Changes to Michigan Foreclosure Law May Result in Early Termination of Mortgagor’s Redemption Right

In January 2014, the Michigan Legislature added a provision to MCL 600.3240 which significantly altered the redemption right of a delinquent borrower whose property is foreclosed and sold via foreclosure by advertisement. The new provision in Section 3240 expanded the rights of purchasers of foreclosed property by providing them with authority to inspect the interior and exterior of the foreclosed property during the redemption period (which varies depending on the circumstances from 30 days to 1 year, but is typically 6 months). With the addition of this new language to Section 3240, if damage (a term which is very broadly defined) to the foreclosed property is identified during the inspection, the purchaser has the right to commence an eviction lawsuit under Michigan’s Summary Proceedings Act (MCL 600.5701 et. seq.). If the eviction lawsuit is successful, the mortgagor’s right of redemption is terminated and title to the property vests immediately with the purchaser.

The foregoing addition to Michigan foreclosure law was a significant and much needed step toward addressing the chronic problem facing purchasers (often lending institutions) of foreclosed properties – that is, preventing property damage and waste during the redemption period. As these new wrinkles to Michigan’s foreclosure law were enacted only six months ago, we cannot yet know exactly how they will be interpreted and applied by the courts. However, on June 19, 2014, new legislation (MCL 600.3237 and MCL 600.3238) will go into effect which clarifies the procedure regarding obtaining access to the foreclosed property for inspection, including very specific notice requirements to the mortgagor and all other individuals in possession of the property. These new procedural requirements and other aspects of the new laws which go into effect on June 19, 2014, are summarized below.

Under Section 3237, if the purchaser intends to conduct an interior inspection of the property, then the mortgagor (and all occupants of the property) must be provided with an initial written notice which must be provided in a manner reasonably calculated to achieve actual service and contain certain statutorily mandated information.

Section 3238 also requires that a second written notice be served on the mortgagor before conducting an initial inspection of the interior of any structures on the foreclosed property. This second notice must be provided at least 72 hours before the scheduled inspection and set the specific time for the inspection. Importantly, Section 3238 also provides that “the purchaser may conduct any number of exterior inspections of the property and any structures on the property during the redemption period.” Neither Sections 3237 nor 3238 require notice to the mortgagor prior to inspections of the exterior of the foreclosed property.

In addition to addressing inspection rights and notice requirements, Section 3238 also provides post-inspection remedies available to the purchaser and recourse if an inspection is unreasonably refused or if damage to the property is present or imminent. Specifically, under the latter circumstance, the purchaser has the ability to commence an eviction lawsuit to obtain possession of the property.

As stated above, the most notable aspect of the January 2014 changes to Michigan’s foreclosure law is with respect to the mortgagor’s redemption right. Specifically, if the purchaser of foreclosed property is successful in an eviction lawsuit, the mortgagor’s right of redemption is extinguished and title to the foreclosed property vests immediately with the purchaser. This is a very significant change in the law because, previously, purchasers of foreclosed property were forced to wait until the expiration of the redemption period to gain possession and title to the property, at which point the purchaser often discovered that the property was damaged by the mortgagor and was forced to pursue subsequent legal action against the mortgagor to recoup the cost of repairing the damage.

Dykema will continue to monitor these issues and provide further updates and analysis as the new procedural requirements and other aspects of the new law are tested. If you have questions about the matters raised in this alert, you may contact Michael Vogt at 248-203-0739, Brian Page at 616-776-7509 or your regular Dykema contact.