In exchange for a loan, a creditor (usually a bank), known as the mortgagee, is given (as security) a mortgage by the debtor, known as the mortgagor. The mortgage provides the mortgagee rights in the mortgaged property if the mortgagor defaults on the loan.
Michigan, like most states, is a Lien Theory state. Lien theory means title remains with the mortgagor, and the mortgagee is provided a lien on the property. A lien is all that a mortgagee needs to assert its rights. This is converse to Title Theory, whereby, title in fact is held by the mortgagee and the mortgagor holds the benefit of the title.
General Mortgage Requirements
A mortgage and all subsequent modifications, releases, or discharges must be in writing. The mortgage must contain several specific things including the name of the creditor (mortgagee) and debtor (mortgagor), an adequate description of the property, and several other provisions. Ideally, the mortgage must be recorded with the county register of deeds—although—recording is not strictly required.
Occasionally, a creditor and debtor whom would normally create a mortgage attempt to secure the loan by an absolute deed (rather than a mortgage deed), in theory avoiding foreclosure procedure. Upon redemption, the would be mortgagee transfers the deed back to the would be mortgagor. Where there is a default (failure to perform the obligations) the mortgagee retains title. However, an equitable mortgage is created if the intent of the parties was to only secure the debt (defeating the purpose of the attempted avoidance).
Foreclosure and Default by Mortgagor
Default can take on several forms and it is not strictly defined. Therefore, if there is a failure to pay taxes, or perhaps even waste, let alone nonpayment, a default could be triggered. Allowing the creditor (mortgagee) to foreclose on the mortgage. Michigan has two procedures of foreclosure, the first and quickest is foreclosure by advertisement, and the second and most secure is foreclosure by judicial action. Michigan forbids any immediate transfer of title on default (as alluded to in the previous paragraph).
Generally, to foreclose by advertisement in Michigan, (1) the actual mortgage document must grant the power of sale, (2) the mortgage must be recorded with the register of deeds, (3) notification must be published for four weeks, and (4) notice must be posted to the property. The mortgagor has a right to redeem the property under equity prior to the sale. After the sale, the mortgagor has a right to redeem the property under law, typically 6 months.
A foreclosure by judicial action in Michigan is available on all mortgages. It requires typical judicial proceedings of filing a complaint, and the mortgagee must show they are entitled to a deficiency judgment or foreclosure (summary proceedings to follow). Judicial foreclosures must provide at least 6 months before a sale may be allowed.
Other Mortgages that are foreclosed, Creditors rights
In Michigan, a foreclosure sale does its best to clean the title to all recordings after the mortgage was created. Foreclosure sales will not clean title to recordings before the foreclosed mortgage was created. Meaning, if a mortgage created January 2016 forecloses properly, a mortgage created February 2016 will be extinguished (there are steps to preserve junior rights). If a mortgage created January 2015 on that same property, the January 2016 foreclosure will not extinguish the January 2015 interest.
That is why, foreclosing on a mortgage and purchasing a foreclosed property, requires such diligence. Purchasing a property subject to a mortgage is not as ideal as purchasing a property extinguishing a mortgage. Getting your attorney involved early is the best step a creditor or debtor may take.
Mortgage Electronic Registration Systems (MERS)
In Residential Funding Co., L.L.C. v. Saurman, 490 Mich. 909 (2011), the Michigan Supreme Court cited MCL 600.3204(1)(d), and stated Mortgage Electronic Registration Systems is an owner of interest in indebtedness secured by the mortgage at foreclosure proceedings. This clarified the standing of a party foreclosing on a mortgage must have. Thus, even if a party does not hold an interest in the mortgage debt, that party may foreclose. This is contrary to several other state rulings in Maine, Kansas, and Arkansas.
