Mortgage Assignments: What is and is Not Required for a Foreclosure in Michigan

By Jonathan L. Engman, Esq.

A perfect world would dictate that a perfect chain of assignments would be recorded and reflected on title at the time of foreclosure. In our far from perfect reality, however, this perfect chain does not always exist. It is a basic premise that a mortgagee must own the indebtedness to begin foreclosure proceedings. [i] What is not so basic, however, is whether the chain of assignments must be unbroken in order for the last link to be valid. Pursuant to Michigan statute MCL §600.3204 a mortgagee may foreclose a mortgage by advertisement if:

(1) (a) A default in a condition of the mortgage has occurred, by which the power to sell became operative.

(b) An action or proceeding has not been instituted, at law, to recover the debt secured by the mortgage or any part of the mortgage; . . ..

(c) The mortgage containing the power of sale has been properly recorded.

(d) The party foreclosing the mortgage is either the owner of the indebtedness or of an interest in the indebtedness secured by the mortgage or the servicing agent of the mortgage.

(2) If a mortgage is given to secure the payment of money by installments, each of the installments mentioned in the mortgage after the first shall be treated as a separate and independent mortgage . . .

(3) If the party foreclosing a mortgage by advertisement is not the original mortgagee, a record chain of title shall exist prior to the date of sale under section 3216 evidencing the assignment of the mortgage to the party foreclosing the mortgage. (Emphasis added).

The legislative history reveals that prior to 1994, §600.3204(3) read: "the mortgage containing such power of sale has been duly recorded; and if it shall have been assigned that all the assignments thereof shall have been recorded." In 1993, the Michigan Court of Appeals held in Arnold v DMR Financial Services (No. 90-00778) that all assignments of the mortgage had to be recorded before a sheriff's sale could take place. The court of appeals based its decision on the plain meaning of the statute as it was written prior to the 1994 amendment. [ii]

LEGISLATURE ENACTS CHANGE

In 1994, following the court of appeals ruling in Arnold, the Michigan legislature amended the statute due to concerns raised by mortgage experts. It is important to note that there is no general requirement that assignments of mortgages be recorded under Michigan law. [iii] Based on this fact, mortgage experts argued that the true purpose of the Michigan foreclosure statute was to afford a borrower/mortgagor the ability to find out what entity was claiming the right to foreclose so the mortgagor would be able to negotiate to retain his property. [iv]

In amending the statute, the legislature recognized that the record title did not need to reflect every entity that had owned the note, but only that evidence exists as to the mortgagee that currently claimed ownership to the note, giving rise to the right to foreclose by advertisement. [v] To effect this change, the legislature removed the specific language requiring that all assignments in a chain of title be recorded and replaced it with the simple requirement that a record chain of title exist evidencing an assignment to the foreclosing party, if the foreclosing party is not the original mortgagee. One could argue that the phrase "record chain of title" by its definition includes every assignment in perfect chain. However, the Sixth Circuit Court of Appeals found that phrase plain on its face and reasonably defined: "record chain of title is comprised of documents that were filed in the County Register of Deeds' office." [vi]

Hot off the press, the Michigan Court of Appeals, in an opinion just published this month, analyzed what it means to be in the chain of title. [vii] In Kim, the plaintiffs gave a mortgage to Washington Mutual Bank in July 2007. In September 2008 the Department of Treasury closed Washington Mutual and appointed the FDIC as receiver. Thereafter, the defendant JP Morgan Chase Bank purchased and assumed all of Washington Mutual's loans and foreclosed plaintiff's mortgage. The defendant admitted that there was no assignment recorded from the FDIC to itself. The plaintiff argued that 600.3204 required the defendant to record its mortgage interest prior to the sale. The Defendant argued that the statute was inapplicable because it acquired its interest by operation of law. In ruling that the sale was void, the court found that even if the FDIC obtained it's interest by federal statute, the defendant purchased that interest from the FDIC and was required to record its mortgage interest before the sheriff's sale. This case speaks to the necessity of being in the record chain of title prior to the sheriff's sale; however, the distinction here is there was no recorded assignment to the foreclosing entity.

In analyzing the current statute, it is evident that the purpose of the statutory requirement in MCL §600.3204 is to afford notice to the mortgagor of who owns the mortgage at the time of sale; it is not to afford notice of every entity that ever owned it. Since there is no legal requirement to record notice of the transfer of a mortgagee's interest outside of the foreclosure statute, the legislature was only requiring that the mortgagee record evidence that it currently owns the mortgage. [viii]

A secondary issue is when does the assignment of the foreclosing party need to be recorded? To answer that question an attorney need not look past the statute. The statute directs that the assignment of the foreclosing party needs to be in the record chain of title prior to the sale date. This does not mean prior to the first publication, but simply prior to the date the sheriff forecloses the mortgage.

CONCLUSION

Although a foreclosure may be statutorily valid with an imperfect chain of assignments, mortgagees will, nevertheless, likely find it hard to obtain title insurance from major underwriters who require a perfect chain prior to issuing a policy. A foreclosing mortgagee should try to ensure that all assignments line up before proceeding with foreclosure and obtain a missing assignment when necessary to fill a gap. Again however, the world of real property is not perfect, and there may be a gap in a chain of assignments that cannot be filled. The legislature recognized this imperfection when it enacted changes to the foreclosure statute in 1994. When necessary, a mortgagee should be able to rely on this statute as currently written to secure possession of its collateral.

 


[i] Arnold v DMR Financial Services, Inc. 448 Mich. 671 (1995) see also; Davenport v HSBC Bank, 375 Mich. App. 344 (2007).

[ii] The Michigan Supreme Court subsequently overturned the appellate ruling because in that specific case, the unrecorded assignment was a security interest only. Arnold, supra.

[iii] Dougherty v Randall, 3 Mich. 581 (1855). A real estate mortgagee's interest is a chattel interest, which may be transferred without a writing.

[iv] House Legislative Analysis Section, House Bill 5721 (Substitute H-1) First Analysis (9-20-94).

[v] House Legislative Analysis Section, supra.

[vi] Livonia Properties Holdings, LLC v Farmington Road Holdings, LLC, 399 Fed. Appx. 97, 2010 WL 4275305 (C.A.6 (Mich.)).

[vii] Euihyung Kim v JP Morgan Chase Bank, 2012 WL 104463 (Mich. App).

[viii] As final evidence of for this analysis, the author will point out that there is a move to change the statute back to requiring all that assignments be recorded in the chain of title. See HB 5020.