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Sixth Circuit Rejects Borrowers’ Foreclosure Challenges Under Michigan Statute, Alleged HAMP Violations

6thcircuitThe U.S. Court of Appeals for the Sixth Circuit recently affirmed a district court’s dismissal of borrowers’ state law negligence and constitutional due process allegations arising from the foreclosure and sale of their home under Michigan’s foreclosure-by-advertisement statute.

A copy of the opinion is available at: Link to Opinion.

The plaintiff borrowers obtained a mortgage loan in 2008. The mortgage named Mortgage Electronic Registration Systems, Inc. (MERS) as the lender’s nominee and the mortgagee. The note was endorsed in blank to the original lender and was later transferred to a loan servicer. The assignment of mortgage to the loan servicer was recorded in 2011.

The borrowers defaulted and the holder of the note foreclosed the mortgage under Michigan’s foreclosure-by-advertisement statute. The borrowers failed to redeem the property within the six-month statutory redemption period allowed, and the loan owner purchased the property at the foreclosure sale.

The loan owner sued to evict the borrowers in state court and they answered and counterclaimed, challenging the foreclosure and eviction. The case was removed to federal court by the loan owner.  The district court entered judgment on the pleadings in favor of the loan owner defendants, and the borrowers appealed.

On appeal, the Sixth Circuit began by pointing out that under Michigan’s foreclosure-by-advertisement statute, the failure to redeem the property by paying the amount owed within an allowed six-month period results in the vesting of all right, title and interest of the mortgagor in the purchaser at the sheriff’s sale.

The Sixth Circuit noted that, because the plaintiffs did not redeem the property within the time allowed, they had to clearly plead fraud or irregularity relating to the foreclosure itself and that they were prejudiced by such fraud or irregularity. To demonstrate prejudice, the Court held the borrowers “must show that they would have been in a better position to preserve their interest in the property absent defendant’s noncompliance with the statute.”

The Appellate Court rejected the borrowers’ argument that the loan servicer lacked standing to foreclose under Michigan law because there was no record chain of title showing an assignment of the mortgage to it, reasoning that, in fact, MERS had assigned the mortgage to the servicer and the assignment was duly recorded in October 2011, before the November 2011 sheriff’s sale took place.

In addition, the Appellate Court held that, because the borrowers granted MERS and its assigns the power to assign the mortgage as well as to initiate foreclosure proceedings, the servicer, as holder of record of the mortgage, also had the power to foreclose the mortgage.

The Sixth Circuit also rejected the borrower’s argument that the Michigan statute required a record chain of title reflecting ownership of the note, because the statute only required a record chain of title for the mortgage, and not the underlying debt evidenced by the note.

The plaintiff borrowers did not allege any facts showing the prejudice required to void the foreclosure.  The Appellate Court held that, because the borrowers did not exercise their right to redeem in a timely fashion, the borrowers could not show they would have been in a better position to preserve their interest in the property, and their right, title and interest in the property was extinguished by operation of law.

The Sixth Circuit next rejected the borrowers’ argument that the foreclosing party must be both the assignee of the note and the assignee of the mortgage in order to have the right to foreclose because, under Michigan law, the holder of the mortgage and the owner of the debt do not have to be one and the same, and the servicing agent of the mortgage is also one of the parties entitled to foreclose. The borrowers’ challenge to the mortgage’s chain of title due based on the “securitization” of the debt was rejected for same reasons, i.e., because separating or severing the mortgage from the note had no bearing on the servicer’s right to foreclose as MERS’ assignee of record.

In Count II of their counterclaim, the borrowers argued that the loan owner was negligent in failing to grant them a loan modification under the federal Home Affordable Modification Program (HAMP) because it failed to comply with the applicable administrative guidelines. The Appellate Court rejected this argument also, because the borrowers could not show that the loan owner breached any duty the loan owner owed to them, relying on a Sixth Circuit recent ruling in another case (Campbell v. Nationstar Mortg., No. 14-1751, 2015 WL 2084023, at *9 (6th Cir. May 6, 2015) (unpublished)) that HAMP does not create a private right of action, and Michigan courts have not recognized that HAMP’s regulations impose a duty of care owed by servicers to borrowers.

Finally, the Court rejected the borrower’s claim that their due process rights under the Fifth and Fourteenth Amendments were violated because (a) they waived the argument by not objecting to the magistrate judge’s report and recommendation and the district court did not address the issue in its opinion; and (b) on the merits, the loan owner satisfied the requirements of the Due Process Clause because it complied with Michigan’s foreclosure-by-advertisement statute by publishing notice of the foreclosure sale and posting it on the property and giving notice of the six-month redemption period, which the borrowers did not contest.

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Kevin Hudspeth is a Principal of Maurice Wutscher LLP. He practices in the firm’s Commercial Litigation, Consumer Credit Litigation, Appellate, and Regulatory Compliance groups, predominantly representing national mortgage loan servicers on a wide variety of issues. Kevin has substantial litigation experience in federal and state courts across the country. He regularly handles cases involving the FDCPA, RESPA, TILA, FCRA, FACTA, the TCPA, the United States Bankruptcy Code, and similar federal and state laws and regulations, as well as cases litigating real estate and commercial business disputes, the Uniform Commercial Code, loan repurchase demands, and contested foreclosures. Prior to joining Maurice Wutscher, Kevin worked as an Assistant Attorney General with the Office of the Illinois Attorney General, where he litigated actions arising under the Illinois Consumer Fraud and Deceptive Business Practices Act, the Illinois Uniform Deceptive Trade Practices Act, the Illinois Securities Law, and other related statutes. He also previously worked for Fifth Third Bank, N.A., where he coordinated and supervised outside counsel on litigation strategy for contested foreclosures and cases involving default mortgage loan servicing. Kevin has taught legal research and writing as an Adjunct Professor with Loyola University Chicago School of Law and has published articles in academic and trade journals on a diverse range of topics impacting the consumer lending industry, including issues related to the transfer and enforcement of promissory notes, procedural and evidentiary problems presented in contested mortgage foreclosure cases, substantive law impacting bankruptcy administration, and related matters. He regularly contributes to the American Bar Association’s Business Law Today. Kevin is admitted to practice law in the States of Ohio and Illinois, and he has represented clients pro hac vice in trial and appellate level jurisdictions throughout the country. For more information see