If you have lost your home to foreclosure, this is a story you will want to read. It is possible there could be a payoff in your near future.
Keep in mind, though, that the key word here is possible.
But within that possibility is a stunning fact: Tens of thousands of Michigan residents who were the victims of illegal foreclosures could receive compensation.
Two Michigan court cases involving the Mortgage Electronic Registration Systems, or MERS, are key to how this issue will play out.
According to court documents, MERS was created in the early 1990s as a "mechanism to provide for the faster and lower-cost buying and selling of mortgage debt. Apparently, over the last two decades, the buying and selling of loans backed by mortgages after their initial issuance had accelerated to the point that those operating in that market concluded that the statutory requirement that mortgage transfers be recorded was interfering with their ability to conduct sales as rapidly as the market demanded. By operating through MERS, these financial entities could buy and sell loans without have to record a mortgage transfer for each transaction because the named mortgagee would never change; it would always be MERS even though the loans were changing hands.”
In other words, MERS was acting as a sort of clearinghouse for mortgages without having an actual interest in the property. Part of the beauty of the whole thing — at least from the perspective of lenders and the investors who bought mortgage-backed securities — was that they didn't pay the standard fee to any county register of deeds when the mortgages repeatedly changed hands.
Then the housing bubble burst, and the value of mortgage-backed securities crumbled, helping to bring about the 2008 economic collapse and the ensuing foreclosure crisis.
Jump ahead to 2011, when the Michigan Court of Appeals ruled that MERS, under state law, lacked the standing to actually foreclose on a property through the standard procedure in Michigan — which is though advertisement, as opposed to judicial foreclosures that require an appearance in front of a judge at the start of the process — because MERS wasn't actually owed any money by the homeowners.
If you think that sounds confusing, you are right. Part of the reason for that confusion is this: Most people don't realize that there is a difference between a mortgage and a promissory note. When you borrow money to buy a home, typically there are two crucial documents. One is the mortgage, which specifies the terms of the agreement; the other is the promissory note, which is a written promise to repay a specific amount of money.
So the mortgages got traded back and forth while the promissory notes would typically remain in the hands of the original lender. And, as the Court of Appeals ruled in a 2-1 decision handed down in April, although MERS was technically the mortgagee — meaning that it held the title to the property that secured the note — it wasn't actually the entity that was owed the money when borrowers defaulted on their loans.
As a result, the court ruled, MERS couldn't initiate a foreclosure by simply posting notice in a publication such as the Legal News. The immediate effect was that the holder of the notes, and not MERS, would initiate the foreclosures. In addition, the sheriffs in at least two counties — Oakland and Wayne — suspended their sales of homes foreclosed on by MERS.
(That didn't mean that people would necessarily get to remain in the homes permanently. They would still be in default, and the property would still be subject to foreclosure. But the process would have to start all over again, at the very least giving people more time in their homes and giving them more opportunity to negotiate a loan modification.)
Homecoming Financial, LLC, which, as the original lender in the case, was the named defendant, is appealing the appellate court decision.
The fact that the appellate court split 2-1 on the decision indicates that the issue of MERS' right to foreclose by advertisement isn't clear-cut.
"The law is not absolutely clear on this issue,” says John Mogk, a professor at Wayne State University's school of law.
Despite that doubt, a number of class action lawsuits have been filed against MERS. The contention is that, based on the appellate court ruling, an untold number of people were illegally forced from their homes, and that they should be compensated for the loss.
One of those suits has been filed in U.S. District Court in Detroit by the Dailey Law Firm. Attorneys for the Royal Oak firm, Brian Dailey and Justin Grove, argue in court filings that MERS should be required to pay damages amounting to $400 million.
It remains an open question whether any class actions will be allowed, or if each foreclosed homeowner will have to seek compensation on a case-by-case basis.
MERS, in a July press release, pointed to a recent federal court decision in Detroit, in the case March vs. Home Loans Servicing, where the judge ruled that, under Michigan law, "once the redemption period following foreclosure of property has expired, the former owner's rights and title to the property are extinguished.”
However, Dailey and Grove, in a phone interview with Metro Times, point out that in the case that the Michigan Court of Appeals ruled on, that the homeowner's redemption period had already expired. The difference, they explain, is that the federal court ruling didn't take into consideration the fact that a foreclosure may have been based on fraud, which is how they classify the foreclosures instituted by MERS.
Real estate attorney Robert Nix says the task awaiting the Michigan Supreme Court is twofold. One is the underlying matter: whether MERS had standing to bring foreclosure by advertisement. In that regard, he says, the appellate court gave a careful reading to the law and produced a clear analysis.
They other question facing the state's high court, if it agrees that MERS didn't have standing, will be how to remedy a situation where people have been wrongly foreclosed, and that others have unwittingly bought those homes, which could have a "clouded” title as a result.
Dailey and Grove say they have already identified "thousands” of former homeowners who were foreclosed on by MERS, and that — depending on the amount of time they are allowed to go back, which could be anywhere from three to five years — that number could grow into the tens of thousands.
Wayne State law professor Mogk summed the whole complicated legal entanglement up with just four words:
"It's a real mess.”