Residential Funding v Saurman

A Michigan Court of Appeals recently held that Mortgage Electronic Registration Systems (“MERS”), the mortgagee under the security instrument for a home mortgage loan, but not the holder of the note evidencing the debt for that loan, could not exercise its contractual right to foreclose by advertisement pursuant to the applicable Michigan law, MCL 600.3204(d)(1).


Defendant-borrower (“Borrower”) obtained a home mortgage loan which included a security instrument that provided for rights of foreclosure by the designated mortgagee, MERS. However, MERS was not the owner of the debt and did not hold or service the subject loan. After the Borrower defaulted on his loan, MERS began non-judicial foreclosure by advertisement, purchased the property and then quit-claimed the property to successor lender (“Plaintiff”). When Plaintiff began an eviction action, Borrower challenged the foreclosure, arguing that MERS did not have authority to foreclose by advertisement because it did not qualify as a mortgagee permitted to do so under MCL 600.3204(d)(1). The lower court rejected Borrower’s arguments and Borrower appealed.

As you may recall, Michigan law allows a party to foreclose a mortgage by advertisement if, among other things, that party owns an interest in the indebtedness secured by the mortgage. See MCL 600.3204(d)(1). The Court first held that where, as here, the “indebtedness is solely based upon the note,” a party “must have a legal share, title, or right in the note” in order for that “party to own an interest in the indebtedness” under MCL 600.3204(d)(1). Further, an “interest in the mortgage” is insufficient because “the note and the mortgage are two different legal transactions providing two different sets of rights, even though they are typically employed together.”

The Court next held that “MERS did not have the authority to foreclose by advertisement on Borrower’s property.” The Court reasoned that “it was the Plaintiff that lent the Borrower money pursuant to the terms of the note,” and not MERS as mortgagee, which “only held an interest in the property as security for the note, not an interest in the note itself.” “Moreover, the mortgage specifically clarified that, although MERS was the mortgagee, MERS held ‘only legal title to the interest granted’ by Borrower in the mortgage.” “Consequently, the interest in the mortgage represented, at most, an interest in Borrower’s property. MERS was not referred to in any way in the note and only Plaintiff held the note.”

The Court also rejected various arguments set forth by the plaintiff mortgage loan investor. First, the Court denied that “MERS was a contractual owner of an interest in the note based on the agreement between MERS and the lenders” because “MERS had no right to possess the debt, or the money paid on it.” In addition, “the fact that the originating lender gave MERS authority to take ‘any action required of the Lender’ did not transform MERS into an owner of an interest in the note.” The “contract language expressly limits the interests MERS owns to those granted in the mortgage instrument and limits MERS’ right to take action to those actions related to the mortgage instrument.”

The Court also rejected the plaintiff mortgage loan investor’s argument “that MERS had the authority to foreclose by advertisement as the agent or nominee for the originating lender, who held the note and an equitable interest in the mortgage.” The Court reasoned that the “statute explicitly requires that, in order to foreclose by advertisement, the foreclosing party must possess an interest in the indebtedness,” and “simply does not permit foreclosure in the name of an agent or a nominee.”

The plaintiff mortgage loan investor also argued that the Michigan legislature did not create three distinct categories of entity which could foreclose by advertisement, but rather envisioned a continuum of entities: those that actually own the loan, those that service the loan, and some ill-defined category which might be called “everything in between.” However, the Court found no language in the statute providing for a “continuum,” no analysis from the plaintiff mortgage loan investor of what the “continuum” constitutes, and therefore found no merit in that position.