house keyWhen banks voluntarily merge, which is happening a lot these days, the purchasing bank or the resultant entity must be vigilant in assigning all the mortgages or face the risk down the road if the borrowers default on their loans.

In a recent development in foreclosure related litigation, the Court of Appeals concluded in Federal Home Loan Mortgage Assocation v. Kelley, 2014 Mich. App. LEXIS 1272 (Mich. Ct. App. June 24, 2014) that because the foreclosing party obtained its mortgage interest in a voluntary transaction, it was subject to the recording requirement under MCL 600.3204(3). In contrast, the Court further clarified its discussion of mergers in Kim v JPMorgan Chase Bank, NA, 493 Mich 98, 825 NW2d 3239 (2012), as limited to those financial institution mergers initiated under 12 USC 1821. The statute at issue in Kim, 12 USC 1821, granted the FDIC the discretionary authority to merge a failed bank with another institution without any voluntary or affirmative action on the part of the other institution. Kim explained that these involuntary mergers are mergers “by operation of law.”

Unlike Kim, the merger discussed in Federal Home Loan Mortgage Association involved a voluntary transaction on the part of the transferee. The foreclosing party acquired Defendant’s mortgage by voluntarily merger of operations with another bank, and not by operation of law and thus was required under MCL 600.3204(3) to record its mortgage interest by assignment.  The financial institution’s failure to record the assignment of its interest rendered the foreclosure voidable, not void ad initio.

My recommendation to any of my banking clients is that before a lawsuit with a borrower ensues, my clients need to take a simple step and record the assignments of all mortgages at once. Borrowers must receive clear and immediate notice of the owners of their mortgage. It’s an easy step to take and the consequences of not doing it are very high.

by Randal R. Cole, Member, Dawda, Mann, Mulcahy & Sadler PLC