CHALLENGING THE LOAN MODIFICATION PROCESS UNDER MICHIGAN’S FORECLOSURE BY ADVERTISMENT STATUTE

By Jonathan L. Engman, Esq.

In 2009 the Michigan legislature amended the foreclosure by advertisement statute by adding a 90-day period in which borrowers could opt in "to attempt to work out a modification of the loan" for their primary residence. [1] In the four years since this amendment, the legislature has tweaked sections and extended the sunset provision, however, the underlying concept remains. As with most changes, this statutory change has brought forth new issues such as; what may a borrower do if a lender does not comply with this process? If the process is complete, and the borrower meets the criteria for a modification but is still denied, what recourse does the borrower have against the lender? And, finally, at what point should a borrower raise an objection to a flaw in the process, a violation of the statute, or a denial that "should have been" an approval?

The Modification Process

Michigan's non-judicial foreclosure process requires that a notice of sale be posted to property and published for four weeks prior to a foreclosure sale. The 2009 change added the requirement that a mortgagee foreclosing on a primary residence has to provide an opportunity for the borrower to "opt in" to a ninety-day loan review period. The amended statute sets forth guidelines that the lender has to follow in reviewing the loan for modification. Specifically, the statute holds that if the mortgaged loan is "pooled for sale" or held by a government entity or government-sponsored enterprise ("GSE") the modification guidelines are dictated by the government entity. [2] Generally, in these cases the servicer uses the Federal Home Affordable Modification Program ("HAMP") in reviewing the borrower for a modification. Under HAMP, the borrower's monthly mortgage payment must be greater than 31% of the borrower's gross income to be eligible for a modification. [3] If, however, the mortgaged loan is not held by a government entity or GSE, the Michigan statute states that the loan modification process must target a ratio of the borrower's housing related debt to the borrower's gross income of 38% or less. [4] To reach the target ratio, the modification process should include one or more of the following: an interest rate reduction, an extension of the amortization period for the loan term, a deferral of some portion of the amount of unpaid principal, or a reduction of late fees.

Once the borrower "opts in" to the negotiation process, the lender requests financial documentation to determine if the borrower qualifies. The borrower must comply and provide any requested documents within sixty days. Thereafter, the lender's designated representative sets up a meeting with the borrower to discuss whether the borrower qualifies and whether the lender is willing to provide a modification.

It is important to note that the statute does not require that a loan modification be offered, even if the borrower qualifies under the statutory guidelines. The statute states that if the borrower is eligible for a modification the mortgage holder may foreclose judicially, but may not foreclose by advertisement. [5]

Challenging the Modification Process

We now return to the questions raised by this statutory change. What happens if a borrower is entitled to a loan modification under the statute, but the lender rejects and proceeds with a non-judicial foreclosure? What action, if any, may a borrower take and when should it be taken? Some borrowers take no action throughout the foreclosure process and then raise the issue of a wrongful denial as a defense to a subsequent eviction action. When raised at this stage, courts have been increasingly ruling that the argument is too late. It is well settled that a mortgagor may hold over after foreclosure by advertisement and test the validity of the sale in a summary proceeding, in so far as invalidity appears in the sale process. [6] While the District Court is allowed to test the invalidity of the foreclosure sale in a summary proceeding, the Michigan Supreme Court has also held that the "underlying equities, if any, bearing on the instrument, legal capacity of the mortgagee or trustee, and other matters, wholly deb hors the record, inclusive of an accounting to determine the amount due, [and] cannot be made triable issues in a summary proceeding." [7]

Even though the modification "opt in" period is found in the foreclosure by advertisement statute, arguably it is not really a part of the actual foreclosure process, but instead, a condition to be met prior to the initiation of the foreclosure. This is akin to the condition that a loan must be in default before starting the foreclosure process. Once complete, the issue of default is no longer a viable argument for a borrower. Although a borrower may have been entitled to a loan modification under the statute, this is not a viable claim after the redemption period has expired because a violation of the modification "opt in" section does not bear on the validity of the sheriff sale itself. In the words of the court, it is not a "test of the validity of the sale" and therefore, not a triable issue in a summary proceeding.

However, the statute does provide recourse. If a lender's compliance with the modification process is in question, the burden falls on the borrower to enforce her rights in a timely fashion. Specifically, if a mortgage holder begins foreclosure proceedings without complying with Michigan's modification "opt in" section, the statute allows a borrower to file an action in circuit court to convert the foreclosure by advertisement to a judicial foreclosure. [8] If a borrower files this action and the court determines that a modification process took place, an agreement was not reached, and the borrower was eligible for a modification pursuant to statutory guidelines, the court shall enjoin the foreclosure of the mortgage by advertisement and order that the foreclosure proceed judicially.

As of yet there is no reported Michigan case law dealing with challenges to the modification process, although the issue of timing has been addressed. In unreported cases, the Michigan Court of Appeals has rejected claims brought by borrowers after the redemption period has expired. In Tipton v Flagstar Bank [9] , the lender completed a non-judicial foreclosure and subsequently obtained an order of eviction. The borrowers filed suit after the eviction claiming that their lender never provided them with a modification "opt in" notice pursuant to MCL 600.3205a. The court held that MCL 600.3205c provides a process for the borrower to demand that the foreclosure proceed judicially if a lender does not comply with the statute, but does not "create an independent cause of action to nullify a foreclosure sale after the expiration of the redemption period and entry of judgment of possession."

In addition, the United States District Court, Eastern District of Michigan, has interpreted MCL 600.3205c, finding that the statute does not require a lender to modify a loan; does not give rise to a cause of action for damages; and does not invalidate a sheriff's sale for lack of compliance. In Dingman v One West Bank [10] , the court also reviewed the statutory scheme in the context of a cause of action brought by the borrowers following the foreclosure sale and expiration of the redemption period. In dismissing the Plaintiff's claims arising under MCL 600.3205c, the court stated:

The statute includes a specific enforcement mechanism that provides the borrowers with an opportunity to request judicial foreclosure if the foreclosing party does not comply with the loan modification provisions. MCL §600.3205c(8). However, plaintiffs have not requested a judicial foreclosure. Unless the borrower files a complaint seeking such relief, which plaintiffs have not done, nothing prevents the lender from foreclosing. [11]

Courts have widely held that borrowers lose standing to file claims against a foreclosing lender with respect to property after expiration of the redemption period. [12] These decisions rely on the premise that if redemptive rights are not exercised within the requisite period, a mortgagor no longer has standing and "all the right, title, and interest" in the property belongs to the purchaser of the sheriff's deed. [13]

Conclusion

Michigan's modification process is currently scheduled to sunset on June 30, 2013 although the legislature has extended it more than once. Until the sun finally sets, Michigan borrowers facing foreclosure of their primary residence have the right to opt-in to a ninety-day (grace) period of loan review before a lender may initiate a non-judicial foreclosure action. The statute does not mandate a modification, even if the borrower meets the criteria of the statute. It does however allow a borrower to require a judicial, as oppose to non-judicial, foreclosure proceeding if the borrower acts timely. Based on the trending case law, if a borrower waits to test the process at the eviction stage, it will be too late.

 


[1] See MCL §600.3205, .3205a - .3205e.

[2] MCL §600.3205c(2) and (3)

[3] Making Home Affordable Handbook, version 4.1 (12/13/12).

[4] MCL 600.3205c(1)(a)

[5] MCL §600.3205c(6).

[6] Reid v Rylander, 270 Mich 263, 267 (1935)

[7] Ibid at 267.

[8] MCL §600.3205(c)(8)

[9] Tipton v Flagstar Bank, FSB, 2012 WL 4800169 (Mich. App.)

[10] Dingman v Onewest Bank, FSB, 859 F.Supp.2d 912 (E.D.Mich. 2012)

[11] Ibid at 922.

[12] Ibid at 917; see also Overton v MERS, 2009 WL 1507342 (Mich. App.)

[13] MCL §600.3236; see Piotrowski v State Land Office, 302 Mich 179 (1942)