MERS Has Right to Foreclose, Michigan Court Rules by the Consumer Financial Services Group

Mortgage Electronic Registration Systems, Inc., the national mortgage nominee, has been on a winning streak in the lower courts with a long string of decisions that have upheld its right to foreclose and rejected borrowers’ claims that MERS doesn’t enjoy the same legal rights and standing as a lender.

Now that trend is starting to solidify as state appellate courts begin to weigh in.

The Michigan Supreme Court, in a November 16 order in Residential Funding Co. v. Saurman, held that MERS must be allowed to foreclose because it owns “an interest in the indebtedness secured by the mortgage” as a result of its secured lien on the properties.

The high court’s two-page order reversed a judgment of the Michigan Court of Appeals in favor of borrowers who executed mortgage instruments naming their respective lenders as “lender,” but designating MERS as the mortgagee. The mortgages in question provided that MERS, as nominee for the lender, had the right to foreclose and sell the properties.

When the borrowers defaulted, MERS started a non-judicial foreclosure proceeding under Michigan’s Foreclosure of Mortgages by Advertisement statute. It then purchased the properties at sheriffs’ sales, and quit-claimed the properties to Residential Funding Co. and Bank of New York Trust Co. When these entities filed eviction actions to remove the borrowers from the properties, the borrowers argued that the foreclosures had been invalid.

The borrowers argued that MERS did not fall within any of the three categories of mortgagees allowed to foreclose under Michigan law, even though the statute makes a clear distinction between an “owner of the indebtedness” and an “owner of an interest in the indebtedness secured by the mortgage.”

The Saurman court rejected the borrowers’ position. Although MERS’ ownership of an interest in the indebtedness “does not equate to an ownership interest in the note,” the justices concluded that MERS was nonetheless mortgagee of record, and therefore “owned a security lien on the properties, the continued existence of which was contingent upon the satisfaction of the indebtedness.”

Based on “established legal principles governing Michigan’s real property law,” the Saurman court held that mortgagees, such as MERS, have “a lien on the land to secure the debt,” and that MERS, as “an undisputed record holder of a mortgage,” had statutory authority to foreclose.

The ruling marks at least the fourth time this year that MERS has prevailed on the issue in a state appellate court. The Utah Court of Appeals and two California appellate courts have ruled in favor of MERS.

Ballard Spahr’s Consumer Financial Services Group has substantial experience in defending financial institutions against the kinds of claims advanced by borrowers in this case. The group is nationally recognized for its skill in litigation defense, its guidance in structuring and documenting new consumer financial services products, and its experience with the full range of federal and state consumer credit laws throughout the country. For more information, please contact Practice Leader Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Practice Leader Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; or Anthony C. Kaye, 801.531.3069, or kaye@ballardspahr.com.

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