Foreclosure by Advertisement vs. Judicial Foreclosure
There are two types of foreclosures in Michigan: foreclosure by advertisement and judicial foreclosure. The primary difference is that judicial foreclosures are processed through the court system, while foreclosure by advertisement does not require court supervision. Lenders might choose a judicial foreclosure if there are defective mortgage documents, title defects, or if the lender anticipates litigation. Otherwise, foreclosure by advertisement is quicker, less expensive, and does not require judicial oversight. Not surprisingly, most foreclosures in Michigan are done through foreclosure by advertisement.
Foreclosure by advertisement is governed by statute. There are certain statutory requirements that must be satisfied before a lender can initiate a foreclosure by advertisement. For example, the mortgage document must contain a power-of-sale clause authorizing a non-judicial foreclosure and the mortgage must be properly recorded. If the foreclosing party is not the original mortgagee, then all assignments of the mortgage must be recorded. In addition to the statutory requirements, most mortgages contain requirements that must be met before a lender can start foreclosure.
Default and Initiation of the Foreclosure Process
Mortgage payments are due on a specific day each month, usually the first of the month, with a grace period of around 15 days. If a payment is not made within the grace period, late penalties will be assessed pursuant to the terms of the mortgage and borrowers may begin receiving phone calls and letters from their lender. A loan is in default when it is 30 days late and will be reported to the credit bureaus.
Under the terms of most mortgages, lenders are required to send a Notice of Default to the borrower which includes the following information: (a) the default, (b) the amount required to cure the default, (c) a date by which the default must be cured, not less than 30 days from the date of the notice, and (d) that failure to cure the default on or before the specified date may result in acceleration of the loan. Lenders generally send a Notice to Default after 90 days of missed payments, however this can vary depending on several different factors.
If the borrower does not bring the loan current by the date specified in the Notice of Default, the lender will send a notice of acceleration. The acceleration clause in most mortgages gives lenders the right to declare the entire loan balance due immediately in the event of default, hence accelerating the original payment schedule. Lenders must accelerate the loan before proceeding with foreclosure. The notice of acceleration is typically sent within 45-90 after the Notice of Default if the past due amount is not paid.
In Michigan, lenders must comply with additional requirements before initiating foreclosure. Under an amendment to Michigan’s foreclosure by advertisement statute passed on May 20, 2009, mortgage lenders must go through a 90-day pre-foreclosure process to attempt to avoid foreclosure. The lender must mail the borrower a notice of the following rights and information:
If the borrower and lender are unable to agree to modify the loan or reach some other foreclosure alternative, and the borrower is not eligible for a modification under the statute, then the lender can proceed with foreclosure. The lender is required to publish a Notice of Sale in the local newspaper stating that the property will be sold on a certain date. Michigan law requires that the Notice of Sale contain certain information including:
Foreclosure Sale
Foreclosure sales are generally held at the circuit court in the county in which the property is situated. They are usually conducted by the sheriff, undersheriff, or a deputy sheriff of the county, which is why foreclosure sales are also referred to as Sheriff’s sales.
The purchaser at a foreclosure sale receives a Sheriff’s Deed to the property. The Sheriff’s Deed only becomes operative if the property is not redeemed during the statutory redemption period, as further discussed in the next section. The lender is allowed to make a credit bid at the sale up to the amount owed on the mortgage, and for this reason the lender is usually the highest bidder and acquires the property. Upon expiration of the statutory redemption period, the purchaser acquires all right, title, and interest that was held by the borrower at the time the mortgage was executed.
A Sheriff’s Deed must be recorded within 20 days of the foreclosure sale. If it is not, the sale remains valid but the redemption period does not begin to run until the date the deed is recorded.
Redemption Period
Following the foreclosure sale, there is a statutory redemption period during which the borrower has the right to redeem the property. This means that the borrower can get the property back by paying the purchase price plus other costs recoverable by statute. These costs may include interest or any taxes and insurance paid by the purchaser. If the borrower redeems the property, the foreclosure sale and resulting Sheriff’s Deed are annulled.
In most cases, borrowers have a statutory redemption period of six months. In some circumstances, the redemption period is one year. If the property is deemed abandoned, the redemption period is shortened pursuant to statute. During the redemption period, borrowers still hold legal title to the property and can stay in the property without any mortgage or rent payments until the redemption period expires.
During the redemption period, any person liable on the mortgage is liable to the purchaser at the foreclosure sale (whether or not the mortgagee) for any damage to the property beyond normal wear and tear, if the damage is caused by or at the direction of the mortgagor or other person liable on the mortgage.
If the redemption period expires and the borrower has not redeemed, legal title to the property vests in the purchaser via the Sheriff’s Deed. If the borrower is still occupying the home, the purchaser can file an eviction proceeding in the local district court.
Even after the redemption period expires and the borrower vacates the property, the borrower may still be liable for a deficiency judgment. If the price paid at the foreclosure sale was less than the total amount owed on the mortgage, the borrower is personally liable for the difference, called a deficiency. This is based on the promissory note underlying the mortgage, by which the borrower agreed to pay back the full amount of the loan. The note and the mortgage represent two separate agreements, and even though the mortgage is discharged after foreclosure the borrower is still responsible for any remaining balance owed under the note. The lender can file an action for the deficiency in circuit court and, if successful, can attempt to collect the deficiency the same as any other civil judgment.
Each situation is different and you should consult an attorney for legal advice regarding your particular situation. If you would like to speak with one of the experienced attorneys at Peterson & Calunas, PLLC, please contact us at (248) 457-6000 for a free consultation.
Resources:
Michigan’s foreclosure by advertisement statute can be found at MCL §§ 600.3201, et seq.
Michigan’s judicial foreclosure statute can be found at MCL §§ 600.3101, et seq.