MERS Ruling Forces HUD to Reforeclose on Mich. REO

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The Department of Housing and Urban Development will re-foreclose on all its REO properties in Michigan where the original foreclosure was conducted in the name of MERS using the state’s nonjudicial process.

In late April, the Michigan Court of Appeals ruled that Mortgage Electronic Registration Systems Inc. is ineligible to use the state’s nonjudicial foreclosure process because MERS does not meet the requirements to foreclose by advertisement and should have filed the foreclosures through the state’s judicial process. That ruling vacated the 2009 foreclosures of two borrowers.

In an email to HUD mortgagees that was obtained by National Mortgage News, the agency said most of the major title insurance company underwriters have ceased issuing title insurance for any properties where MERS foreclosed by advertisement.

“As a result, any Michigan REO properties in HUD’s inventory that cannot close due to an inability to obtain title insurance must be re-foreclosed in accordance with the Michigan Court of Appeals opinion,” the email reads.

In the two cases before the Michigan court, MERS was the mortgagee in county property records and was the named entity initiating the foreclosure. The court ruled MERS could have remained the mortgagee and filed a valid judicial foreclosure or the investors could have obtained assignment of the mortgage from MERS and initiated the nonjudicial foreclosure.

A HUD spokesperson told NMN the department will not dictate to mortgagees which method to use in the reforeclosures once the properties are reconveyed, adding that mortgagees are responsible for ensuring HUD receives good and marketable title to REO properties in compliance with state laws.

The policy applies to all Michigan REO properties in HUD’s inventory where MERS executed the initial nonjudicial foreclosure. Currently, HUD has 3,600 REO properties in the state. Making the issue murkier though is uncertainty about how many properties became REOs at the hands of MERS-initiated foreclosures.

HUD has asked mortgagees to identify affected properties and notify its Mortgagee Compliance Manager, vendor Michaelson, Connor & Boul by June 7, after which the properties will be reconveyed by HUD to allow the mortgagee to cure the title defect.

HUD’s National Servicing Center will conduct a conference call to address this reconveyance process on June 1. Later it will publish written guidance.

The practice of servicers foreclosing in the name of MERS—rather than filing a mortgage assignment transfer to the note holder prior to initiating the foreclosure—has come under increasing scrutiny, and it’s a routine MERSCorp has recently proposed eliminating.

In March, MERSCorp proposed a rule change that would require that servicers assign the mortgage to the name of the foreclosing entity. The rule is currently pending a 90-day comment period, during which MERS requested its members do not foreclose in its name.

If the proposal is enacted, the MERS board of directors will have to first approve it and set a start date for the new policy.

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