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/.
Meeting certain criteria
Just remember that the form must be filed by May 1 in order to be effective for the current year. Also remember that the conditional rescission must be renewed annually. If you have a conditional rescission that is effective for 2011, you must file again by December 31, 2011, in order to claim the exemption for 2012.
The Michigan Landlord Tenant Relationships Act (the “LTRA”) regulates the relationship between landlords and tenants of residential property in any situation where the landlord requires the tenant to pay a security deposit. Pursuant to amendments to the LTRA that took effect on October 5, 2010, landlords must now release tenants from their leases if the tenant submits written notice and documentation of a reasonable apprehension of present danger to the tenant or to a child of the tenant due to domestic violence, sexual assault or stalking. Key provisions of the amendments include the following:
The Michigan Construction Lien Recovery Fund, in effect for nearly 30 years, was recently dissolved by the Michigan Legislature. The Fund was initially established to protect homeowners who pay a residential building contractor and are left holding the bag when that contractor fails to pay the subcontractors and suppliers who provide labor or material on a project. Before the Fund was established, if the contractor was uncollectible the subcontractors and suppliers had no recourse but to go after the homeowner for payment. The end result was that unlucky homeowners sometimes ended up paying twice for the same work.
Homeowners will be able to avoid paying twice if they can prove that they paid the contractor in full, but subcontractors and suppliers will no longer have an alternative source of payment available to them (particularly if the contractor has absconded or is otherwise uncollectible).
Michigan permits husbands and wives to own real estate as “tenants by the entireties.” This special form of joint ownership, recognized only in about half of the states, protects real property from the claims of creditors unless the creditor is the joint creditors of both the husband and the wife. In other words, the creditor of one spouse has always been powerless to force the sale or refinance of entireties property in order to collect a debt.
The tax collection landscape changed dramatically this August when the U.S. Court of Appeals expanded the reach of the IRS by ruling that the government could foreclose a husband’s income tax debt by forcing the sale of the Michigan home he owned as tenants by the entireties with his wife. As a practical matter, this ruling means that any transfer of a marital home to one spouse or to that spouse’s living trust must be completed well before any tax dispute arises if the home is to be protected from the collection efforts of the IRS against the other spouse.
A few years ago, terms like “short sale,” “upside down,” and “under water,” were not even part of our lexicon. Today, they are common place. Following some 15 years of steady appreciation, peaking in 2006, home values in Michigan have since declined 45% on average. In Oakland County, distressed sales now account for approximately 93% of all home sales. If a short sale becomes your only option, here are some basics to keep in mind.
Whether or not the forgiven debt is taxable depends upon a number of factors, including whether or not the home was the borrower’s principle residence, when the forgiveness took place, and so on.
The Michigan General Property Tax Act (the Act) requires real property in Michigan be assessed yearly and taxed at one-half (1/2) of its true cash value (true cash value is the same as market value). However, with the passage of the Headlee Amendment to the Michigan Constitution in 1994, limitations were placed on how much assessments and taxes could go up each year. Since 1994-1995, annual property tax increases have been “capped” at levels specified in the Act and remain capped until a “transfer of ownership” occurs. Once a transfer of ownership occurs, the property is reassessed at one-half (1/2) of the “true cash value” as of that date and the taxes, in most cases, go up substantially. The property tax is capped at the new, higher amount until the next transfer of ownership takes place (Michigan property tax bills show a “Taxable Value” and a “State Equalized Value.” The Taxable Value is the capped value upon which the property tax is assessed. The State Equalized Value approximates one-half (1/2) of the true cash value/market value of the property. Once the property tax is uncapped, the State Equalized Value and the Taxable Value become the same for the year in which the uncapping occurred and the cap goes back into effect at that amount).
In 2006, the assessor for the City of Charlevoix determined that the death of James in 2005 constituted a conveyance to Nathan and uncapped the property taxes, resulting in a new taxable value that was almost double the previous taxable value. Nathan appealed the assessor’s determination to the local board of review which upheld the decision of the assessor. Nathan appealed that decision to the Michigan Tax Tribunal which upheld the decision of the board of review. Nathan appealed that decision to the Michigan Court of Appeals.