The Michigan Court of Appeals ruled that Mortgage Electronic Registration Systems Inc. is ineligible to use the state’s nonjudicial foreclosure process, vacating the 2009 foreclosures of two borrowers.
Foreclosures in Michigan typically follow a nonjudicial process, meaning attorneys for the owner of a defaulted promissory note can initiate a foreclosure of the mortgage simply by publicly advertising the foreclosure sale. 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.
“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,” 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 a 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 reads. “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.
MERS is not a plaintiff in the case. The named plaintiffs, Residential Funding Corp., also known as ResCap and a wholly owned subsidiary of what is now known as Ally Financial and Bank of New York Trust Co., tried to invoke what’s known as the “MERS statute,” a Minnesota Supreme Court ruling from 2009 that upheld MERS’ ability to initiate nonjudicial foreclosures in that state. But the appeals court rejected the argument, noting the Minnesota law is “substantially different” from Michigan’s statute.
The case could be appealed to Michigan’s Supreme Court. Ally Financial, who was the note holder, declined to comment on the case. Bank of New York Trust did not respond to a request for comment.
The court opinion notes that “MERS seeks to blur the lines between itself and the lenders in this case in order to position itself as a party that may take advantage of the restricted tool of foreclosure by advertisement,” but in other cases MERS has “sought to clearly define those lines in order to avoid the responsibilities that come with being a lender.”
The court cited a 2005 case in which MERS successfully defended itself against claims by the Nebraska Department of Banking and Finance that MERS meets the state’s definition of a mortgage banker and is subject to licensing and registration requirements. The Nebraska court accepted the MERS argument that it is not a lender, and rather “merely a shell designed to make buying and selling of loans easier and faster by disconnecting the mortgage from the loan,” the Michigan court wrote.
“Having separated the mortgage from the loan, and disclaimed any interest in the loan in order to avoid the legal responsibilities of a lender, MERS nevertheless claims in the instant case that it can employ the rights of a lender by foreclosing in a manner that the statute affords only to those mortgagees who also own an interest in the loan,” the opinion said.
The practice of servicers foreclosing in the name of MERS—rather than filing a mortgage assignment transfer to the noteholder 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 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.
