In a recent opinion, the Sixth Circuit Court of Appeals (available at http://www.law.justia.com/cases/federal/appellate-courts/ca6/10-1498/11a0580n-06-2011-08-18.html) ruled that proceeds from a tax sale of property held as tenants by the entirety between a husband and wife should, presumptively, be split 50-50. Under a tenancy by the entirety, a husband and wife hold joint title with a right of survivorship. This form of ownership is only available to married couples and does not allow one spouse to sell or transfer the property without the other spouse’s consent.

In US v. Barczyk, the Internal Revenue Service sought foreclosure of a home owned by a married couple in tenancy by the entirety. The married couple filed individual tax returns under the status of “married filing separately,” and the husband owed over $500,000 in back taxes. The house was worth approximately $200,000 and litigation ensued between the wife and the United States to determine two issues. First, the court had to determine whether the federal government had the authority to sell the property when the Barczyk’s holding the property as tenants by the entirety. Second, if the United States could foreclose on the property, to what percentage of the property was Mrs. Barczyk entitled.

In reaching the first issue, the Sixth Circuit had to determine whether the peculiarities of the tenancy by entirety prevented attachment of a tax lien. After noting that federal tax liens attach to property held as tenants by the entirety, the court ruled, that the United States had the authority to foreclose on the property under IRC § 7403, despite Michigan law.

After determining that the federal government could foreclose on, and sell the property, the court then considered what percentage of the house the woman owned. The Sixth Circuit determined that there is a presumption that a husband and wife each have an equal ownership interest in property held as tenants by the entirety. Mrs. Barczyk argued that she had a greater interest in the property based on actuarial evidence. The court rejected this argument by noting that the Mr. and Mrs. Barczyk were only five years a part in age and that both were in comparable health. As a result, Mrs. Barczyk was entitled to half of the proceeds acquired after the foreclosure sale of the property.

Although a significant property right is undercut by this ruling, it should be noted that the scope of the ruling is quite narrow. The ruling applies only to the federal government. Michigan law still protects property held jointly by husband and wife against creditors other than the federal government.

The Supreme Court decided the case on Application for Leave to Appeal. Rather than grant leave to appeal, the Court instead ordered that oral argument be held upon the application for leave to appeal, and reversed the Court of Appeals.

The Supreme Court essentially adopted the dissenting opinion from the Court of Appeals, ruling that although MERS did not own the mortgage note itself, MERS was “recordholder of the mortgage,” which was a sufficient “interest in the indebtedness” to satisfy the statutory requirement that the foreclosing entity be an “owner of an interest in the indebtedness.”  Essentially, the Supreme Court determined that the Court of Appeals improperly interpreted the meaning of the language of the foreclosure by advertisement statute.

This Supreme Court Order appears to definitively resolve the issue of whether MERS can foreclose a mortgage by advertisement in MERS’ name, rather than the name of the owner of the note, in the State of Michigan.

In Michigan, a mortgage can be foreclosed either judicially, or by advertisement (which does not require a court filing).  Mortgages secured by residential properties are almost universally foreclosed by advertisement, given that it is a quicker, less expensive option.  In Residential Funding Co, LLC v Saurman, a divided panel of the Michigan Court of Appeals ruled that MERS did not qualify to foreclose a mortgage by advertisement.

To qualify under the applicable Michigan statute, MERS would have to be either: (a) the owner of the indebtedness; (b) the owner of an interest in the indebtedness; or (b) the servicing agent of the mortgage.  It was undisputed that MERS was not the owner of the indebtedness or the servicing agent.  MERS argued it had an interest in the indebtedness, because its interest was derivative to the existence of the note.  The Court of Appeals disagreed with that argument, and ruled that MERS did not satisfy any of the three qualifiers.

Given the significance of this issue to residential lenders in the State of Michigan, and the existence of a dissenting opinion in the Court of Appeals, one should expect an application for leave to appeal to the Michigan Supreme Court.

On May 19, 2009, the Michigan Legislature passed a package of three bills designed to give homeowners facing foreclosure a ninety-day window to meet with their lender and modify the terms of their mortgage.  With the state facing one of the highest foreclosure rates in the nation, lawmakers hope these new laws will ease the strain on distressed homeowners and allow them to stay in their homes.  These laws may not be permanent.  Some of the provisions will be in effect for a period of only two years unless the “sunset” provision is amended.  Governor Granholm signed the bills on May 21, 2009, and the laws will take effect on July 5, 2009.

Under the legislation, a lender may not foreclose on a property claimed as a principal residence unless the lender first provides written notice to the borrower stating the reasons that the mortgage loan is in default and the amount due.  The written notice must also designate an agent of the mortgage holder whom the borrower can contact to attempt to rework the terms of the loan, and a list of housing counselors prepared by the Michigan State Housing Development Authority whom the borrower can request to attend a meeting with the agent of the mortgage holder to assist in modifying the loan.

The law further provides that foreclosure proceedings may not be commenced until ninety days after the initial notice was mailed if the borrower chooses to meet with the mortgage holder.  If the borrower and the mortgage holder reach an agreement to modify the terms of the loan within the ninety-day period, the mortgage cannot be foreclosed.  Potential modifications include an interest rate reduction, extension of the amortization period, deferral of up to 20% of the unpaid balance of the loan, and reduction or elimination of late fees.

If the homeowner meets minimum financial standards specified in the law, but the mortgage holder refuses to modify the terms of the loan, the lender is required to go before a judge to attempt to complete the foreclosure.  Additionally, if notice is not mailed to the borrower as required, the borrower may bring an action in the circuit court to enjoin the foreclosure.

The new restrictions apply only to property claimed as a principal residence by the property owner.  They do not apply to second homes, rental properties or other commercial properties.

For the full text of the new laws, click here (PDF format).

Michigan Legislature Website – House Bill 4453

Michigan Legislature Website – House Bill 4454

Michigan Legislature Website – House Bill 4455