By Stuart A. Best, Esq.
In April 2011, a Michigan case was published that initially caused a shock wave throughout the foreclosure and eviction world. The case arose from the consolidated cases of Residential Funding Co., LLC v. Saurman, and Bank of New York Trust Co. v. Messner (“Residential Funding”), and involved foreclosures brought in the name of Mortgage Registration Systems (MERS). The Michigan Court of Appeals ruled that MERS had no authority under Michigan law to foreclose non-judicially. The ruling was based upon the determination that MERS was not an “owner of the indebtedness or of an interest in the indebtedness secured by the mortgage” as required by statue. This decision went on to state that “MERS did not own the indebtedness, own an interest in the indebtedness secured by the mortgage, or service the mortgage. MERS’ inability to comply with the statutory requirements rendered the foreclosure proceedings in both cases void ab initio.”
Mortgages that were foreclosed in the name of MERS and any pending eviction actions, were subject to this ruling. Thereafter, Michigan courts began denying evictions based upon MERS foreclosures, stating that the underlying foreclosures were void.
Subsequently, Residential Funding was appealed to the Michigan Supreme Court. On November 16, 2011, the Michigan Supreme Court reversed the Court of Appeals decision.
MERS is an entity which was developed to provide faster and lower cost buying, selling and tracking of mortgage loans. At the time of closing or thereafter, the mortgage (but not the note) was assigned from the initial lender to, or in some cases originated in, the name of MERS. MERS would hold the mortgage as nominee for the lender. When the note or indebtedness was sold, MERS would then track these sales within its private system. The mortgage was not changing hands – being held in the name of MERS – therefore there was no need for assignments of the mortgage to be recorded with the Register of Deeds. In Michigan, all assignments must be of record before the commencement of a foreclosure. In some instances, MERS was the foreclosing entity. For some time, it has been common practice for MERS to assign the mortgage interest to the note holder prior to foreclosure. This did not occur in Residential Funding where the foreclosure was undertaken in the name of MERS.
The sole question presented to the court in Residential Funding was whether MERS could foreclose by advertisement under Michigan law- specifically MCLA 600.3204 that restricts which entities can commence a non-judicial foreclosure. MCLA 600.3204(d) requires that “[t]he party foreclosing the mortgage is either the owner of the indebtedness or of an interest in the indebtedness secured by the mortgage or the servicing agent of the mortgage.”
The Court of Appeals, in applying MCLA 600.3204, found that MERS was not an owner of the indebtedness and MERS did not hold an interest in the indebtedness. The Supreme Court overruled this determination and found:
* * * MERS’ status as an ‘owner of an interest in the indebtedness’ does not equate to an ownership interest in the note. Rather, as record holder of the mortgage, MERS owned a security lien on the properties, the continued existence of which was contingent upon the satisfaction of the indebtedness. This interest in the indebtedness — i.e., the ownership of legal title to a security lien whose existence is wholly contingent on the satisfaction of the indebtedness — authorized MERS to foreclose by advertisement under MCL 600.3204(1)(d).
By finding that the owner of a security interest in the property allows MERS or other similar entities to foreclose non-judicially, the Michigan Supreme Court ruling validates any past MERS foreclosures. Most foreclosures (and all since the Court of Appeals decision) have followed the procedures discussed in a footnote to the Court of Appeals Decision that suggested MERS assign its interest in the mortgage to the holder of the note prior to foreclosure and thereby avoid ownership concerns.
The Court of Appeals decision in Residential Funding was given retroactive effect by a subsequent ruling in Richard v. Schneiderman & Sherman, P.C., 2011 Mich. App. LEXIS 1522. With the overruling of Residential Funding, any retroactive effect would also be eliminated.
Notwithstanding the Residential Funding decision, and based upon the decisions in both matters, Weltman, Weinberg & Reis Co., LPA, continues to recommend that prior to a foreclosure, any mortgage held in the name of MERS should be assigned to the note holder or servicer prior to foreclosure.
For a complete copy of the Michigan Supreme Court’s decision, go here.
If you have any questions on this matter, please contact Mr. Stuart A. Best, Esq. Stuart is a partner in the Detroit office practicing in the Litigation & Defense department of Weltman, Weinberg & Reis Co., LPA. Stuart is a part of the Integrated Real Estate Default Group, handling complex legal foreclosure and title issues, as well as state law foreclosure compliance. He can be reached at 248.786.3124 and firstname.lastname@example.org.