SUMMARY MICHIGAN STATUTES CHANGE TO FORECLOSURE BY ADVERTISEMENT PROCEDURES EXECUTIVE SUMMARY

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1 ATTORNEYS MICHAEL A. KUS MICHAEL J. RYAN MARSHA J. GRECO JEFFREY S. HOROWITZ ANTHONY E. VALENTINE DANA K. PEZNOWSKI OF COUNSEL JAMES C. ROSE THOMAS G. SCHLUENTZ This publication is for information purposes and does not contain, convey or constitute legal advice and may not be relied upon as such. The information contained in this publication should not be relied upon in regard to any particular circumstances or facts. You should consult an attorney about your own particular facts and/or circumstances. JUNE 2009 This Summary was prepared to assist clients in understanding the amendments to Michigan s Foreclosure by Advertisement Statutes enacted in May, Effective on July 3, 2009, the law imposed significant new procedural requirements on mortgage holders seeking for foreclose a mortgage secured by the borrower s principal dwelling. SUMMARY MICHIGAN STATUTES CHANGE TO FORECLOSURE BY ADVERTISEMENT PROCEDURES EXECUTIVE SUMMARY On May 20, 2009, Governor Granholm signed into law Public Act 29 of 2009 (the Act ). The Act modifies the process that must be followed when a borrower s principal residence is foreclosed by advertisement under Michigan law. The new requirements take effect on July 3, The Act applies only to foreclosure by advertisement. The judicial foreclosure process remains unchanged. Further, the new requirements apply only to a borrower s principal residence they do not apply to any property that is not claimed by the borrower as their principal residence for property tax purposes. Thus, second homes, investment properties and commercial properties are not covered by the Act. Under the Act, before foreclosure may begin, the foreclosing party 1 must both mail 2 and publish 3 a Notice to the borrower that informs the borrower of his or her rights and responsibilities under the Act. The mailed Notice must contain specific information 4, while the one-time Publication Notice must contain similar, but less specific, information. 5 On the day the Notice is mailed, a fourteen (14) day window of opportunity is opened for the borrower. Before the 14 day period expires, the Borrower must request a meeting with the mortgage holder/servicer or their agent through a housing counselor identified in the Notice. The housing counselor must contact the mortgage holder/servicer/agent (the H/S/A ) within 10 days of being contacted by the borrower, and must arrange a meeting between the borrower and the H/S/A. The borrower may request that the housing counselor attend the meeting. If the H/S/A is contacted to request a meeting, the foreclosure process cannot begin until 90 days from the date of the Notice. If 24 days pass from the date of the Notice (the sum of the 14- and 10-day periods), and the H/S/A has not been contacted to arrange a meeting, then the foreclosure by advertisement process may begin High Meadow Circle, Suite 120 Auburn Hills, Michigan Phone: Copyright 2011 Kus,Ryan & Associates, PLLC Facsimile:

2 If a meeting between the borrower and the H/S/A is requested, the housing counselor must arrange the meeting at a time and place convenient to all parties, or in the county where the property is located. The meeting should be scheduled within a reasonable time after the request is received. Depending on the outcome of the meeting, different processes are followed. If the meeting produces an agreement to modify the borrower s loan, the foreclosure process is stopped from going forward upon execution of the written modification agreement. However, if a good faith written offer to modify the borrower s loan is made, but the borrower does not execute and return the agreement within 14 days after receiving it, then the foreclosure by advertisement process can go forward. If the meeting does not produce an agreement to modify the borrower s loan, the H/S/A is required to determine whether the borrower is eligible for a loan modification under the Act 6. For loans pooled for sale to a government entity or sold to FNMA or FHLMC, loan modification eligibility standards set by those entities must be used instead. The H/S/A is entitled to request the borrower to furnish the documents necessary to determine their eligibility. The borrower is eligible for a loan modification under the Act if a combination of adjustments to the interest rate and/or loan term, a deferral of some portion of the principal, or a reduction or elimination of late fees can lower the borrower s housing-related debt 7 to 38% of the borrower s gross income. The borrower is entitled to receive a copy of the calculations used to determine their eligibility, and upon request, a copy of the program, process or guidelines that were used. If an agreement to modify the borrower s loan could not be reached, but the borrower is determined to be eligible for a loan modification, the loan may not be foreclosed by advertisement but may proceed under the judicial foreclosure process. If a borrower is determined to be ineligible for a modification, the loan may be foreclosed by advertisement. If an agreement is reached between the H/S/A and the borrower under the Act, but the borrower defaults during the first year of the agreement, then the loan is no longer subject to the provisions of the Act, and foreclosure by advertisement may proceed. If the borrower complies with the modified agreement for a period of one year but subsequently defaults, then the loan is subject to the Act. HELOC Appraisal Fees Regulation Z Requirements Page 2 of 6 REVISED PROCEDURES FORECLOSURE BY ADVERTISEMENT Overview Public Act 29 of 2009 (the Act ), signed into law by Governor Granholm on May 20, 2009, modifies Michigan law regarding Foreclosure of Mortgages by Advertisement. New prerequisites and procedures have been added that must be satisfied before a mortgage loan secured by a borrower s principal residence may be foreclosed by advertisement. The new requirements take effect 45 days from the date of enactment, on July 3, The Act also contains a sunset provision, and expires two years from the effective date of the Act. The modifications affect only the process of foreclosure by advertisement of those mortgage loans secured by the property claimed by a borrower as his or her principal residence for property tax purposes. Foreclosures of loan secured by second homes, investment properties and commercial properties may proceed without regard to these new requirements. The process of judicial foreclosure is unchanged by the Act. The Act expands an existing section of Michigan law, and adds a new section. 8 New subsection 3204(4) describes six circumstances which preclude a mortgage holder or mortgage servicer (newly defined terms) from beginning

3 the foreclosure by advertisement process. If one or more of the circumstances applies, the foreclosure process may not go forward. New section 3205 outlines the specific procedures and requirements that must be followed for a foreclosure by advertisement to proceed. With the revisions, the Michigan Legislature has enacted a process designed to increase the likelihood that a mortgage loan in danger of foreclosure will be modified rather than foreclosed. In essence, so long as a borrower is able to service the debt under conditions specified in the Act, and is willing to negotiate with the lender, the new procedures are intended to maximize the possibility that the delinquent loan is modified rather than foreclosed. To accomplish this, the Michigan Legislature has provided the borrower with legal remedies against lending institutions that fail to comply with the requirements. Lenders are obligated to negotiate with the borrower in good faith. Lenders still have the option of pursuing a foreclosure under the judicial foreclosure process at any time. New Prerequisites New notice requirements are at the core of the expanded procedures. Failure to provide a required notice precludes foreclosure by advertisement. Specific information must be conveyed to the borrower in the notice, which starts the clock running on various timing requirements. Depending on the actions of the borrower, the foreclosure by advertisement process is delayed a minimum of 24 days from the date the notice is mailed. If the borrower responds to the Notice (as specified in the Act), the foreclosure process is delayed by 90 days from the date of the Notice, unless a modification is made to the Borrower s obligation, or the process is diverted to the Judicial foreclosure process, or the Borrower fails to respond to a good faith offer to modify their loan. Notice of Default and Intent to Foreclose A Notice containing the following information must be sent to the borrower by both regular mail and by Certified Mail, Return Receipt Requested, Restricted Delivery (addressee only): A statement of the reasons that the mortgage loan is in default and the amount due and owing under the mortgage loan. The names, addresses, and telephone numbers of the Mortgage Holder, the Mortgage Servicer, or any agent designated by the Mortgage Holder or Mortgage Servicer. The name of a person employed by the Mortgage Holder, the Mortgage Servicer, or any agent designated by the Mortgage Holder or Mortgage Servicer, who has been designated as the contact person ( Contact Person ). The Contact Person must have the authority to make agreements to modify or extend the borrower s obligation. The Contact Person may be a third-party service provider, so long as they are fully empowered to negotiate modifications and extensions on behalf of the Mortgage Holder or Mortgage Servicer. A statement that enclosed with the Notice is a list of Michigan State Housing Development Authority (MSHDA) approved housing counselors, and that within 14 days after the Notice is sent, the borrower may request a meeting with the Contact Person to attempt to work out a modification of the mortgage loan to avoid foreclosure, and that the borrower may also request a housing counselor to attend the meeting. A statement that if the borrower requests a meeting with the Contact Person, that foreclosure proceedings will not be commenced until 90 days after the date the Notice was mailed to the Borrower. A statement that if the Borrower and the Contact Person reach an agreement to modify the mortgage loan, that the mortgage will not be foreclosed if the borrower abides by the terms of the agreement. A statement that if the Borrower and the Contact Person do not agree to modify the mortgage loan, but it is determined that the borrower meets the modification criteria and the exception requirements do not apply, that the foreclosure will proceed before a judge instead of under the foreclosure by advertisement process. A statement that the Borrower has the right to Contact an attorney, and the telephone numbers of the State Bar of Michigan s Lawyer Referral Service and a local Legal Aid office serving the area in which the property is located. HELOC Appraisal Fees Regulation Z Requirements Page 3 of 6

4 Publication Notice Within seven (7) days after the Notice is mailed, the party furnishing the Notice must publish a one-time notice ( Publication Notice ) in the same fashion that a foreclosure sale notice for that property would be published. Because of the short time frame involved, a best practice would be to submit the Publication Notice for publication on the same day the Notice is mailed to the Borrower. If a third-party is engaged to perform this process, the same party that sends out the written Notice should also process the Publication Notice. The Publication Notice is intended to notify the borrower of their rights under the Act, and must contain all of the following information: The Borrower s name and the property address. A statement that informs the Borrower of all of the following: o that the Borrower has the right to request a meeting with the Mortgage Holder or Mortgage Servicer; o the name of the Contact Person; o that the Borrower may contact a housing counselor visiting the MSHDA website or by calling MSHDA; o the MSHDA website address and telephone number; o that if the Borrower requests a meeting with the Contact Person, that foreclosure proceedings will not be commenced until 90 days after the date the written Notice is mailed to the Borrower; o that if the Borrower and the Contact Person reach an agreement to modify the mortgage loan, that the mortgage will not be foreclosed if the borrower abides by the terms of the agreement; o that the Borrower has the right to contact an attorney, and the telephone number of the State Bar of Michigan s Lawyer Referral Service. Workout Negotiations If the Borrower wishes to pursue a possible modification of their mortgage loan, the Borrower must contact a Housing Counselor on the MSHDA list (furnished with the Notice) within fourteen (14) days after the Notice is mailed to the Borrower. Within ten (10) days after the Housing Counselor is contacted by the Borrower, the Housing Counselor must inform the Contact Person in writing of the Borrower s request to negotiate. Because of the twostage timing process, the Housing Counselor may send his or her written request as late as 24 days after the date of the Notice. After the Contact Person learns of the Borrower s request to negotiate, foreclosure proceedings may not go forward until 90 days have passed from the date of the Notice. Upon receipt of the Borrower s request for a meeting, the Contact Person may request, and the Borrower shall furnish, any documents that are necessary to determine the Borrower s eligibility for a modification under Section 3205c. After the Borrower s request to negotiate is received, the Housing Counselor shall schedule a meeting between the Borrower and the Contact Person. The Housing Counselor will attend the meeting at the Borrower s request. The meeting and any follow-up meetings are to be held at a time and place convenient to all parties, or in the county where the property is located. Borrower s Failure to Request Meeting Within Prescribed Time Frame Because the Borrower is obligated to respond to the Notice by contacting a Housing Counselor within 14 days, and because the Housing Counselor is obligated to send a written request for a meeting to the Contact Person within 10 days of being contacted by the Borrower, if the Contact Person has not received a written request for a meeting within 24 days after the Notice is sent to the Borrower, those prerequisites that are contingent upon written notification to the Contact Person are not triggered. In such cases, foreclosure by advertisement may proceed after the 24 day period has elapsed. HELOC Appraisal Fees Regulation Z Requirements Page 4 of 6

5 As a practical matter, it is essential that a Mortgage Holder, Mortgage Servicer, or their Agent be able to prove that they have taken all of the necessary steps to Notify the Borrower, and thus trigger the running of the 14- and 10-day periods. Maintaining detailed records on the mailing of the Notice and the publication of the Publication Notice is critical. If a third-party, such as outside counsel or a service provider is used, it is important to ensure that satisfactory records are maintained. Loan Modification; Eligibility for Section 3205c Modification If a Borrower has contacted a Housing Counselor, but the process has not resulted in an agreement to modify the mortgage loan, the Contact Person, in cooperation with the Borrower, must determine if the Borrower qualifies for a loan modification. Unless the loan is pooled for sale to an investor that is a government entity, or has been sold to a government-sponsored entity (FNMA, FHLMC), the Contact Person shall use a loan modification program that has a target housing-related debt (PITI plus homeowner s fees, if applicable) to Gross Income ratio of 38% or less. In attempting to reach the 38% ratio, the following features must be considered: an interest rate reduction, as needed, for a period of at least five (5) years, subject to a floor rate of 3.00%; an extension of the amortized term up to 40 years (or less) from the date of the modification; deferral of some portion of the unpaid principal balance (up to 20%) until the loan matures, is refinanced, or the property is sold; the reduction or elimination of late fees. If the loan is pooled for sale to an investor that is a government entity, or has been sold to a government-sponsored entity (FNMA, FHLMC), then the loan modification guidelines dictated by those entities should be used. If agreed to by the Contact Person and Borrower, the loan may be modified under other terms, or another loss mitigation strategy may be used. The Contact Person is required to furnish the Borrower with a copy of the calculations made in determining the Borrower s eligibility. Upon the Borrower s request, a copy of the program, process or guidelines used shall also be furnished. If the Borrower is determined to be ineligible, or if an offer to modify the Borrower s loan under the above-described terms is made in good faith and the Borrower, through no fault of the Mortgage Holder or Mortgage Servicer, does not execute and return the offered modification agreement within 14 days after it is furnished to the Borrower, then foreclosure proceedings under the foreclosure by advertisement procedures may begin. Failure By Borrower to Comply With Prior Modification Under the Act If the Borrower and Contact Person have previously agreed to a modification under the Act, and the Borrower defaults under the terms of the modified agreement during the first year, the provisions of section 3205a, 3205b and 3205c of the Act do not apply to the mortgage loan, and the normal foreclosure by advertisement process may be followed. However, if the borrower abides by the terms of the modified agreement for a period longer than one year, if he or she subsequently defaults, then the loan is once again subject to the provisions of the Act. Legal Remedies Afforded to Borrower If a Mortgage Holder or Mortgage Servicer fails to serve written notice on the Borrower that complies with MCLA 3205a(1) and fails to publish notice that complies with MCLA 3205a(4), the borrower may file an action in the circuit court of the county where the property is located to enjoin the foreclosure pursuant to MCLA 3205a(5). If a Mortgage Holder or Mortgage Servicer violates the provisions of MCLA c, which exclusively addresses and promotes loan modifications, the borrower may file an action in the circuit court of the county where the property is located to convert the foreclosure proceeding to a judicial foreclosure. HELOC Appraisal Fees Regulation Z Requirements Page 5 of 6

6 Summary The Michigan Legislature has added provisions to the foreclosure by advertisement process intended to ensure that homeowners in danger of losing their homes through foreclosure are given a specific opportunity to negotiate with their lender. Objective criteria have been established that must be satisfied before non-judicial foreclosure can proceed. Information on MSHDA-approved housing counselors and legal resources are required to be provided to homeowners, along with up-to-date contact information on the parties that hold or are servicing their loan. Through an approved housing counselor, borrowers are entitled to arrange for a face-to-face meeting with a party authorized to negotiate a possible modification of their loan. Depending on the circumstances of the loan and the borrower s ability to repay, either the loan will be modified, the loan will diverted to the judicial foreclosure process, or the process of foreclosure by advertisement may go forward. Because mortgage holders, mortgage servicers, or their agents must perform specific steps before foreclosure by advertisement may proceed, it is very important that an orderly and time-sensitive process be established by those parties handling foreclosures of mortgage loans secured by a borrower s principal dwelling. It is strongly recommended that the status of a property be determined and documented (homestead vs. non-homestead), and that a consistent process be developed for furnishing and publishing the required notices, arranging for any meetings that are requested by delinquent borrowers, and for establishing whether the loan meets the 38% housingrelated debt to gross income ratio. A clear and unequivocal document trail must be established for any principalresidence secured loan that is foreclosed by advertisement. 1 The foreclosing party may be either the mortgage holder the owner of the indebtedness; the mortgage servicer the servicing agent of the mortgage; or the mortgage holder s or mortgage servicer s agent. 2 By both regular and certified mail, return receipt requested, restricted delivery. 3 Publication must occur no later than 7 days after the date the Notice is mailed. 4 See Notice of Default and Intent to Foreclose, below, for details. 5 See Publication Notice, below, for details. 6 See Loan Modification; Eligibility for Section 3205c Modification, below, for details. 7 The sum of Principal, Interest, Taxes and Insurance plus homeowner s fees, if applicable. 8 MCLA was modified by adding new subsection MCLA (4); New section MCLA was added, along with five new subsections, 3205a, 3205b, 3205c, 3205d and 3205e. HELOC Appraisal Fees Regulation Z Requirements Page 6 of 6