Southeast Real Estate Advisor : Atlanta Real Estate Lawyer & Attorney : Kevin Caiaccio Law Firm : Commercial Development, Retail Leasing : Buckhead, Sandy Springs, Georgia

Given the dramatic rise in foreclosures over the past several years, the Georgia legislature has tackled foreclosure reform on several occasions.  However, this reform has largely been cosmetic and has not helped property owners or lenders.

The most recent attempts at reform are currently pending in the legislature and,  like other recent efforts, are mostly lacking in substance.  House Bill 1228  would provide the borrower with a statutory "right of redemption" for 90 days after the foreclosure sale.  The right would very rarely be exercised because it involves the full payoff of the debt plus penalties within 90 days.  House Bill 972 introduced by Rep. Billy Mitchell would provide a 90-day right-to-cure period after default which the debtor could exercise once every 24 months. 

In 2008, the last time foreclosure reform passed, the measures centered on the content of the notice to the borrower.  While somewhat helpful, many of the reforms do not include a  remedy for violating the provisions.

In my opinion, none of these reforms addresses the major problem with the current system and that is the obstacles to potential buyers bidding at the foreclosure sale.  Although the current system requires notice of the sale by publication for 4 weeks, potential bidders face several challenges:

• Little or no opportunity to perform due diligence
• No set time for the sale to occur (other than a 6-hour window on the first Tuesday of the month)
• No prior notice of when a sale is canceled or postponed

These problems are particularly acute in commercial foreclosures, and the result is that there is rarely competitive bidding.  The lenders are then forced to repossess the property and deal with the headaches of REO property rather than having the chance to mitigate their losses.  I have clients who are often interested in acquiring property at foreclosure but do not have an adequate opportunity to bid.

Any foreclosure reform should focus on improving the bidding procedures so that the sale functions more like a normal auction. 

I'm interested in hearing others' opinions concerning how best to reform our system.  Reform shouldn't be just about helping debtors keep over leveraged properties but also about helping lenders mitigate losses and having properties trade at appropriate values.

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Last week, Senate Majority Leader Chip Rogers introduced a major overall of the property tax system in GA.  Senate Bill 346 (PDF) was drafted in response to the perceived unfairness which has resulted from falling home values.  Despite the significant drop in property values, assessments for tax purposes have remained artificially high.  This problem was well documented in a thorough report in the AJC late last year.

The comprehensive bill proposed by Sen. Rogers includes over 40 changes to the property tax system and will have a major impact on GA property owners.  Some of the highlights of the bill are as follows:

• Requires the county to send annual assessment notices on all properties along with information on how to file an appeal.  The current system only requires a notice if the assessed value is changing.
• Allows the property owner to file an appeal up to one year after receiving the assessment notice. This is probably one of the more controversial provisions of the bill.  Current law requires the owner to file an appeal within 30 days.
• Requires unanimous approval by the Board of Equalization to approve a value higher than that claimed by the property owner.
• Requires that the market value for tax purposes not exceed the sales price for the first year after an arms-length sale of the property.

 My initial thoughts on this bill are as follows:

Pros:   would create a more consistent, objective and fair system by shifting some power to the homeowners;  would simplify the tax appeals process.

Cons:  would increase administrative costs to counties; would likely result in reduced revenues unless the counties take the unpopular step of raising millage rates; could delay the approval of the tax digest and make budgeting more difficult;  could hurt schools which derive much of their revenue from property taxes.

Bottom Line:  I like the fundamental policy objectives of this bill, but some of the finer points will need tweaking. 

Sen. Rogers has indicated that the bill will not be fast tracked and that he is seeking wide input on the bill.  As result, the proposal will likely go through many iterations before reaching the Governor's desk. 

Because of the significance of these changes and the impact on GA property owners, I will continue to monitor this bill and provide updates as warranted.

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As I wrote back in November, the dramatic fall in real estate values is leading to litigation  involving confirmation proceedings after a non-judicial foreclosure.  Under Ga. law, a creditor is allowed to foreclose on real property without a court hearing or other judicial action.  However, if the lender claims that the foreclosure sale did not fully satisfy the debt obligation and seeks to recover the deficiency, the lender must file a confirmation action which requires a court hearing and testimony as to the fair market value of the property.

The Ga. Court of Appeals issued an opinion earlier this month in Statesboro Blues Development, LLC v. Farmers and Merchants Bank (PDF) which reiterates the deference given to the trial court in determining fair market value.  The case involves a very typical scenario in Georgia:  the borrower purchased a large acreage tract with the intention of developing the property for single-family home lots.  After the residential  market collapsed, the borrower defaulted.  At the time of default, the outstanding loan balance was over $3.5MM.  The bank was the sole bidder at the foreclosure sale (as is usually the case) and bid $2.915MM.  After the foreclosure, the bank sought to recover the deficiency from the borrower and guarantors.

At the hearing, the borrower contested the bank's appraiser's use of comparable sales and his estimate of development costs.  The trial court accepted the appraiser's calculations and found for the bank.  On appeal, the court reiterated Ga. law:  “The trial court is the trier of fact in a confirmation proceeding, and an appellate court will not disturb its findings if there is any evidence to support them.”  Because the trial court found in favor of the bank, the court of appeals held:  "it appears that the opinion is not based on sheer speculation, then this court cannot second guess the methodology utilized to reach the opinion.”

The upshot for future litigation is that the ruling of a trial court will not often be overturned.  The trial court judges are relying on appraisers who are often guessing at fair market value.  The result will be inconsistent rulings based on the leanings of the appraisers and the judges.  In other words, borrowers can only hope for friendly judges.

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