Michigan Foreclosure Law

This post specifically applies to real estate in Michigan but other states have similar laws.

Once an owner fails to make the mortgage payments on the property they have defaulted on the loan. The loan for the house, or the loan taken out using the equity in the property, is secured by a mortgage on the real estate. This mortgage tells the lender, "If I fail to repay this loan, you can take my property." If the owner does not pay then the lender initiates a foreclosure action to attempt to recoup the money that is owed on the loan.

There are two types of foreclosure in Michigan: judicial foreclosure and foreclosure by advertisement. A judicial foreclosure is one that is effectuated by the courts, giving notice of the sale to all interested parties, and an auction of the property is held by a court officer and a sherrif's deed is given to the highest bidder. A foreclosure by advertisement is less formal and the lender can advertise the auction of the property and conduct the auction privately, giving a deed to the highest bidder. Remember, the owner of the real estate can always pay the past due amount on the mortgage before the auction takes place (equitable redemption) and save the property from foreclosure!

A representative for the lender, most of the time a bank, will always attend the foreclosure action. If no person bids higher than the amount still owed to the lender, the lender will bid the amount of the mortgage and receive the deed to the home. The lender takes the deed in satisfaction of the mortgage, in other words it pays nothing. If an individual other than the lender wins the property they must immediatly pay cash for the real estate.

The highest bidder at the foreclosure auction now has an equitable interest in the property. This basically means that the bidder will own the property as long as the prior owner does not take it back. The prior owner is still the legal owner of the property for 6 months even though the property was sold at a foreclosure auction! This concept is a Michigan law called the statutory period of redemption. During the 6 months following the foreclosure sale, the prior owner can get the property back by paying the amount that the property was sold for at the auction. If at the end of the 6 month period, the prior owner does not come up with the money, the equitable owner becomes the legal owner.

Sometimes a house is worth less than what is owed on a mortgage. In this case, it may be a strategic plan for a homeowner to let the property go into foreclosure and have a third party (a strawman) bid on the house at the auction. The third party wins the auction, the prior owner gives the third party the cash to pay for the house, and the third party transfers the house back to the owner. Wouldn't this just be paying off the mortgage? Where is the strategy? Well, often a homeowner has multiple mortgages on a property. If it is the senior mortgage that is being foreclosed on (usually the loan taken out to buy the house in the first place), and the property is sold at auction, all junior mortgages are wiped out. In sum, a homeowner could end up paying off one mortgage but not owe anything for the others. Othertimes, a homeowner might be able to find an investor who is willing to buy the property at auction and lease it back to them.

Of course, foreclosure kills your credit so preventing a foreclosure is always a homeowner's best option.