A foreclosure by advertisement sale occurs when the mortgagee/lender (e.g. the bank) exercises its right to sell the home at auction to protect against a serious loss after the mortgagor/borrower stops making payments. After all attempts to resolve the default are exhausted and more than 120 days have passed, the bank will make arrangements for a sheriff’s sale to sell the property to the highest bidder so it can mitigate its losses. However, if the property sells for less than what is owed on the mortgage, then the bank can go to court and pursue a deficiency judgment to collect on the difference (which the borrower is personally responsible for). Many homeowners who faced foreclosure assume that there is nothing they can do about it and simply ignore the pleadings which results in a default judgment. Michigan homeowners should be aware that there may be limits that the bank may collect on this deficiency judgment if they exercise their rights.
The bank does not have to sue you in court to foreclose. Many mortgages have a power-of-sale clause built into the agreement which gives them the right to foreclose on the property by publishing notice of a public auction if the borrower is in default. However, to obtain a deficiency judgment, the bank must file a lawsuit in the district court (if $25,000.00 or less) or circuit court (if over $25,000.00) in the borrower’s jurisdiction and serve him or her with a summons and complaint. It may appear that the bank only has to apply the math to prove the difference between the mortgage balance and sale price, but it turns out that the borrower has some defenses available at law.
MCL 600.3280 states the following:
- “When, in the foreclosure of a mortgage by advertisement, any sale of real property has been made after February 11, 1933, or shall be hereafter made by a mortgagee, trustee, or other person authorized to make the same pursuant to the power of sale contained therein, at which the mortgagee, payee or other holder of the obligation thereby secured has become or becomes the purchaser, or takes or has taken title thereto at such sale either directly or indirectly, and thereafter such mortgagee, payee or other holder of the secured obligation, as aforesaid, shall sue for and undertake to recover a deficiency judgment against the mortgagor, trustor or other maker of any such obligation, or any other person liable thereon, it shall be competent and lawful for the defendant against whom such deficiency judgment is sought to allege and show as matter of defense and set-off to the extent only of the amount of the plaintiff’s claim, that the property sold was fairly worth the amount of the debt secured by it at the time and place of sale or that the amount bid was substantially less than its true value, and such showing shall constitute a defense to such action and shall defeat the deficiency judgment against him, either in whole or in part to such extent. This section shall not affect nor apply to the rights of other purchasers or of innocent third parties, nor shall it be held to affect or defeat the negotiability of any note, bond or other obligation secured by such mortgage, deed of trust or other instrument. Such proceedings, as aforesaid, shall in no way affect the title of the purchaser to the lands acquired by such purchase. This section shall not apply to foreclosure sales made pursuant to an order or decree of court nor to any judgment sought or rendered in any foreclosure suit nor to any chancery sale heretofore or hereafter made and confirmed.”
It is not uncommon for the lender/mortgagee to be the purchaser of the mortgaged property at the foreclosure sale. In fact, “[w]hen a lender bids at a foreclosure sale, it is not required to pay cash, but rather is permitted to make a credit bid because any cash tendered would be returned to it.” New Freedom Mortgage Corp v Globe Mortgage Corp, 281 Mich App 63, 68; 761 NW2d 832 (2008). “If this credit bid is equal to the unpaid principal and interest on the mortgage plus the costs of foreclosure, this is known as a ‘full credit bid’”. Id. “When a mortgagee makes a full credit bid, the mortgage debt is satisfied, and the mortgage is extinguished.” Id. “Under the full credit bid rule, a lender who takes title following a full credit bid ‘is precluded for purposes of collecting its debt from later claiming that the property is actually worth less than the bid.’” Bank of America, NA v First American Title Ins Co, 499 Mich 74, 89; 878 NW2d 816 (2016). “[I]n its most direct application, the rule bars a mortgagee who takes title at a nonjudicial foreclosure sale following a full credit bid from pursuing a deficiency judgment against the mortgagor.” Id.
What if the mortgagee purchases the property at less than the mortgage balance? Is the mortgagor on the hook for a deficiency judgment on the difference? Maybe not. The mortgagor may allege MCL 600.3280 as a defense where a purchaser purchased property for less than its true value, either as a complete defense to a deficiency judgment or merely a set-off against it. If the true value of the property is less than the mortgage balance, then the mortgagee may be limited to a deficiency judgment up to the fair market value of the real estate only.
For example, a borrower in Michigan has his property foreclosed by advertisement by Bank One under Michigan law for an unpaid mortgage debt of $300,000. A sheriff’s sale is scheduled after the required notices are published and posted. Bank One bids at the auction and purchases the house for $200,000. After the sale, Bank One files suit in circuit court to obtain a judgment for the unsatisfied balance of $100,000. The borrower objects to the amount of the deficiency and produces evidence from an appraisal that the home was only worth $250,000 at the time of sale. Bank One obtains a deficiency judgment, but the circuit court limits it to only $50,000, not $100,000. Bank One was only entitled to the difference between the sale price and the fair market value, NOT the sale price and the mortgage balance, because it was the original mortgagee at the auction and purchased the home under market price.
However, this defense must be timely asserted or it is lost. In SA Challenger Inc. v Mendoza, unpublished per curiam opinion of the Court of Appeals decided July 16, 2016 (Docket No. 327049), a bank sought a deficiency judgment against a borrower after a foreclosure sale. The borrower filed answer and alleged several defenses, but failed to cite the fair market value defense under MCL 600.2380. The bank later filed a motion for summary disposition alleging there was no genuine issue of fact, and the borrower then raised MCL 600.2380 in its defense to that motion. The circuit court granted the summary disposition motion and awarded the full deficiency judgment requested, finding that the borrower did not timely raise the defense in his pleadings. The Michigan Court of Appeals upheld the trial court’s determination and found that the defendant failed to properly plead MCL 600.3280 as a valid defense and the trial court did not err by declining to consider it when ruling on the summary disposition motion. The moral of the story: if you do not timely assert your rights, then you have none and they are lost forever.
A borrower facing a deficiency judgment suit after a foreclosure sale should consult with a skilled property lawyer immediately to understand all the rights they have under the law. If you or a loved one have questions about the foreclosure process or need legal representation, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.