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Summary of 2009 Amendment to the Non-Judicial Foreclosure Statute

(a.k.a. Foreclosure by Advertisement)

By:  H. Douglas Shepherd IV

House Bills No. 4453, 4454, and 4455 (the “Amendment”) were passed by the House and Senate and have been signed by Governor Granholm on May 20, 2009.

The Amendment substantially modifies the Foreclosure by Advertisement Statute (MCL 600.3201 et. seq).  Below please find a summary of the Amendment along with the full copy of the actual Bills which are now the law in the state of Michigan.

What Mortgages are affected?

            All Mortgages encumbering primary residences (specifically property claimed as a principal residence exempt from tax under section 7cc of the general property tax act, MCL 211.7cc, a copy of which is attached hereto).

When does the Amendment take effect? 

            45 days (on or about July 5^th).  The Amendment currently has a sunset provision 2 years from the effective date (however, it could always be extended). 

What is required?

            The Mortgagee or Servicer must send a Notice to borrower prior to commencing the Foreclosure.

What is the Notice required to say?

1.       The reason the Mortgage is in default.

2.       The amount due and owing under the Mortgage.

3.       The name, address and telephone numbers of the mortgage holder, the mortgage servicer, or any agent designated by the mortgage holder or mortgage servicers.

4.       Designation of a contact person (“Modification Agent”) that has the authority to make loan modification agreements (as discussed more fully below).

5.       The Notice must enclose a list of housing counselors prepared by the Michigan state housing development authority (“MSHDA”).

6.       That within 14 days of the date the Notice is sent that borrower may contact the Modification Agent to request a meeting to attempt to work out a modification.

7.       That the housing counselor can attend the meeting.

8.       That if borrower requests a meeting, foreclosure proceedings will not be commence until 90 days after the date the Notice was sent.

9.       That if borrower and the Modification Agent reach an agreement to modify the mortgage loan, the mortgage will not be foreclosed if borrower abides by the terms of the agreement.

10.   That if borrower and the Modification Agent are unable to reach an agreement, but borrower meets certain criteria for modification (discussed further below), the foreclosure by advertisement is not allowed, but instead will proceed before as a judicial foreclosure.

11.   That borrower has the right to contact an attorney and include the telephone number of the state bar of Michigan’s lawyer service and local legal aide offices serving the area where the property is located.

How is the Notice delivered?

            Regular and certified mail (return receipt/delivery restricted to borrowers) to the last know address of borrower, and within 7 days of mailing the Notice, a slightly different Notice (“Newspaper Notice”) must be published one (1) time in the newspaper in the county the property is located.

What is the Newspaper Notice required to say?

1.       Borrower’s name and property address

2.       That borrower has the right to request a meeting with the Mortgagee or servicer.

3.       The name of the Modification Agent.

4.       That borrower may contact a housing counselor by visiting the MSHDA website or calling the MSHDA, along with providing the website and phone number.

5.       That if borrower requests a meeting, foreclosure proceedings will not commenced until 90 days after the date the Notice was sent.

6.       That if borrower and the Modification Agent reach an agreement to modify the mortgage loan, the mortgage will not be foreclosed if borrower abides by the terms of the agreement.

7.       That borrower has the right to contact an attorney and the telephone number of the state bar of Michigan’s lawyer service and local legal aide offices serving the area where the property is located.

What happens if the Notice and Newspaper Notice is not served?

            Borrower can bring an action in circuit court to enjoin the foreclosure.

What if the Mortgagee previously agreed to a Mortgage Modification?

            Mortgagee can foreclose by advertisement if within the previous year they have agreed to a modification under the Amendment.

How much time does the debtor have to respond?

            Simple question with an interesting answer, as the Amendment contains contradictory terms.  Section 3204(c) states that borrower has 14 days from the date the Notice is mailed to contact the Modification Agent to request the meeting.  However, Section 3205b(1) states that a borrower who wishes to participate in the negotiations for a loan modification shall contact a housing counselor within 14 days after the Notice is sent and the housing counselor shall contact the Modification Agent within 10 days after being contacted by borrower.  Based upon these two sections, it is not clear whether borrower has 14 days or 24 days to respond, before the Mortgagee is allowed to move forward with the foreclosure by advertisement.     

Is the housing counselor mandatory?

            Again, another contradiction in the Amendment, but in our opinion we think so.   Section 3205a(1)(d) states that borrower may request a meeting with the Modification Agent and borrower may request the housing counselor be present.   However, section 3205b(1) states borrower “shall” contact a housing counselor from the list provided.  Section 3205b(3) further states the housing counselor contacted by borrower shall schedule the meeting between borrower and Modification Agent.  Therefore, there is at least the suggestion that there will be a housing counselor involved.  There is no mention of who is paying the housing counselor.

What happens when borrower (or housing counselor) requests a meeting?

            When the meeting has been requested, the Modification Agent may request that borrower provide any documents that are necessary to determine whether borrower is eligible for a modification.  Borrower shall give the Modification Agent copies of any documents requested.  Those documents would include pay stubs, tax returns, personal financial statement, homeowner’s insurance receipts, property tax receipts and Homeowner’s fees.

            The Amendment gives no guidance as to when the documents must be returned.

Where does the meeting take place?

            The meeting and any later meetings must be held at a time and place that is convenient for all parties, or in the county the property is situated.  My interpretation of this section is that borrower can dictate the meeting is held in the county the property is located.  It is likely the housing counselors will request the meetings be held in the county in which the property is located.

What happens at the meeting?

            The parties attempt to reach mutually agreeable loan modification terms.

What happens if mutually agreeable loan modification terms are not reached?

            It depends on whether borrower meets the loan modification threshold under the Amendment.  (See below)

What is the loan modification threshold?

If the ratio of borrower’s housing related debt to borrower’s gross income (“Housing/Income Ratio”) is greater than 38%, borrower meets the loan modification threshold.  If the borrower’s Housing/Income Ratio is 38% or less they do not meet the threshold.

What happens if the borrower does not meet the loan modification threshold?

            The mortgagee can proceed with foreclosure by advertisement.

What happens if borrower meets the loan modification threshold?

The Modification Agent must use 1 or more of the following features (“Modification Techniques”), set forth in the Amendment to modify the loan in an attempt to bring the Housing/Income Ratio to the target of 38% or less:

1.       Interest Rate reduction to a floor of 3%.

2.       An extension of the Amortization period for the loan term to 40 years or less from the date of the loan modification.

3.       Deferral of some portion of the amount of unpaid principal balance of 20% or less, until maturity, refinance or sale.

4.       Reduction or elimination of late fees.

What comprises the borrower’s housing related debt?

            Housing related debt includes mortgage principal, interest, property taxes, insurance and homeowner’s fees.

What if borrower meets the loan modification threshold, but even after using the Modification Techniques the ratio is still greater than 38%?

            If after applying all of the Modification Techniques the Housing/Income Ratio is still greater than 38%, the mortgagee can proceed with foreclosure by advertisement.

Are there exceptions to the Loan Modification programs and terms that must be used?

            Yes, if the loan is pooled for sale to an investor that is a governmental entity or is sold to a governmental-sponsored entity, the Modification Agent shall follow the modification guidelines dictated by that governmental agency.

May the borrower obtain the calculations used to determine if they meet the threshold and qualify for a required loan modification?

            Yes, the Modification Agent must provide a copy of any calculations used to determine if the borrower qualifies, and upon request, must provide a copy of the program, process and guidelines under which the determination of whether borrower qualified.

What if borrower doesn’t execute the loan modification documents?

The Mortgagee is authorized to proceed with foreclosure by advertisement if the Modification Agent has in good faith offered borrower a loan modification prepared in accordance with the Amendment and within 14 days of borrower receiving the loan modification they have not executed and returned the agreement.

What happens if the borrower meets the loan modification threshold, and qualifies for a loan modification (e.g. Modification Techniques bring the ratio to 38% or less), but the Mortgagee is not willing to agree to the modification?

            The Mortgage must be foreclosed judicially. 

So how will this change the actual foreclosure process?

            From a Title Underwriting standpoint, it is anticipated that in order to insure a foreclosure by advertisement, a title company will most likely require an Affidavit attached to the Sheriff’s Deed setting forth that the Mortgagee complied with the Amendment, along with specific details of whichi exception the Mortgagee is utilizing in order to proceed with the foreclosure by advertisement.  For example:

a.       An Affidavit Stating the property is not a primary residence.

b.       An Affidavit stating the Notice and Newspaper Notice was sent to borrower, along with the return receipt and Affidavit of Publication of the Newspaper Notice, and that borrower has not contacted the Modification Agent in 24 (or 14?) days.

c.       An Affidavit that the meeting did not result in a loan modification and borrower did not qualify for a required modification.

How can Brandt, Fisher, Alward & Roy, P.C. assist with complying with the amended statute?

Brandt, Fisher, Alward, and Roy, P.C. has been monitoring the Amendment and once it took final shape has been steadfast in preparation for the new requirements under the Amendment.  We stand ready to assist our clients in any way possible to insure compliance with the new statute.  That involvement includes any of the following:

§         Preparation and delivery of the Notice.

§         Designation as the Modification Agent.

§         Preparation of the Newspaper Notice.

§         Publication of the Newspaper Notice.

§         Obtain necessary documents for meeting.

§         Attend/coordinate meeting with borrower/housing counselor.

§         Preparation of loan modification documentation.

§         Calculation of Housing/Income Ratios.

§         Determination of whether the borrower the loan modification is required under the Amendment.

§         All necessary communication and follow up with borrower and housing counselor.

§         Completion of the foreclosure by advertisement.

§         Preparation of “Affidavit of Compliance” with statute.

§         Completion of judicial foreclosure, when necessary.

§         Defensive litigation if borrower files suit to enjoin foreclosure by advertisement.

©BRANDT, FISHER, ALWARD & ROY, P.C.

This newsletter is provided for informational purposes and should not be acted upon without professional advice.