The Mortgage Electronic Registration Systems, Inc., is owned by the mortgage industry and operated as a nationwide membership organization. MERS tracks transfers of beneficial ownership interests in mortgage loans on behalf of MERS members and also tracks changes in mortgage servicing rights among the members. According to briefs submitted in this case, MERS was developed to allow faster and lower-cost buying and selling of mortgage debt. As part of the national electronic registry, MERS serves as the “nominee” or limited agent for the beneficial owners – the lender – of the mortgage loan. As nominee, MERS serves as the mortgagee; when mortgage loans are bought and sold, MERS remains the mortgagee of record, with the authority to enforce mortgage rights on the lender’s behalf. According to the defendants, this system makes it more difficult for the borrower to know who actually holds the loan and to approach the lender when the borrower has financial difficulty.
In these consolidated cases, each defendant purchased property and obtained financing; the original lender in both cases was Homecoming Financial, L.L.C. Each financing transaction involved loan documentation – the promissory note – and a mortgage security document, known as the mortgage instrument. Each note provided for the amount of the loan, the interest rate, methods and requirements of repayment, the lender’s identity and that of the borrower, and other matters. The mortgage instrument provided for rights of foreclosure by the mortgagee if the borrower defaulted. Although Homecoming was named as the lender in the mortgage instrument, MERS, not Homecoming, was designated as the mortgagee. The mortgage instrument also stated that “MERS is a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns.” The mortgage instrument further provided that “Borrower does hereby mortgage, warrant, grant and convey to MERS (solely as nominee for Lender and Lender’s successors and assigns) and to the successors and assigns of MERS, with the power of sale, the following described property …. Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender …) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.”
The defendants defaulted on their respective notes, and MERS began non-judicial foreclosures by advertisement as permitted by MCL 600.3201, et seq. MERS purchased the properties at sheriff’s sales and then quit-claimed the properties to the plaintiffs as successor lenders.
The plaintiffs began eviction proceedings, but the defendants argued that the foreclosures were invalid; they asserted, among other matters, that MERS did not fall within any of the three categories of mortgagees who are permitted to foreclose by advertisement under MCL 600.3204(1)(d). The statute provides that “[A] party may foreclose a mortgage by advertisement if all of the following circumstances exist … (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.”
In both cases, the district courts, affirmed by their respective circuit courts on appeal, rejected the defendants’ argument that MERS lacked authority to foreclose under the statute. But in a 2-1 published opinion, the Court of Appeals reversed both lower courts, holding that MERS owned no interest in the indebtedness and that, as a result, MERS is not authorized under MCL 600.3204(1)(d) to foreclose by advertisement. Because the promissory note and the mortgage are “different legal transactions providing two different sets of rights, even though they are typically employed together,” MERS’ role as nominee and mortgagee did not give it any ownership interest in the note, the majority said. As a result, the majority held, the plaintiffs owned no interest in the indebtedness, i.e., the promissory note. To the extent that the lender sought to empower MERS to act on its behalf, this action was ineffective because the lender could not grant a right that the statute prohibits, the majority stated. The dissenting judge would have affirmed the lower courts because the mortgage and indebtedness were interrelated, and because MERS as the mortgagee owned a contractual interest in the indebtedness to act for the lender’s benefit. The plaintiffs appeal.