Sixth Circuit Issues 'Final Chapter' On Electronic Registration System's Role As Foreclosing Mortgagee In Michigan

The Sixth Circuit Court of Appeals has affirmed a Michigan Supreme Court ruling that permits the Mortgage Electronic Registration System (MERS) to foreclose mortgages – particularly nonjudicial foreclosures in states that permit them – even if it does not hold the underlying promissory note at the time of foreclosure.

During the past several years, state and federal courts have been called upon to determine whether MERS could conduct mortgage foreclosures. MERS is a privately held company formed in 1995 to track servicing rights and ownership of mortgage loans made in the United States in an electronic registry in an era when most mortgage loans were bundled and sold in the mortgage securitization market. Typically, MERS will become the owner of the mortgage lien generated by a mortgage loan or the nominee of that owner with authority to foreclose on the mortgage upon the occurrence of an event of default. It has been estimated that MERS owns or controls approximately one-half of all U.S. residential mortgages.

Numerous borrowers who defaulted on their home mortgages owned or controlled by MERS beginning at the inception of the world financial crisis in 2007-2008 have commenced court challenges to foreclosures commenced by MERS as the foreclosing party. A common charge in this litigation is that MERS, as the mere mortgagee that does not hold the underlying promissory note secured by the mortgage, lacks standing to foreclose and, therefore, any foreclosure initiated by MERS is void or voidable under applicable state law.

In Michigan, such a challenge was initially upheld by the Michigan Court of Appeals in Residential Funding Co., LLC v. Saurman, 292 Mich.App. 321, 807 N.W.2d 412 (2011), where a number of mortgage foreclosures by advertisement pursuant to MCL 660.3201, et seq. were avoided by that court because MERS, as the foreclosing party, was neither the "owner of the indebtedness [nor] of an interest in the indebtedness secured by the mortgage [nor] the servicing agent of the mortgage." MCL 600.3204(1)(d). However, the Michigan Supreme Court on appeal reversed this decision, declaring that MERS was an "owner" of the mortgage indebtedness within the meaning of this statutory requirement even though it did not hold the underlying promissory note. According to the Michigan Supreme Court, "as record-holder of the mortgage, MERS owned a security lien on the properties, the continued existence of which was contingent upon the satisfaction of...