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A Better Partnership
June 25, 2014

COA finds that Freddie Mac is not a government actor and voluntary mergers must be recorded in the chain of title for the surviving entity to foreclose by advertisement

In Federal Home Loan Mortgage Ass’n. v. Kelley, No. 315082, the Michigan Court of Appeals held that Freddie Mac is not a government actor subject to a Fifth Amendment claim, but it also held that the foreclosure-by-advertisement statute requires voluntary mergers of banks to be recorded in the chain of title prior to the foreclosure sale because transfers of the mortgage in a merger do not occur "by operation of law." Still, because there was no due process violation, there was no prejudice, and the foreclosure would not be set aside.  Accordingly, the Court affirmed in part, reversed in part, and remanded for further proceedings.
In 2003, First National Bank of America (First National) loaned the defendants $240,000 to purchase property and First National encumbered the property via an executed mortgage. First National assigned the mortgage to ABN-AMRO Mortgage Group, Inc. and both, the mortgage and assignment, were properly recorded. In 2007, CitiMortgage, Inc. and ABN-AMRO merged, maintaining the name CitiMortgage. In 2011, defendants defaulted on the mortgage and CitiMortgage foreclosed on the property under the advertisement statute, MCL 600.3201, et seq. Freddie Mac purchased the property at a sheriff’s sale and the property vested in Freddie Mac on April 20, 2012.
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 governs Freddie Mac. Congress amended the Safety and Soundness Act by enacting the Housing and Economic Recovery Act of 2008 (HERA), which enables the Federal Housing Finance Agency (FHFA) to act as conservator or receiver of Freddie Mac. FHFA placed Freddie Mac into conservatorship in September 2008.
In May 2012, Freddie Mac initiated eviction proceedings and the defendants contested, arguing Freddie Mac was a government actor due to the FHFA’s conservatorship and therefore, it could not foreclose by advertisement because it was subject to due process requirements. The defendants also argued the foreclosure was invalid because there was no chain of title evidencing the transfer of the mortgage from ABN-AMRO to CMI. The district court granted Freddie Mac’s motion for summary disposition and held that Freddie Mac was not a government actor and the merger between ABN-AMRO and CMI did not constitute an assignment for purposes of recording. The defendants appealed and the circuit court reversed.
The Court of Appeals reversed part of the circuit court’s holding and determined that Freddie Mac is not a government actor for constitutional purposes. Even though Freddie Mac was created by statute to further government objectives, Congress did not appoint FHFA as permanent conservator and the conservatorship was only to reorganize, rehabilitate, or wind-up Freddie Mac’s affairs. Since the court determined Freddie Mac was not a government actor, it was not liable for violations of the Fifth Amendment’s Due Process Clause. Therefore, the defendants’ due process claim failed as a matter of law.   
The Court of Appeals affirmed the circuit court’s holding that CitiMortgage was subject to recordation requirements under MCL 600.3204(3). Under the statute, a mortgage obtained by an assignment must be recorded, and historically, mortgages obtained by operation of law do not need to be recorded. The court acknowledged that a mortgage obtained by operation of law is unintentional, involuntary, and through no affirmative act on behalf of the transferee. Freddie Mac relied on Kim v JP Morgan Chase Bank, NA, 493 Mich 98; 825 NW2d 329 (2012), to argue that mergers in general should be considered “obtained by operation of law.” The court stated that Kim’s discussion of mergers was limited to involuntary mergers initiated by the FDIC under a particular statute. CitiMortgage obtained an interest in the mortgage by voluntarily signing a merger agreement, therefore, the court determined it did not acquire the mortgage "by operation of law" and was required to record the transfer under MCL 600.3204(3).
Lastly, the Court of Appeals reversed the circuit court’s holding that the foreclosure was void ab initio as opposed to merely voidable. For the foreclosure to be void ab initio, the defendants would have to show the foreclosure violated their due process rights. Since the court determined Freddie Mac is not a government actor and not subject to Fifth Amendment claims, the defendants could not prove the only prejudice they alleged.

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