which homeowners may be able to assert due process protections is if the state foreclosure laws require that a government official participate in the process. A number of court cases have examined this issue, and many have found that significant state official involvement in the foreclosure process gives homeowners due process protections.
For instance, in Vermont’s strict foreclosure process, state action can determine a whole range of issues relating to the disposal of the property, and homeowners are given due process protections. Another court found that state action is created even when a town clerk is required to record a lis pendens on a property facing foreclosure. Depending on the responsibilities given to such government officials, homeowners may be able to assert due process protection.
However, on the other hand, some involvement by state officials does not create due process protections for borrowers. For instance, courts have found that the involvement of a county sheriff in the sale of a property through nonjudicial foreclosure does not create state action. Similarly, the use of a county recorder in the auction does not automatically give due process protections to homeowners.
Homeowners facing foreclosure in nonjudicial process states have always had a more difficult time defending foreclosure than if they lived in a judicial state. Banks are more able to begin foreclosure without having to prove they even own the loan, let alone have a strong enough case to take the house back. While borrowers have few protections against predatory actions of banks, government action in the foreclosure sale may give them more protections.