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- The Michigan Court of Appeals reversed the foreclosure of a house on Canal in Wyoming and one in Jackson County because the wrong party did the foreclosure. The Mortgage Electronic Registration System (MERS) is not a mortgage lender. Rather, it is a big computer system created by the lending industry to allow lenders to quickly trade mortgages from one to another to another. MERS acts as their agent on all the mortgages they register in their system -- around 60 million mortgages -- and even forecloses on them.
- But the Michigan Court of Appeals ruled MERS can't foreclose on houses in this state. "The (Michigan) legislature says you have to have an interest in the mortgage, and MERS didn't have an interest in the mortgage," said Hastings attorney Dave Tripp, who filed the appeal. "The Court of Appeals said, 'if you don't have an interest in the mortgage, you can't foreclose.'"(1)
For more, see MI appeals court reverses foreclosures (Judge: MERS not mortgage lender, can't foreclose).
For the majority opinion, see Residential Funding Co, LLC v Saurman, ___ Mich App ___, ___ NW2d ___ (April 21, 2011) (for publication)
Go here for the dissenting opinion.
(1) In actuality, MERS held the mortgage in this case, but did not establish that it owned an interest in the promissory note. In addressing this point, the court stated (bold text is my emphasis):
- In these cases, a promissory note was exchanged for loans of $229,950 and $207,575, respectively. Thus, reasonably construing the statute according to its common legal meaning, ISB Sales Co, 258 Mich App at 526-527, the defendants’ indebtedness is solely based upon the notes because defendants owed monies pursuant to the terms of the notes.
Consequently, in order for a party to own an interest in the indebtedness, it must have a legal share, title, or right in the note. Plaintiffs’ suggestion that an “interest in the mortgage” is sufficient under MCL 600.3204(d)(1) is without merit.
This is necessarily so, as the indebtedness, i.e., the note, and the mortgage are two different legal transactions providing two different sets of rights, even though they are typically employed together.
A “mortgage” is “[a] conveyance of title to property that is given as security for the payment of a debt or the performance of a duty and that will become void upon payment or performance according to the stipulated terms.” The mortgagee has an interest in the property. See Citizens Mtg Corp v Mich Basic Prop Ins Assoc, 111 Mich App 393, 397; 314 NW2d 635 (1981) (referencing the “mortgagee’s interests in the property”). The mortgagor covenants, pursuant to the mortgage, that if the money borrowed under the note is not repaid, the mortgagee will retain an interest in the property.
Thus, unlike a note, which evidences a debt and represents the obligation to repay, a mortgage represents an interest in real property contingent on the failure of the borrower to repay the lender.
The indebtedness, i.e., the note, and the mortgage are two different things. Applying these considerations to the present case, it becomes obvious that MERS did not have the authority to foreclose by advertisement on defendants’ properties.
Pursuant to the mortgages, defendants were the mortgagors and MERS was the mortgagee. However, it was the plaintiff lenders that lent defendants money pursuant to the terms of the notes. MERS, as mortgagee, only held an interest in the property as security for the note, not an interest in the note itself. MERS could not attempt to enforce the notes nor could it obtain any payment on the loans on its own behalf or on behalf of the lender.
Moreover, the mortgage specifically clarified that, although MERS was the mortgagee, MERS held “only legal title to the interest granted” by defendants in the mortgage. Consequently, the interest in the mortgage represented, at most, an interest in defendants’ properties. MERS was not referred to in any way in the notes and only Homecomings held the notes.
The record evidence establishes that MERS owned neither the notes, nor an interest, legal share, or right in the notes. The only interest MERS possessed was in the properties through the mortgages. Given that the notes and mortgages are separate documents, evidencing separate obligations and interests, MERS’ interest in the mortgage did not give it an interest in the debt.
Moreover, plaintiffs’ analysis ignores the fact that the statute does not merely require an “interest” in the debt, but rather that the foreclosing party own that interest. As noted above, to own means “to have good legal title; to hold as property; to have a legal or rightful title to.” None of these terms describes MERS’ relationship to the note.
Plaintiffs’ claim that MERS was a contractual owner of an interest in the notes based on the agreement between MERS and the lenders misstates the interests created by that agreement. Although MERS stood to benefit if the debt was not paid—it stood to become the owner of the property—it received no benefit if the debt was paid. MERS had no right to possess the debt, or the money paid on it. Likewise, it had no right to use or convey the note. Its only “right to possess” was to possess the property if and when foreclosure occurred. Had the lender decided to forgive the debt in the note, MERS would have had no recourse; it could not have sued the lender for some financial loss.
Accordingly, it owned no financial interest in the notes. Indeed, it is uncontested that MERS is wholly without legal or rightful title to the debt and that there are no circumstances under which it is entitled to receive any payments on the notes.
Before concluding its ruling, the majority appears to take a parting shot at MERS with this observation:
- The separation of the note from the mortgage in order to speed the sale of mortgage debt without having to deal with all the “paper work” of mortgage transfers appears to be the sole reason for MERS’ existence.
The flip side of separating the note from the mortgage is that it can slow the mechanism of foreclosure by requiring judicial action rather than allowing foreclosure by advertisement.
To the degree there were expediencies and potential economic benefits in separating the mortgagee from the noteholder so as to speed the sale of mortgage-based debt, those lenders that participated were entitled to reap those benefits. However, it is no less true that, to the degree that this separation created risks and potential costs, those same lenders must be responsible for absorbing the costs.
In concluding its ruling, the court provided this significant tidbit regarding the void status of the foreclosure proceeding undertaken by MERS in this case:
- Defendants were entitled to judgment as a matter of law because, pursuant to MCL 600.3204(1)(d), 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.
Thus, the circuit courts improperly affirmed the district courts’ decisions to proceed with eviction based upon the foreclosures of defendants’ properties.
The significance of the foreclosure proceedings being rendered void ab initio is that, at least based on this position, anyone who may have purchased a home in Michigan that has a recent foreclosure in its chain of title, where said foreclosure has the same or a similar fact pattern as in this case, may find themselves having an Ibanez problem with respect to the home they thought they purchased and paid for (ie. they hold no title to the home purchased, notwithstanding any status as a bona fide purchaser that may have been otherwise available).