Hugh C. Wood, Esq.
Wood & Meredith, LLP
Of Counsel, Shapiro & Swertfeger
Atlanta, Georgia 2002
All Rights Reserved.¹

Presented to the Georgia Real Property Law Institute, May 10, 2002,
Amelia Island Plantation, Amelia Island, Florida

In this overview of Georgia Foreclosure law, we wish to provide the reader with a brief sketch of the mechanics of foreclosure law and to provide the reader with the most common Georgia foreclosure forms. Additionally, for the practitioner in this area, we desire to show the most common legal problems litigators have faced in this area in the last few years.

A. Title Theory State

Recall that Georgia is a title theory state. In Georgia, the borrower (mortgagor) actually gives legal title to the lender (mortgagee) through the instrument of the Deed to Secure Debt ("DSD") (this document is also frequently referred to as a "Security Deed"). The borrower retains equitable title and legal title is returned to the mortgagor only when the debt is paid in full (or some other obligation is performed). In theory, the lender actually owns the property until the debt is paid. The lender allows the borrower all the usual rights of ownership, such as possession and use. In effect, because the lender actually holds legal title, technically, the lender has the right to immediate possession of the real estate and rents from the mortgaged property if the mortgagor defaults. However, as a practical matter, foreclosure must be accomplished to retake possession of the property.

As a mere contrast to the Georgia DSD, remember that there are at least three (3) other real estate security methods -- only two (2) of which are in common use in the United States. In Lien Theory states, the "mortgage" is merely a lien against the real property. The borrower retains legal and equitable title. This method is allowed in Georgia, but not commonly used. Much of the western United States employs lien theory.

In the states in which this author began law practice, Virginia and West Virginia, we employed the very common method of the Trust Deed. In a Trust Deed Theory state, the naked legal title is conveyed to a Trustee, usually a local lawyer. That Trustee holds the title and reconveys it to the borrower, if and when all conditions are met (the loan paid). The borrower is the trustor; the lender the beneficiary. The Trustee holds the power of sale. If a default occurs, the lender notifies the Trustee who uses the power of sale to take back the property. This method is allowed in Georgia, but is not in common use.

There is yet another legal method in Georgia, which, in this author's opinion, one will only encounter in transactions of questionable repute -- that is, the land trust, the land deed, the bond for title or contract for title. While these methods of real property security are legal in Georgia, they are disfavored. The lender (usually an individual) enters into a contract with the borrower which provides the borrower with equitable title and immediate possession. The contact also states that if the borrower makes 20 or 30 years of payments and does not breach the contract, the lender will then convey legal title to the borrower. If the borrower defaults on any portion of the land contract, the borrower loses all the money he or she has paid and loses possession of the land. As you might imagine, modern equity courts are quick to intervene in these harsh contracts.

We point out this method only to alert the Georgia practitioner to the fact that land contracts still exist. A number of "questionable" real estate seminars tout the use of land trusts and land contracts as a method of asset protection and "tax shelters" (though this author has never figured out how these work). This method of real estate security is, technically legal, but we strongly advise reputable practitioners to avoid this particular area of real estate security.

Georgia is, perhaps, the only state that uses the DSD in the configuration that we as Georgia practitioners recognize it. Thus, if you do not see that term Deed to Secure Debt or DSD in any other state's mortgage literature, you have not missed anything. Georgia has the probate anomaly of "a year's support." Because a year's support can, in some situations, get in front of the first mortgage on real property, Georgia secured creditors moved to the use of DSD. Since a DSD severs title and take's title out of the probate estate, the DSD is immune to priority by a probate year's support. Thus, we have Georgia’s weird animal -- the DSD.

B.    The Promissory Note

In Title Theory States and Lien Theory states, all parties use a Promissory Note ("PN"). The PN is the borrower's personal promise to pay the underlying debt no matter what happens to the secured real property.

Due to the federal overlay of the law in this area via the Federal National Mortgage Association ("Fannie Mae" or "FNMA"), the PN widely used in this area has (to some extent) become standard. Bear in mind that no specific form is required by the Georgia Code and any promissory note that complies with the basic contractual elements for a PN will work in Georgia. However, your client (or lender) may lose FNMA insurance, if the standard FNMA forms and covenants (which are heavily cited by HUD in its lending Regs.) are not used.

A copy of the standard acceptable FNMA and Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) PN is attached hereto as Exhibit 1.

A copy of the standard acceptable FNMA and FHLMC Georgia DSD is attached hereto as Exhibit 2.

                    C. Provisions of the DSD

Common provisions of the DSD are: payment of the debt in accordance with the terms of the note; payment of all real estate taxes on the property given as security; maintenance of adequate insurance to protect the lender if the properly is destroyed or damaged by fire, windstorm or other hazard; maintenance of the property in good repair at all times; receipt of lender authorization before making any major alterations on the property; failure to meet any of these obligations can result in a borrower's default.

When the debt is paid in full (or satisfied), the assignee is required to execute the satisfaction (or release) of the DSD. When all mortgage loan payments have been made and the note has been paid in full, the mortgagor will want the public record to show that the debt has been satisfied and that the mortgagee is divested of all rights conveyed under DSD. By the provisions of the defeasance clause in most mortgage documents, the mortgagee is required to execute a satisfaction of mortgage (also known as a release of mortgage or mortgage discharge). This document returns to the mortgagor all interest in the real estate conveyed to the mortgagee by the original recorded DSD. Entering this satisfaction in the public record shows that the DSD has been removed from the property.

If a mortgage has been assigned by a recorded assignment, the release must be executed by the assignee/mortgagee.

D. Default

If the borrower fails to pay (the most common) or commits some other act of default (wastes the secured property -- much less common), the lender may move to declare the DSD and PN in default. To enforce default, the lender must send a Demand Letter to Borrower and a Foreclosure Acceleration Letter.

When a borrower defaults on the payments or fails to fulfill any of the other obligations set forth in the DSD, the lender's rights can be enforced through foreclosure. The foreclosure procedure brings the rights of the parties and all junior lienholders to a conclusion.

A copy of the standard acceptable FNMA and FHLMC Georgia Demand Letter is attached hereto as Exhibit 3.

Default and acceleration mean the lender may declare the entire debt due and payable immediately. Such action is allowed due to the acceleration clause present in the DSD. Without an acceleration clause, the lender would have to sue the borrower every time a payment was overdue.

A copy of a standard FNMA and FHLMC Georgia Acceleration Letter is attached hereto as Exhibit 4.

The property is sold at foreclosure free of all junior liens.

E. Methods of Foreclosure

The great bulk of all foreclosures in Georgia concern the nonjudicial self-help use of the power of sale in the DSD. The lender declares default, follows the statutory notice and sells the property on the courthouse steps at a foreclosure sale. However, realize that in Georgia other methods may be employed. If your lender uses some other type of security (Trust Deed, for example), you must follow that method of foreclosure.

The Lender must follow the Notice provision carefully prior to foreclosure. See, OCGA § 44-14-162, et seq. The borrower has to be served Certified Mail at the address listed on the DSD (unless, the borrower has designated another service address by certified mail the lender - a rare occurrence), the lender must publish the scheduled foreclosure in the County Legal Organ for four (4) consecutive weeks prior to the foreclosure, and the notice of the use of the power of sale must be provided to the defaulting borrower no later than 15 days prior to the date of proposed sale.

A copy of the standard acceptable Notice of Sale for the Legal Organ is attached hereto as Exhibit 5.

In Georgia foreclosure always occurs on the First Tuesday in every month, on the courthouses steps of the particular county. The sale must be conducted between 10:00 a.m. and 4:00 p.m. or it is an improper use of the Power of Sale.

                    F. Deed Under Power of Sale

Once the sale occurs, the foreclosing attorney shall prepare and issue to the purchaser (which in many cases is the lender), a Deed Under Power of Sale.

A copy of a acceptable Deed Under Power of Sale is attached hereto as Exhibit 6.

                    G. Deed In Lieu of Foreclosure

As an alternative to foreclosure, a lender may accept a deed in lieu of foreclosure from the borrower. This is sometimes known as a friendly foreclosure because it is carried out by mutual agreement rather than by use of the power of sale. The major disadvantage of the deed in lieu of foreclosure is that the mortgagee takes the property subject to all junior liens. In a foreclosure action, all junior liens are eliminated. Also, by accepting a deed in lieu of foreclosure, the lender usually loses any rights pertaining to FHA or private mortgage insurance or VA guarantees.

A copy of an acceptable Deed in Lieu of Foreclosure is attached hereto as Exhibit 7.

                    H. No Right to Redeem; Memorandum of Sale

Once a sale occurs on the courthouse steps in Georgia, there is no right to redeem given to the defaulting borrower. There is no post sale statutory right to redeem in Georgia. After the sale, the lender’s attorney should record a Memorandum of Sale in the records of the local courthouse showing the sale occurred.

A copy of an acceptable Memorandum of Sale is attached hereto as Exhibit 8.

                    I. Notice to the IRS

Foreclosure alone does not automatically sever the Federal Tax Lien ("FTL"). FTLs will follow the foreclosed property, if they are not cleared pursuant to the procedures promulgated by the IRS. If any FTLs are recorded against the borrower/owner of the property, those FTLs will remain as a lien unless prior notice has been given to the IRS. The notice must have been given more than 25 days prior to the foreclosure sale and the IRS must fail to take any action within 120 days of the foreclosure sale. If these events occur, the FTL is severed from the real property. 26 U.S.C. § 7425(b). See, IRS Publication 786, Instructions for Preparing Notice to NonJudicial Sale of Property and for Consent to Sell.

A copy of the letter to the 25 day Notice Letter to the IRS and some information concerning Publication 786 are attached hereto

as Exhibit 9.

J. Deficiency Judgment

The foreclosure sale may not produce enough cash to pay the loan balance in full, after deducting expenses and accrued unpaid interest. In this case, the lender may be entitled to a personal judgment against the borrower for the unpaid balance. The lender is not required to seek a deficiency judgment and most commercial and residential lenders in Georgia do not seek deficiencies; however, it is allowed. Deficiency may also be obtained against any endorsers or guarantors of the note and against any owners of the mortgaged property who assumed the debt by written agreement. If any money remains from the foreclosure sale after paying the debt and other liens, such as the second mortgage or any mechanic's liens, expenses and interest, these proceeds are paid to the borrower.

If the lender seeks a deficiency judgment in Georgia, the lender must file for a deficiency within thirty (30) days of the foreclosure sale and follow the procedures outlined in OCGA § 44-14-161, or the claim for a deficiency is barred. The foreclosure sale must be confirmed and the deficiency judgment must be approved by a judge of the Superior Court in the county in which the sale occurred.

II. CURRENT LEGAL ISSUES

                A. Wrongful Foreclosure; No Notice

The most common area concerning which this author defends lenders concerns the allegation of lack of notice or no notice in the event of foreclosure. The foreclosure borrower either moves for equity to block the sale (an OCGA § 9-11-65 TRO), alleging no notice, or sues to overturn the completed foreclosure on lack of notice. The percentages of ultimate success by borrowers on these claims are, statistically, quite low.

If a lender can show that it complied with notice, it will usually win. Georgia statutory law provides that notice of sale under a power must be provided to the borrower both by advertisement and by mail:

O.C.G.A. § 44-14-162 provides:

No sale of real estate under powers contained in mortgages, deeds, or other liens contracts shall be valid unless the saleshall be advertised and conducted at the time and place and in the usual manner of the sheriff’s sales in the county in whichsuch real estate or a part thereof is located and unless notice of the sale shall have been given as required by Code Section  44-14-162.2.

With regard to advertisement of Sheriff’s Sales O.C.G.A. § 9-13-140(a) provides as follows: "The Sheriff…. shall publish weekly four weeks in some newspaper published at the county site…notice of all sales of land and other property executed by him."

The Georgia Code, however, requires, in addition to advertisement, 15 days notice by mail prior to the sale. O.C.G.A. § 44-14-162.2 provides as follows:

(a) Notice of the initiation of proceedings to exercise a power of

sale in a….security deed…shall be given to the debtor by the secured creditor no later than 15 days before the date of the proposed foreclosure. Such notice shall be in writing and shall be sent by registered or certified mail, return receipt requested, to the property address or to such other address as the debtor may designate by written notice to the secured creditor.

(b) The notice required by this Code section shall be deemed given on the official postmark date. The notice required by subsection (a) of this Code section shall be given by mailing to the debtor a copy of the published legal advertisement or a copy of the notice of sale submitted to the publisher.

Georgia law states that the debtor is entitled to notice containing a copy of the legal advertisement sent by certified mail to the property address at least 15 days prior to the foreclosure sale. There is no requirement that the mail actually be received. Once the mailing of the required notice is accomplished, the debtor’s receipt of the notice is immaterial to the right of the grantee to sale under power. McCollum v. Pope, 261 Ga. 835, 411 S.E.2d 874 (1992).

Upon the default by the grantor of a security deed, the grantee initiated a sale under power contained in the deed. It is undisputed that the grantee mailed a notification of the sale under power correctly addressed to the grantor in accordance with [OCGA § 44-14-162] Under these circumstances, the actual receipt (or want of receipt) by the grantor of the notice of sale under power is immaterial to the right of the grantee to sale under power. Id.

B. Special Appearance Only

The wave of mergers and the constant assignment of DSDs and PNs have caused our firm to file as many Protective Answer, Special Appearance Answers as regular Answers in recent litigation. OCGA § 9-11-12. For example, by the time the former borrower gets around to suing over some issue on a PN and DSD, the originating lender has (many times) long ago sold the loan. The originating lender, who gets sued calls us and states, "we can't find this loan in our current system." If you encounter this in practice, you should consider filing a special appearance protective answer and then investigate whether another lender (which is usually the case) actually owns the loan in dispute.

C. Unauthorized Cancellations of the DSD

Surprisingly, a relatively recent scam has been encountered by a number of lenders in Georgia. Unethical borrowers have been "assigning" the PN and DSD (illegally we might add) to LLC's, Mother-in-Laws, 1st cousins, and then filing unauthorized "satisfactions" upon the real estate records. The satisfactions are wholly false, sometimes even with faked notary signatures. A number of lenders that we have represented have had significant difficulties dealing with third party BFP defenses in this strange new area of real estate fraud. A BFP for value rightfully asserts an OCGA § 23-1-20 defense, if he or she purchased over a false cancellation (remember: the records in the courthouse show satisfied). Now, in some suits, we have gotten behind the BFP and shown that they too are in on the fraud. The fake satisfactions are real problem for the lender. And, no one is paying the lender while these issues are being litigated.

With regard to representing lenders on this particular issue, we have (after developing information in each case by a private investigator to avoid OCGA § 9-15-14 claims) counterclaimed the forgers for the tortious interference with the lender’s business relations, counterclaimed for attorneys fees, under OCGA § 13-6-11 and, in at least two (2) cases, counterclaimed for punitive damages under OCGA § 51-12-5.1.

III. Conclusion

It is important to remember that foreclosure is a derogation of common law and the code requirements must be followed to the letter or your lender may have a defective foreclosure. However, if the DSD and PN are properly prepared and adequate Notice is given to the borrower upon default, the first mortgagor should recover all the money it extended based on the real property security.

1 Other than the author's original work, all material used in this paper is used pursuant to 17 U.S.C. § 107 (Fair Use Exception); No Claim of Copyright is made to any material owned by ICLE, Athens, Georgia; Frank S. Alexander, Georgia Real Estate Finance and Foreclosure Law, 3rd Edition; Harrison Publishing’s Copyright of Georgia Real Estate and Finance Law; or, Modern Real Estate Practice, Real Estate Education Company, Chicago, IL; the Harrison Material may be obtained by purchase from The Harrison Company Publishers, 1327 Northbrook Parkway, Suite 400, Suwanee, GA 30024-3586, Phone: 1-800-241-8600.