MERS Conundrum

As all in the real estate industry of Michigan are aware, the recent State of Michigan Court of Appeals's decision, published April 21, 2011, has caused a great deal of confusion.

This case dealt with mortgage foreclosure by advertisement. It did not concern judicial foreclosure. Keep that in mind as you read.

MERS is an acronym for Mortgage Electronic Registration System. MERS was designed to make loans easily and rapidly transferable, without the necessity of having to record an assignment for each such transfer. The idea is that MERS continually remain the mortgagee "of record," while allowing for transfers behind the scene. If MERS foreclosed, as the "mortgagee of record," it would subsequently transfer its interest, as the grantee in the Sheriff's Deed, to the entity actually holding the loan, whichever entity that may have been at the time of foreclosure.

MERS appears in numerous mortgages "as nominee" for the lender. Such mortgages disclose that MERS's interest is solely that of mortgagee.

This had remained a very neat and convenient arrangement; until it ran into conflict with Michigan Compiled Laws 600.3204(1)(d). The stage had been set for an entertaining cage fight. And, as you might expect, statutory provisions make a respectable combatant! Sort of like Hercules on steroids.

MCL 600.3204(1)(d) reads as follows:

(1) A party may foreclose a mortgage by advertisement if all of the following conditions exist:

(d) The party foreclosing the mortgage is either the owner of the indebtedness or of an interest in the indebtedness secured by the mortgage or the servicing agent of the mortgage.

To summarize the case at bar, the Michigan Court of Appeals analytically distinguished the "note" from the "mortgage." It determined that for a party to own an interest in the indebtedness, it must own an interest in the note. MERS, acting solely as the mortgagee, did not own an interest in the note, which meant that it did not own an interest in the indebtedness, which meant that it did not qualify as a party capable of foreclosing under 600.3204(1)(d).

Additionally, MERS is not the servicing agent of the mortgage. The parties agreed on this point, as MERS simply exists to transfer the loans.

The Note:

Between a lender and a borrower, it is the note that represents the contract between the parties. The note represents the indebtedness. MERS, acting solely as mortgagee, maintained no interest in the note and, therefore, maintained no interest in the indebtedness. As such, the court concluded that MERS had no standing to foreclose by advertisement within the State of Michigan, as discussed.

The Mortgage:

The mortgage is simply an instrument of security. The mortgage acts to secure the debt to the property. The mortgagor is the party pledging the property. The mortgagee is the party holding the benefits of the secured interest.

Another Question: Can MERS effectively assign?

Example: A mortgage is recorded May 1, 2009, in which MERS is acting as nominee for the lender therein. On June 1, 2009, MERS assigns to Lender A. On August 1, 2010, Lender A forecloses by advertisement. Is this foreclosure valid? Well, let's look at our facts.

We know that MERS, as nominee, does not own an interest in the note. When MERS transfers to Lender A, all it can logically transfer is its interest as mortgagee, solely. If all Lender A received was the interest as mortgagee, it would hold no interest in the note, no interest in the indebtedness, and would not be permitted to foreclose by advertisement under the statute. Lender A would be in the same shoes as MERS. If MERS owns no interest in the indebtedness, how can it subsequently assign such interest? It seems that the original lender would have to assign its interest in the note to Lender A, prior to foreclosure by advertisement. And how can we be certain that Lender A received such interest from the original lender? Interesting, huh?

I am aware that my example predates the Court of Appeals decision, and that the decision did not address such transfers. Nonetheless, everyone is waiting to see if this decision will effect transactions retroactively. A big mess.

The Davenport Decision (published April 24, 2007):

In Davenport, the defendant began foreclosure proceedings October 27, 2005, four days before receiving its assignment of the mortgage. The defendant subsequently recorded its assignment, prior to foreclosure sale.

At issue in Davenport were two statutory provisions, MCL 600.3204(1)(d) and MCL 600.3204(3). The court ruled that the defendant did not own an interest in the indebtedness which would permit it to foreclose by advertisement. Reason: The defendant began foreclosure proceedings on October 27, four days before receiving its actual interest in the indebtedness.

The defendant countered with the position that it had fulfilled the requirement of 600.3204(3), which statute requires that the foreclosing party record its assignment prior to foreclosure sale. The court recognized this fact, but reasoned that satisfaction of 600.3204(3) did not render 600.3204(1)(d) inapplicable.

Summary:

All of us await the position of the Michigan Supreme Court, if they hear the appeal, or the position of the Michigan Legislature. Will they uphold the current decision, strike down the current decision, or find some sort of legislative middle ground? Will such decisions be retroactive in nature, or will such decisions have a fresh starting date? Who knows.

The relevance of the determination that MERS, as nominee, holds no interest in the indebtedness, or no interest as servicer, automatically calls into question every transfer or foreclosure undertaken by MERS. If MERS never held an interest in the note, how could it have effectively transferred a forecloseable interest to a third party?

As it stands, where foreclosure by advertisement has occurred, or is contemplated, it is the original lender that holds all the answers. It is the original lender that must assign the note to subsequent assignees. It is the original lender that must assign servicing rights to subsequent assignees. Bringing the note and the mortgage into the same hands, prior to foreclosure by advertisement, is the only current solution.

The Court of Appeals decided one thing only: Could MERS, as mortgagee, but not note holder, foreclose by means of advertisement. They did not address the implications of this decision, nor did they offer suggestions on how everyone is to move forward from this point. That is not the job of the court; the court simply decides the issue before it.

Thanks to Lisa Giraud-Minutolo for conferring with me prior to writing this.

dave