The Michigan Court of Appeals ruled that Mortgage Electronic Registration Systems Inc. is ineligible to use the state’s non-judicial foreclosure process, vacating the 2009 foreclosures of two borrowers.
Foreclosures in Michigan typically follow a non-judicial process, meaning attorneys for the owner of a defaulted promissory note can initiate a foreclosure of the mortgage simply by advertising it. But Michigan law specifies that in order to use this expedited process, the foreclosing entity must be “either the owner of the indebtedness or of an interest in the indebtedness secured by the mortgage or the servicing agent of the mortgage.”
In the two 2009 cases, MERS was the mortgagee in county property records and was the named entity initiating the foreclosure. In a 2-1 split decision, the court ruled that MERS does not meet the requirements to foreclose by advertisement and should have filed the foreclosures through the state’s judicial process.
“[I]t 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,” the court wrote in its April 21 opinion. “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.”
The lender’s equitable interest in the mortgage does not translate into an equitable interest for MERS in the loan, the court decision added. “Applying these considerations to the present case, it becomes obvious that MERS did not have the authority to foreclose by advertisement on defendants’ properties.”
The decision overturned lower court rulings that judged the foreclosure actions legal.
“We are reviewing the decision and evaluating our options,” said Janis Smith, MERS vice president of corporate communications, in an e-mailed statement.
MERS Inc. is the mortgagee of record on public property records, an entity within parent company MERSCorp. Inc. Another component of the corporation is the MERS System, an electronic platform that tracks changes in promissory note ownership, allowing mortgage investors to bypass the county-level land recordation process. While possession of the note may changes hands, MERS remains the listed owner of the mortgage document that serves as proof in the public record of the borrower’s home as collateral for the note—in the name Mortgage Electronic Registration Systems Inc.
“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,” the court’s opinion said. “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,” the ruling added.
