June 24, 2013
The Michigan Court of Appeals considered two cases involving MERS-related foreclosures, Residential Funding Co., LLC v. Saurman and Bank of New York v. Messner, 292 Mich. App. 321 (April 21, 2011) deciding whether MERS is an entity permitted to foreclose by advertisement or if it must go through a judicial foreclosure. The Court of Appeals held that MERS doesn’t meet the statute’s requirements to foreclose by advertisement, however, the Michigan Supreme Court reversed the decision, holding that MERS had standing to foreclose.
In both cases the original lender was Homecoming Financial, LLC, with the mortgages providing rights to foreclose upon default. MERS was named as the mortgagee and nominee for the lender. After default, MERS began foreclosure by advertisement on both properties, purchasing the properties at their respective sales, and quit-claiming title to the plaintiffs, Residential Funding and Bank of NY. Upon eviction, the homeowners questioned MERS’s authority but were denied by the district court. The circuit courts affirmed the district court’s decision, and the Michigan Court of Appeals considered whether MERS, as mortgagee but not note-holder, can foreclose non-judicially by advertisement.
The Court of Appeals discussed implications of the MERS system, which allows entities to transfer loans without having to record the transactions, since the mortgagee, MERS, is never changed despite the change of ownership among other entities. The statute in question, MCL § 600.3204(1)(d), states that a party may foreclose by advertisement if: “the 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.” Since MERS is not the servicing agent or the owner of the debt, the Court of Appeals held MERS lacked authority to foreclose by advertisement under the statute. The court further explained “in order for a party to own an interest in the indebtedness, it must have a legal share, title, or right in the note,” and that an interest in the mortgage is not enough, as these are two separate instruments with different rights. The mortgage provides an interest in the property, while the note documents a debt to be repaid. Since the statute requires that the foreclosing party must own an interest in the indebtedness, the court held that MERS cannot act on behalf of Homecoming as agent or nominee to advertise the foreclosure. The decision of the Circuit Court enforcing the eviction was reversed, granting defendant-homeowners’ summary judgment.
Judge Wilder dissented, believing MERS to have an ownership interest in the loan by way of the language in the mortgage giving MERS explicit rights to foreclose upon default. As mortgagee, MERS owned a “contractual interest” in the indebtedness, with the ability to take any action required by it, including its right to foreclose if the debt is not paid. The purpose of the mortgage is to create a security interest “specifically linked to the debt” to ensure payment. Since the mortgage gives MERS the right to “take any action required of it,” MERS has “a greater interest than just an interest in the property as security for the note,” giving MERS the right to act on behalf of Homecomings.
Plaintiffs Residential Funding and Bank of NY appealed the decision and the case was considered by the Michigan Supreme Court in late 2011, ultimately reversing the Court of Appeals order. 807 N.W.2d 412, rev’d 805 N.W.2d 183 (Mich. 2011). The Supreme Court agreed with the dissenting opinion from the Court of Appeals, holding that the foreclosure was valid. MERS has an ownership interest in the indebtedness, and therefore the right to foreclose because MERS’s “contractual obligations as mortgagee were dependent upon whether the mortgagor met the obligation to pay the indebtedness which the mortgage secured.” Though this does not give MERS an ownership interest in the note, the court held that the note and mortgage do not need to be held by the same entity in order to foreclose under Michigan law.| Permalink