Relevant Michigan Legislation and Case Law

The first quarter of 2012 has brought changes to Michigan's Foreclosure by Advertisement statutes as well as several significant Court of Appeal decisions affecting default processing in the State.

Michigan's Mandatory Loan Modification Review Period

In 2009, §MCL 600.3201 et seq, was amended by adding a mandatory workout period (known as the "opt in" provision) prior to commencing foreclosure on property that is the principal residence of the mortgagor. Under the 2009 law, the borrower was required to contact a house counselor within fourteen days and then the housing counselor was required to contact the lender within ten days or the lender could initiate foreclosure. The lender was also required to publish the notice one time within seven days. Effective January 2012, the law was simplified by allowing the borrower 30 days to "opt in" with or without the assistance of a housing counselor by simply contacting the designated representative directly. In addition, the lender is no longer required to publish the "opt in" letter. Also, in an attempt to minimize extended delay to an already extensive process, a time period has been created for the borrower to return financial documents to the lender once electing to opt-in to the modification process. If the borrower does not provide the requisite financials documents within sixty days, the lender may proceed with foreclosure without waiting any additional time. The "opt in" provisions of the Michigan statute are currently scheduled to expire on December 31, 2012.

Shortened Redemption Periods

The recent amendments to the non-judicial foreclosure statute have also changed how the redemption periods are calculated following the sheriff sale. Previously, if a property exceeded three acres, the redemption period was one year. The amended statute makes the size of the property irrelevant to the redemption period. The percentage paid on the loan however is still a factor. The statute states that all residential property not exceeding 4 units, if the amount claimed due is more than 66 2/3% of the indebtedness, will be subject to a six month redemption. If less than 66 2/3% is claimed due, or the property is exempted agricultural land, the redemption period is one year. Based on this change there will be fewer cases requiring a one-year redemption period.

Property Preservation

Finally, a positive change was added to help prevent theft of fixtures and damage to post-sale property during the redemption period. A new addition to the statute, MCL §600.3278, now provides that a mortgagor, or anyone responsible on the mortgage, is liable to the purchaser at a sheriff sale for physical damage to the property beyond normal wear and tear. An action for damages may be joined with an eviction proceeding following the expiration of the redemption period.

Assignment Required to Foreclose on Loans Purchased from the FDIC

An opinion from the Michigan Court of Appeals in the case of Kim v JP Morgan Chase Bank, 2012 WL 104463 (Mich.App.), on January 12, 2012 has consequences for lenders who have purchased loans from the FDIC as receiver of a closed bank. In Kim, the Court held that if a loan is purchased from the FDIC as receiver of a closed bank, this is not a transfer by "operation of law" and a recorded assignment must exist prior to foreclosure. The borrowers in Kim obtained a loan from Washington Mutual (WaMu) and gave a mortgage to secure the debt. A little over a year later, the treasury closed the bank and appointed the FDIC as receiver. Thereafter, Chase acquired all of the WaMu loans from the FDIC pursuant to a Purchase and Assumption Agreement. Chase then foreclosed on the mortgage but no assignment of the borrower's mortgage was recorded prior to the sale. The plaintiff argued that the plain meaning of the statute required the foreclosing entity to be in the record chain of title. The defendant argued that it obtained its interest by operation of law and therefore the recording provision was not applicable. In holding the foreclosure sale invalid, the Court of Appeals found that the defendant did not acquire its interest by "operation of law" even though the loan was purchased from the FDIC. The FDIC was appointed receiver under federal statute, which is considered operation of law, however the transfer of this interest to Chase was not acquired by the same 'operation of law'. The Court held that the transfer should have been on record and a recorded assignment was necessary prior to foreclosure. This decision mandates that an assignment is required on all future foreclosures of the subject properties as well as those already foreclosed and in REO status. The Michigan Supreme Court recently granted leave to appeal this decision so it is uncertain whether re-foreclosure will be necessary on the subject loans.

GSEs Subject to Transfer Tax

In Oakland County, et al. v Federal Housing Finance Agency, 2012 WL 987580 (E.D. Mich.) a federal judge in the Eastern District of Michigan found that Fannie Mae and Freddie Mac must pay state and county transfer taxes when selling REO properties in Michigan. The Michigan statutes impose a transfer tax, based on the sales price, to be paid to the state and county when selling real property. For years however, the entities did not pay the transfer tax when selling REO properties in Michigan base on federal statutes granting immunity from "all taxation" which was believed to include transfer taxes. Generally, the federal charters provide that Fannie Mae and Freddie Mac are exempt from "all taxation" imposed by any state or by any county, except that real property shall be subject to state, county, or local taxation to the extent that other real property is taxed. See 12 U.S.C. §1723a(c)(2) and 12 U.S.C. §1452(e).

In ruling that the entities were subject to the transfer taxes, the federal court in Oakland County found that the exemption from "all taxation" did not include transfer taxes because a transfer tax was a form of excise tax and not a direct tax. The court relied on the decision of United States v Wells Fargo Bank, 485 U.S. 351 (1988) in holding that "[b]ecause there is a presumption against implied tax exemptions, and "all taxation" has been implied to mean "direct taxation," and the Michigan transfer taxes are an excise tax rather than a direct tax, Defendants are unambiguously liable for the transfer taxes."

An appeal to the 6 th Circuit seems inevitable, however until there's a final decision, the majority of Michigan's eighty-three counties are demanding that Fannie Mae and Freddie Mac pay transfer taxes on REO properties before they will record REO deeds on their behalf.

For more information contact:

Jonathan L. Engman, Esq. or
Rose Marie Brook, Esq.
Fabrizio & Brook, P.C.