MERS May Foreclose by Advertisement in Michigan
Blayne V. Scofield | Bloomberg Law
On November 16, 2011 the Michigan Supreme Court, in a 4-3 decision, reversed a Court of Appeals decision and ruled that the Mortgage Electronic Registration System (MERS) is authorized to conduct nonjudicial foreclosures under Michigan’s foreclosure by advertisement statute.
Foreclosure regimes vary from jurisdiction to jurisdiction. In some states, a foreclosing party must first obtain a court’s permission before proceeding (judicial foreclosure) while in others, a foreclosing party may conduct foreclosures outside the judiciary using various self-help remedies (nonjudicial foreclosure).
One form of nonjudicial foreclosure available in Michigan (as well as in other states, such as Minnesota), is foreclosure by advertisement. This process allows a foreclosing party to avoid the cost and delay involved with a judicial process, provided that it publishes a notice of the impending foreclosure in a newspaper in the area where the property is located and posts notice of the foreclosure on the property itself. The applicable mortgage must contain a power of sale that authorizes the foreclosing party to sell the property upon a default by the borrower and, importantly, only certain foreclosing parties are eligible to use foreclosure by advertisement under Michigan law.
Mortgage loans consist of two components—the promise to repay (i.e., the note) and the security instrument (i.e., the mortgage or deed of trust, collectively referred to as the mortgage). In a transaction where the lender uses MERS services, MERS has no involvement with the note—the lender funds the loan and acts as the noteholder. MERS only provides services with respect to the mortgage. It does not fund or receive repayment of the loan.
Typically, the mortgage designates MERS as the mortgagee, grants MERS legal title to the mortgage, and authorizes MERS as nominee for the noteholder to foreclose in the event of default. Upon a default, the then-current noteholder has a choice—it may direct MERS to carry out the foreclosure on its behalf or it may request MERS to assign the mortgage back to it and carry out the foreclosure itself. Thus, in a transaction involving MERS, the note and the mortgage are split—one party holds the note and MERS holds the mortgage.
Appellate Court: MERS Lacked Sufficient Interest to Foreclose
In this case, MERS was the mortgagee for two separate transactions. Both borrowers defaulted. MERS used Michigan’s foreclosure by advertisement statute to foreclose on the mortgages and sell the properties. When the purchasers of the foreclosed properties sought to evict the borrowers, the borrowers objected and alleged that the foreclosures were defective.
— Eligible Foreclosing Parties
Under MCL § 600.3204(1)(d), foreclosure by advertisement is available only to a party that (i) owns the underlying debt, (ii) owns an interest in the debt secured by the mortgage, or (iii) is the servicing agent of the mortgage. All other parties must rely on judicial foreclosure.
MERS argued that it was an eligible party under clause (ii). It cited three grounds—its status as mortgagee, contractual language in the mortgage, and its status as the lender’s nominee when foreclosing on a property.
— Appeals Court Denies MERS; Dissent Disagrees
The Michigan Court of Appeals rejected these arguments and ruled in favor of the borrowers. In the appellate court’s view, MERS’s role as mortgagee meant that it had an interest in the property securing the debt rather than the debt itself. The appellate court also denied the contract argument, concluding that the contract only empowered MERS to act with respect to the property and gave it no interest in or control over the debt. Finally, the appellate court held that MERS’s status as the noteholder’s nominee did not confer authority on MERS to use foreclosure by advertisement on the noteholder’s behalf. According to the appellate court, Michigan law only allows a narrow category of agents (i.e., servicing agents) to use foreclosure by advertisement. All other agents, including parties that act as collateral or foreclosure agents like MERS in this situation, are ineligible. Thus, the Court of Appeals vacated the foreclosures and held that MERS may only use judicial foreclosure in Michigan.
The dissent would have accepted MERS’s contractual argument. The dissent’s position turned on two factors—the fact that actions taken pursuant to the mortgage are always predicated on the borrower’s action (or inaction) under the note and MERS had a broad contractual right to act on the lender’s behalf with respect to the mortgage. In the dissent’s view, these two factors combined to give MERS the requisite level of interest in the underlying debt for purposes of foreclosing by advertisement under Michigan law.
— Effects of Appeals Court Decision
The appellate court’s decision had widespread ramifications in Michigan. The American Banker reported that the Department of Housing and Urban Development, Fannie Mae, and Freddie Mac reinitiated over 1,600 decisions following the ruling. The Court of Appeals vacated another foreclosure based on its opinion in Saurman. Federal courts stayed at least two other proceedings while awaiting the Michigan Supreme Court’s ruling.
Supreme Court: MERS May Foreclose by Advertisement
In a cursory two-page opinion, the Michigan Supreme Court reversed the appeals court and instead accepted the dissent’s position. It also noted that the record holder of a mortgage generally had been recognized as an eligible party throughout the statute’s history and the court found nothing in the most recent (1994) revisions to change this view.
The Michigan Supreme Court’s decision followed a Minnesota Supreme Court decision from 2009 which also concluded that MERS was eligible to foreclose by advertisement under applicable Minnesota law.
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. Bloomberg Finance L.P. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
©2011 Bloomberg Finance L.P. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of Bloomberg Finance L.P.