Insights

The Michigan Supreme Court recently reversed a decision that had caused considerable confusion and troubles for Michigan’s mortgage industry. The court reversed the Michigan Court of Appeals’ prior ruling that the Mortgage Electronic Registration System (“MERS”), as nominee for the lender, could not foreclose by advertisement. This decision called into question all foreclosures by advertisement that MERS initiated, causing title companies to cease issuing title policies on such properties and prompted HUD to instruct mortgagees to re-file foreclosures in line with the decision that required MERS to file judicial foreclosures or to assign the mortgage to the investors to initiate nonjudicial foreclosure. Obviously, such requirements significantly slowed the process and increased the costs associated with foreclosure, impacting investors and neighborhoods all over Michigan.

In order to be able to foreclose by advertisement under Michigan law the party foreclosing must be the: 1) owner of the indebtedness; 2) owner of an interest in the indebtedness secured by the mortgage; or 3) servicing agent of the mortgage. There is no question that MERS is not the owner of the indebtedness or the servicing agent of the mortgage; the question was whether MERS is an owner of an interest in the indebtedness secured by the mortgage. In looking to the legal definitions of the relevant terms, the court of appeals found the requirement to be that MERS have a legal right in the note. The court concluded that as mortgages and notes are separate documents, MERS as a mortgagee only held an interest in the property as security for the note, not an interest in the note itself. The court also relied on legislative intent, noting it would have been easy to include “agents or nominees of the noteholder” as parties that could foreclose by advertisement.

The Supreme Court overruled the court of appeals’ decision and held that MERS is authorized to foreclose by advertisement. The court found that MERS is an owner of an interest in the indebtedness based on MERS’ contractual obligation as mortgagee being dependent upon whether the mortgagor met the obligation to pay the indebtedness which the mortgage secured. In other words, as mortgage recordholder, MERS has an interest in the indebtedness based on its ownership of a security interest in the property, the continued existence of which is based on the satisfaction of debt.

With MERS being a major filer of mortgages in many states this decision had significant relevance to the industry. For Michigan, it provides a final answer on whether MERS is entitled to foreclose by advertisement and clears up the confusion and concern as to the properties on which MERS had initiated nonjudicial foreclosures. It is also another success for MERS, as this case was not the first in which its foreclosure rights were challenged.

Residential Funding Co, L.L.C. v. Saurman, SC: 143178, SC: 143179, SUPREME COURT OF MICHIGAN, 805 N.W.2d 183; (2011 Mich. LEXIS 1950, November 16, 2011).

Angela Maynard Shovein is a partner in the Ohio office of Hudson Cook, LLP. Angela can be reached at 216-221-8499 or by email at ashovein@hudco.com.