Court of Appeals Declares Some Foreclosures Invalid
A recent decision by the Michigan Court of Appeals has the potential to set aside previously granted foreclosures. In the consolidated cases of Residential Funding Co., LLC, f/k/a Residential Funding Corp. v Saurman and Bank of New York Trust Co. v Messner, (hereinafter “Residential Funding Co.”) the court held that certain foreclosures instituted by Mortgage Electronic Registration Systems Inc. (“MERS”) were invalid. This case is important because MERS holds mortgages on over 60 million homes in the United States.
The sale of real property typically involves two primary documents, a note and a mortgage. These documents create two distinct and different sets of legal rights and obligations. The note evidences a debt and the borrower’s obligation to repay the loan. In contrast, the mortgage gives the lender an interest in the property as security for payment of the note. If the borrower repays the loan, the property interest created by the mortgage becomes void.
Lenders package loans in bulk and sell them to investors. With the rise in the number of loans being sold, it became apparent to lenders that the statutory requirement to record transfers of these loans was slowing down the market. The lending industry responded by creating MERS, a shell designed to simplify the buying and selling of loans by disconnecting the mortgage from the loan.
Under this system, lenders designate MERS as the initial mortgagee on mortgages recorded in the county clerk’s office. Any loan designating MERS as the initial mortgagee is protected against future assignments because MERS remains the mortgagee no matter how many times the loan is sold or transferred. This eliminates the need to record subsequent transfers of the loan with the county clerk.
A potential downside to the MERS system is that homeowners are not necessarily notified of the subsequent sale or transfer of their loan. Without a public filing in the clerk’s office, these homeowners may not be able to contact the owner of their loan because they have no way of identifying them. If the homeowner defaults on the loan, MERS, not the owner of loan, initiates the foreclosure process.
In Residential Funding Co. the Court of Appeals considered whether MERS had the right to initiate foreclosures by advertisement under the applicable statute. Foreclosures by advertisement are preferred by lenders as they are cheaper and quicker than using the judicial foreclosure process. Pursuant to MCL 600.3204(1)(d), a party may foreclose a mortgage by advertisement if certain enumerated circumstances exist.
To be considered a proper party under the foreclosure by advertisement statute, MERS would have to own or have an interest in indebtedness secured by the mortgage. After careful consideration, the court held that MERS did not own or have any interest in the indebtedness and thus, it could not avail itself of the foreclosure by advertisement statute. The court’s decision rested upon the distinction between a note and a mortgage. MERS status as the mortgagee did not give it any interest in the corresponding debt secured by the note. Having successfully implemented a program to separate the mortgage from the debt, MERS did not have any interest in the debt that would justify its use of the foreclosure by advertisement statute.
Because MERS did not meet the requirements necessary to use the foreclosure by advertisement statute, the Court declared that the foreclosure proceedings that had been pursued against both Defendants were void ab initio. As such, the foreclosure proceedings were void from the very beginning and had no legal validity. Accordingly, the evictions proceedings that had been initiated against the Defendants subsequent to MERS’ foreclose of their properties were vacated and the matter was remanded to the trial court for further proceedings.