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Fixing The Foreclosure Crisis

Although residential mortgage foreclosures have wreaked havoc on many communities in metro Detroit and Michigan, efforts to stem the damage and boost property values are under way. But do the relief programs go far enough?

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Michigan is one of several states that provide for nonjudicial foreclosure procedures in which the lender, or its servicer or agent, gives a notice of default and “foreclose by advertisement” through a power of sale provision that can result in the sale of the property at a sheriff’s auction. In states that use “judicial foreclosure,” a mortgagee is required to file an actual lawsuit to initiate the foreclosure.

In April, the Michigan Court of Appeals, in Residential Funding Co. v. Saurman, rendered a significant blow to nonjudicial foreclosure proceedings via a system called Mortgage Electronic Registration Systems, or MERS, which is often utilized by the mortgage industry. MERS simplifies the way mortgage ownership and servicing rights are originated, sold, and tracked. The system eliminated the need to prepare and record assignments when trading residential and commercial mortgage loans.

In a 2-1 decision, the court held that MERS did not have “an interest in the indebtedness secured by the mortgage,” and therefore could not foreclose by advertisement. As a result, foreclosure proceedings in many cases were set aside. The Michigan Supreme Court is reviewing the case, and a decision is expected by year’s end.

Lorray Brown, director of the Michigan Foreclosure Prevention Project and a co-managing attorney and a consumer law specialist for the Michigan Poverty Law Program, filed an Amicus brief in the case on behalf of her organization, as well as the Legal Services Association of Michigan, the National Consumer Law Center, and the State Bar of Michigan Consumer Law Section.

“When MERS forecloses, the homeowner is dealing with a placeholder who has no legal interest and is without authority,” Brown says. “Clearly the homeowner doesn’t know who to negotiate with, which has been a stumbling block to negotiations that could avoid a foreclosure sale. Thankfully, the state Legislature and governor stepped up in 2009 to address the problem.”

Commonly known as the “Pre-foreclosure negotiation law,” and recently extended to January 2012, the legislation provides that before a foreclosure proceeding by advertisement occurs, a mortgage holder or servicer must comply with a 90-day informational campaign. The mortgage holder or servicer must serve a written notice informing the borrower of his or her rights and the opportunity to avoid foreclosure, and the notice must include a list of HUD/MSHDA certified housing counselors. Brown is part of a legislative work group that is addressing whether to let the statute expire or have it extended with some modifications.

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