In a ruling that may presage the Massachusetts Supreme Judicial Court’s eagerly awaited decision in Eaton v. Federal National Mortgage Association (see our related posts here and here), a divided Supreme Court of Michigan has reversed a Court of Appeals decision that required Mortgage Electronic Registration Systems, Inc. (MERS) to hold both the promissory note and the mortgage it was foreclosing. The Michigan Supreme Court’s order is here (pdf). Although Residential Funding involves some Michigan statutes without equivalents in Massachusetts, the decision is still instructive.
Residential Funding follows old Michigan case law holding that only the record holder of a mortgage has the power to foreclose, because the mortgagee holds a lien in trust to secure the borrower’s obligations. In light of this trust relationship, and because the promissory note and mortgage must be construed together, MERS could foreclose the mortgage at issue even though it didn’t hold the underlying note. Residential Funding stresses that MERS’s rights as a mortgage holder were wholly contingent on whether the underlying indebtedness was paid.
The Supreme Court of Michigan must have been concerned that the contrary Court of Appeals ruling would have wreaked havoc with land titles, given the number of properties with foreclosures in their chain of title (see Massachusetts Land Court Judge Gordon H. Piper’s discussion of that topic here). The Supreme Court heard oral argument on November 10, 2011 and issued its order reversing the lower court only six days later. We will soon learn whether Massachusetts’ highest court shares the concern that requiring unity of the note and mortgage will cloud the title of thousands of once-foreclosed properties.