When the loan documents provide for confession of judgment and the collateral encumbered by the mortgage securing the loan is commercial real property, the foreclosure process in Pennsylvania is straightforward. The lender first obtains a judgment by confession against the property owner. Assuming that the property owner does not succeed in having the judgment opened or stricken, the lender then issues a writ of execution to enforce the mortgage and judgment.
When the mortgage is a residential mortgage, however, the process can be much more complicated. When the collateral is owner-occupied residential property Pennsylvania Act 91 limits the lender’s right to accelerate the debt, affords the borrower a right to cure defaults, requires the lender to notify the borrower of that right and of the right to seek mortgage assistance, and stays foreclosure proceedings while the borrower seeks assistance. Even when the property is not owner-occupied, Pennsylvania Act 6 may require the lender to jump through more hoops before it can foreclose. Among other things, Act 6 requires the holder of a “residential mortgage” to give the borrower notice of default before accelerating the debt, limits the rate of interest that may be charged, limits the attorneys’ fees that may be charged to the borrower, and prohibits the lender from foreclosing by executing on a judgment by confession unless it has first obtained a judgment of foreclosure in a “conforming action.”
Act 6 defines a residential mortgage as a mortgage encumbering two or less dwelling units securing a bona fide principal amount of the “Base Figure” or less. When Act 6 was enacted in 1974, the “Base Figure” was $50,000. In 2008, Act 6 was amended to provide that the “Base Figure” was $217,873 and that it was to be adjusted annually thereafter for inflation.
The issue addressed by the Pennsylvania Supreme Court in its August 18, 2020 decision in Johnson v. Phelan Hallinan & Schmeig, LLP was whether Act 6’s limitation on attorneys’ fees applied to the Johnsons’ mortgage. Act 6 limits the attorneys’ fees that may be recovered “prior to foreclosure or other legal action” to $50. The Johnsons’ mortgage, in the amount of $74,000, was executed before 2008 when the “Base Figure” was $50,000. However, by the time that the Phelan Hallinan law firm began enforcing the mortgage in 2009, the Base Figure had been increased to more than $217,873. The lender sought pre-foreclosure attorneys’ fees in excess of $50. The Johnsons contended that their mortgage was a residential mortgage because it secured an amount less than the Base Figure at the time it was enforced and filed a class action against the law firm contending that it had violated Act 6 by seeking attorneys’ fees in excess of $50.
The trial court dismissed the Johnsons’ suit on the grounds that, because the amount secured by their mortgage exceeded the Base Figure at the time it was granted, it was not a residential mortgage within the meaning of Act 6 so that the $50 attorneys’ fee limit did not apply. The Superior Court affirmed and the Johnsons appealed to the Pennsylvania Supreme Court.
The Pennsylvania Supreme Court agreed with the lower courts. Noting that there is a presumption against applying statutes retroactively, the Supreme Court said that nothing in the 2008 amendment to Act 6 stated “clearly and manifestly” that the increase in the amount of the Base Figure was intended to apply to mortgages executed before the amendment took effect. The Court also noted that mortgages securing amounts in excess of $50,000 executed before the 2008 amendment to the Base Figure on which interest rates in excess of the amount permitted by Act 6 would be “essentially voided” retroactively if mortgages that were not residential mortgages when they were executed and thus were not subject to the Act 6 interest rate cap became residential mortgages by virtue of the 2008 amendment. The Court said that would be “a messy state of affairs and one that raises serious constitutional concerns.”
In a last ditch effort to convince the Supreme Court to reverse the lower courts’ decisions, the Johnsons argued that the Supreme Court should defer to the interpretation of Act 6 by the Pennsylvania Housing Finance Agency. In a letter to lenders when in annual increase in the amount of the Base Figure to $221,540 was about the take effect, the Agency informed lenders that they would need to give borrowers the notice required by Act 6 before they could accelerate debts in the amount of $221,540 or less once the increase became effective. The Supreme Court sidestepped the argument entirely on the grounds that the issue was “not properly before us” because the Johnsons has not made the argument in the lower courts. The Court noted that “Arguments about whether the Act’s notice requirements apply to pre-2008 mortgages of more than $50,000 are beyond the scope of this appeal.”
So whether mortgages are “residential mortgages” for purposes of Act 6 depends on what the Base Figure was at the time they were executed. Or maybe not.