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MERS must use judicial process to foreclose in Michigan

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The Michigan Court of Appeals recently ruled Mortgage Electronic Registration Systems cannot initiate a foreclosure in the state by simply advertising the property is available via a sheriff's sale. Instead, MERS, as the mortgagee, must pursue a foreclosure on a property in Michigan secured by a seriously delinquent loan through the courts. The state normally uses a nonjudicial foreclosure process. The appellate court ruled MERS neither owned the debt nor held any interest in it and therefore could not be the foreclosing party in two cases, in which Michigan circuit courts affirmed district court decisions to allow the eviction process to proceed. The Appeals Court ruling reverses the lower court decisions and vacates the foreclosures. The plantiff in the cases – Residential Funding Co. and Bank of New York Trust Co. – claimed MERS interest in the mortgage as nominee for the lender was sufficient under state law to begin the foreclosure. In a 2-1 split decision, the Court of Appeals said this claim "is without merit." "Pursuant to the mortgages, defendants were the mortgagors and MERS was the mortgagee," the court ruled. "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." After the judges decided MERS' interest in the mortgage wasn't sufficient, "it (became) obvious that MERS did not have the authority to foreclose by advertisement on defendants’ properties." The mortgage documents allow for MERS as mortgagee, but the court ruled the company held "only legal title to the interest granted" by the defendants. "The contention that the contract between MERS and (the lenders) provided MERS with an ownership interest in the note stretches the concept of legal ownership past the breaking point," the Michigan Court of Appeals ruled. "While the term may be used very loosely in some popular contexts, such as the expression to 'own a feeling,' such use refers to some subjective quality or experience." And that's not what the Michigan statute means, according to the judges. The state Legislature "used the word 'owner' because it meant to invoke a legal or equitable right of ownership," the judges said in the opinion. And while MERS "owns" the mortgage, it doesn't own any interest in the debt nor is it secondary beneficiary. MERS said the ruling upholds its legal right as mortgagee of the security instrument and nominee of the lenders and successors. "The court recognizes that MERS may exercise its interests in the mortgage by assigning the mortgage to the note holder so that the note holder may avail itself of the foreclosure by advertisement process," said Janis Smith, vice president of corporate communications at MERS. "Title companies should not have any concerns about closing loans with MERS as the mortgagee." "This decision does not impact the MERS business model or the ability of its members to foreclose on mortgages held by MERS as the mortgagee," Smith said. In February, MERS told members not to foreclose in its name and to instead obtain an assignment of the mortgage from the company. Write to Jason Philyaw.

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