I've just finished The Fifth Witness, Michael Connelly's latest legal thriller, which features Mickey Haller. [You may remember him from The Lincoln Lawyer, about to be released as a movie]. In this new novel, the L.A. lawyer, who uses the back seat of his Lincoln town car as his office, has switched from criminal defense work to "foreclosure defense." The plot thickens as Haller elects to defend one of his mortgage foreclosure clients who has been charged with murder.
As the story unfolds, Mickey Haller crafts an impressive effort to interject reasonable doubt at the trial. He struggles to work in "the fifth witness." Connelly's understanding of the obscure and mysterious world of mortgage foreclosure is fascinating.
I have to confess that the fine points of the mortgage industry's much criticized practices have largely gone unnoticed by me. It is only coincidence that brings Michael Connelly's novel and me together at the same time that the Michigan Court of Appeals has decided, for publication, a case finding some mortgage foreclosure practices illegal under Michigan law for exactly the same reason that Haller's clients were able to successfully defend against foreclosure by publication.
You may not practice foreclosure defense work, but you may wish to refer any of your family law clients facing foreclosure to this case and to a morgage foreclosure defense lawyer in their neighborhood. The COA held in consolidated appeals that the Mortgage Electronic Registration System ["MERS"] does not meet the requirements of MCL 600.3204(1)(d) and thus, lacks standing to foreclose by advertisement because MERS holds no power of sale as a mortgagee. The COA reversed the circuit courts' orders affirming the district courts' decisions to proceed with eviction based on the foreclosures of the defendants' properties.
Each defendant purchased property and obtained financing from a financial institution. In each transaction, the buyers signed loan documentation (a note) and a mortgage security instrument. Each note provided for the loan amount, interest rate, methods and requirements of repayment, the identity of the borrower and lender, etc. The mortgage instrument provided for the mortgagee's rights of foreclosure in the event of default on the loan.
Although the lender was named as the lender in the mortgage instrument, MERS was designated as the mortgagee. The lender, as in The Fifth Witness, sold the mortgages to MERS, essentially a holding company having a contract with the lender to monitor title, to complete foreclosure actions, but most important, to be exempt from paying transfer taxes. When the defendants defaulted on their notes, MERS began non-judicial foreclosures by advertisement, purchased the properties at the sheriff's sales, and quit-claimed the properties to the plaintiffs (banks) as successor lenders.
When the plaintiffs began eviction actions, defendants challenged the foreclosures as invalid, arguing, among other issues, that MCL 600.3204(1)(d) did not provide MERS with authority to foreclose by advertisement because it did not fall within any of the three categories of mortgagees allowed to do so under the statute. The issue on appeal was whether MERS, as mortgagee but not noteholder, had standing to foreclose by means of advertisement.
Under the statute, MERS lacked authority to foreclose by advertisement on the defendants' properties because it was not "the owner . . . of an interest in the indebtedness secured by the mortgage." The COA interpreted the statute according to its common legal meaning, holding that the defendants' indebtedness was only based on the notes because they owed monies pursuant to the terms of the notes.
Thus, held the Court, "in order for a party to own an interest in the indebtedness, it must have a legal share, title, or right in the note." The court rejected that plaintiffs' assertion that an "interest in the mortgage" was sufficient under MCL 600.3204(1)(d). The indebtedness (the note) and the mortgage "are two different legal transactions providing two different sets of rights, even though they are typically employed together."
According to the COA:
"[T]he plaintiffs lenders * * * 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."
* * *
"MERS owned neither the notes, nor an interest, legal share, or right in the notes."
The COA also stated that since the mortgages and the notes were separate documents, reflecting separate interests and obligations, "MERS' interest in the mortgage did not give it an interest in the debt." The mere fact that the lender gave MERS authority to take "any action required of the Lender" did not make MERS an owner of an interest in the notes to satisfy the statute. Moreover, because the statute prohibited it, the lender could not grant MERS authority to take action to foreclose by advertisement because the "Legislature specifically requires ownership of an interest in the note before permitting foreclosure by advertisement."
As a result, the court vacated the foreclosure proceedings and remanded to the trial court for further action.
You may read the case here: Residential Funding Co. LLC v Gerald Saurman (Kent County Circuit Court) consolidated on appeal with Bank of New York Trust Co v Corey Messner (Jackson County), Docket No. 290248, decided April 21, 2011, For Publication. [Majority Opinion] Servitto and Shapiro, JJ; [Dissenting Opinion] Wilder, J
For more details about how the MERS system works and how foreclosure defense attorneys are defeating foreclosures around the country, see: Peterson, Christopher Lewis, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, Univ. Cincinnati L Rev, Vol. 78, No. 4, 2010. You'll find specific cites to cases and statutes in states other than Michigan.
Abstract:
At the roots of the worst recession since the Great Depression were unaffordable home mortgages packaged into securities, sold to investors, and used as capital assets by financial institutions. The process of securitization, as well as financial institution over-leveraging associated with it, has been well documented and explored. However, there is one company that was a party to more questionable loans and foreclosures than any other and yet has received virtually no attention in the academic literature. Mortgage Electronic Registration Systems, Inc., commonly referred to as “MERS,” is the recorded owner of over half of the nation’s residential mortgages. MERS operates a computer database designed to track servicing and ownership rights of mortgage loans anywhere in the United States. But, it also acts as a proxy for the real parties in interest in county land title records. Most importantly, MERS is also filing foreclosure lawsuits on behalf of financiers against hundreds of thousands of American families. This Article explores the legal and public policy foundations of this odd, but extremely powerful, company that is so attached to America’s financial destiny. It begins with a brief explanation of the origins of the county real property recording systems and the law governing real property liens. Then, it explains how MERS works, why mortgage bankers created the company, and what MERS has done to transform the underlying assumptions of state real property recording law. Next, it explores controversial doctrinal issues confronting MERS and the companies that have relied on it, including (1) whether MERS actually has standing to bring foreclosure actions; (2) whether MERS should be considered a debt collector under the federal Fair Debt Collection Practices Act; and (3) whether loans recorded in MERS’ name should have priority in various collateral competitions under state law and the federal bankruptcy code. The article culminates in a discussion of MERS’ culpability in fostering the mortgage foreclosure crisis and what the long term effects of privatized land title records will have on our public information infrastructure. The Article concludes by considers whether the mortgage banking industry, in creating and embracing MERS, has subverted the democratic governance of the nation’s real property recording system.
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