Michigan Supreme Court Reverses Court of Appeals, Upholds MERS Foreclosures
This past April 21, 2011, the Michigan Court of Appeals issued a ruling that not only stunned the mortgage industry, but had far reaching ramifications for homeowners facing foreclosure, people who had purchased foreclosed homes, mortgage lenders and title companies. This past November 16, 2011, however, the Michigan Supreme Court reversed the Court of Appeals, thereby preserving the validity of hundreds, if not thousands, of Michigan mortgage foreclosures. So, what am I talking about? Well, that requires a bit of an explanation.
Protecting the Lender’s Security Interest
The two primary documents that are executed when financing the purchase of a home are the mortgage note and the mortgage itself. The mortgage note sets forth the obligation of the borrower to repay the loan, while the mortgage gives the lender a security interest in the home being purchased, to secure the repayment of the mortgage note. In order to protect the lender’s security interest, the mortgage is then recorded in the office of the register of deeds for the county where the property is located. While you can have a promissory note without a mortgage, you can’t have a mortgage without a note; the two are inseparable.
Mortgage Electronic Recording System (MERS)
The buying and selling of loans backed by mortgages has been a common investment vehicle for decades. Every time the right to collect the loan was bought by a new investor, the mortgage went with it, and a transfer of the mortgage had to be recorded in the register of deeds’ office. As the popularity of these investments grew, market demands made such recordings cumbersome. In 1993, several large participants in the real estate mortgage industry set up something known as the Mortgage Electronic Recording System (MERS), in order to track electronically the ownership interest in residential mortgages. Mortgage lenders, and others, pay annual fees to MERS for the electronic processing and tracking of ownership and transfers of mortgages. MERS members appoint MERS as their agent (or “nominee”) on all mortgages they register in the system, and such appointment is referenced in the mortgages.
Judicial Foreclosure
There are two (2) ways to foreclose mortgages in Michigan. With “judicial foreclosure,” the mortgage holder files a lawsuit in the circuit court for the county where the property is located, asking the court to foreclose the mortgage based upon the borrower’s default. That process takes about a year and is subject to all of the vagaries, complications and expenses of litigation.
Foreclosure by Advertisement
The second method is “foreclosure by advertisement” pursuant to a “power of sale” contained in the mortgage. By this method, the mortgage holder need only post a notice on the property that the mortgage loan is in default, publish the notice, and fulfill a number of other procedural requirements. If those requirements are met, and if the mortgage note is not paid by the specified deadline, the mortgage is deemed foreclosed and the property is sold at public sale. The defaulting borrower then has the right to “redeem” the property from foreclosure for a limited window of time after the public sale.
Foreclosure by advertisement was created by law and has been around for a very long time. Because it is so much faster, easier and cheaper, virtually every residential mortgage contains the statutorily prescribed “power of sale” clause, and foreclosures by advertisement are pretty much the norm.
By statute, foreclosure by advertisement can only be undertaken by someone who has an ownership interest in the indebtedness or is the servicing agent of the mortgage. Under the MERS system as it existed at the time, MERS never actually owned an interest in the debt, nor did MERS have the right to collect the debt on its own behalf or that of its members. Nor was MERS the servicing agent for the mortgage. As a result, and although MERS had regularly been conducting foreclosures by advertisement on behalf of its members, the Michigan Court of Appeals ruled that MERS had no authority under the statue to do so.
Statute of Limitations
The reaction within the industry was swift: some title companies canceled scheduled closings on foreclosed properties, some refused to insure title on properties foreclosed by MERS, class action lawsuits were filed, and homeowners who had purchased properties foreclosed by MERS were left wondering whether or not they actually owned the property. Because Michigan has a five year statute of limitations to bring litigation to challenge a foreclosure, some opined that every MERS foreclosure that had occurred in the preceding five years would have to be re-foreclosed.
Quick Action by the Supreme Court
The ruling was immediately appealed to the Michigan Supreme Court. On November 16, 2011, the Supreme Court issued its order reversing the Court of Appeals on the basis that the Court of Appeals ruling was inconsistent with established Michigan law. Stated in the most general possible terms, the Supreme Court found that because MERS had an interest in the mortgage, and because the mortgage and note must be construed together, MERS did have an interest in the indebtedness sufficient to allow it to conduct foreclosures by advertisement. While many have heralded this reinstatement of the status quo as a benefit to homeowners, others have characterized the ruling as an embarrassment and a sell-out to special interests. As is often the case, the truth is probably somewhere in the middle. Either way, quick action by the Supreme Court to get this resolved was certainly a good thing.
Further Reading
If you’re inclined to do more reading, the case is Residential Funding Co, LLC v. Saurman. Both the Court of Appeals and Supreme Court rulings can be found at: http://www.courts.michigan.gov/.
In the Franklin case, the landlord changed the locks after receiving notice from the tenant that the tenant was terminating the lease due to its unhappiness with the leased space. Unfortunately for the tenant, its personal property was still inside. The landlord refused to release the personal property, treating it as collateral for unpaid rent.