The Michigan Court of Appeals has ruled that Mortgage Electronic Registration Systems, Inc. (MERS) does not meet the requirements under state statute to foreclose by advertisement.
As a quasi-judicial state, Michigan recognizes both judicial foreclosures that go through the courts and ""foreclosure by advertisement,"" which gives creditors' the right to foreclose after they post a notice of the default in a newspaper for four consecutive weeks when the mortgage includes a power of sale clause.
The appellate court ruled the latter is not a valid function of MERS because the company does not own any interest in the debt.
The judgment does not apply to judicial foreclosures conducted by MERS, but observers warn the court's decision could void thousands of foreclosure actions in the state, including properties that have already been sold to new buyers.
The _Detroit Free Press_ says it's received reports from local Realtors that title companies are canceling closings on some bank-owned homes in light of the appellate court's ruling.
MERS issued a statement following the decision, saying, ""Title companies should not have any concerns about closing loans with MERS as the mortgagee.""
But the risks raised in the chain of title and the legal standing now provided to homeowners who have been non-judicially foreclosed on by MERS have local agencies
thinking twice about insuring the title on a bank-owned home in which MERS was involved.
According to Randall S. Miller, Esq., of the law firm Randall S. Miller & Associates in Bloomfield Hills, Michigan, ""Title underwriters are taking a very conservative stance on the issue and will not insure any property that was foreclosed in the name of MERS to be insured at REO sale unless the foreclosure was performed prior to 2005.""
Miller explained that Michigan has a five-year statute of limitations period in which to bring litigation challenging a foreclosure.
In addition, Miller says the consensus of local experts is that any property where redemption has expired, but has not been sold to a third party, will have to be re-foreclosed.
A daunting task considering the number of cases affected, but Miller says it pales in comparison to the additional lawsuits that will be filed if the properties are not re-foreclosed. He notes that there have been reports of at least three class action lawsuits filed immediately in the wake of the court's decision, and Miller expects ""hundreds if not thousands"" more.
""The good news is that most, but not all, firms stopped foreclosing in the name of MERS approximately two years ago, so the number of potential issues had been preemptively diminished,"" Miller said. ""However, there are indications that some firms and lenders were continuing the practice, and now have to deal with the consequences.""
MERS was developed by the mortgage industry to keep track of the servicing rights on home loans. It was designed as a paperless property registry to facilitate the transfer of mortgages. The system is also used by communities to identify parties responsible for vacant properties.
Earlier this year, MERS published a proposed membership rule change, which states that lenders can no longer foreclose in MERS' name but must obtain an assignment from MERS to move forward with a foreclosure action.
""[O]n a going forward basis, 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,"" MERS said in a statement.