On September 15th, Governor Corzine signed into law the "Save New Jersey Homes Act of 2008" (the "Act"). Effective immediately, the Act will substantially affect how certain mortgage lenders deal with the ongoing economic crisis created, in part, by the subprime mortgage market. Under the Act, "Eligible Borrowers" are able to continue their current payments, at a rate not to exceed the introductory interest rate, for a period of up to three years. Meanwhile, "Eligible Foreclosed Borrowers" are provided the opportunity to suspend their foreclosure proceedings for a period of up to three years. The Act reflects the State's "intentions to help residents stay in their homes while they make good-faith efforts to keep their financial commitments." Although Eligible Borrowers and Eligible Foreclosed Borrowers are still liable for the higher charges under their mortgage agreements, proponents believe that the Act will give homeowners time to restructure their finances and pay their debts.
The Act significantly impacts those mortgage lenders which are governed by its provisions with respect to specific types of "introductory rate mortgages" covered by the Act by requiring certain notifications to be sent to (i) Eligible Borrowers prior to the interest rate reset date, and (ii) Eligible Foreclosed Borrowers currently in foreclosure proceedings. Additionally, mortgage lenders will be afforded lien protection for the payments that are being deferred during the extension period by a "modification of mortgage" provision under the Act. More specifically, the mortgage lenders will be able to record a "modification of mortgage" on the Eligible Borrower's property to secure the repayment of any interest deferred on account of the period of extension; or, in the case of an Eligible Foreclosed Borrower, any existing arrears on the principal and interest payments at the pre-reset interest rate, as well as any other amounts that the borrower failed to pay under the terms of the introductory rate mortgage (i.e., taxes and insurance, etc.), along with any interest deferred on account of the period of extension. Under the Act, the sums due as a result of the modification would be collectible on the maturity date, or upon refinancing, or at the time of sale or transfer of title to the property. As written, the Act is to remain in effect until January 1, 2011.
What Mortgage Lenders Are Affected By The Act?
The Act governs all state-chartered banks, savings banks, savings and loan associations or credit unions, any person required to be licensed under the "New Jersey Licensed Lenders Act," and any entity acting on behalf of the creditor named in the debt obligation including, but not limited to, servicers.
What "Borrowers" Must Be Notified?
Under the Act, both "Eligible Borrowers" and "Eligible Foreclosed Borrowers" must be notified of their right to extend the introductory interest rate on their loan.
- An "Eligible Borrower" is defined as any borrower who is obligated to repay a loan from a governed lender, secured by a mortgage on a one to four family dwelling occupied by the borrower as the borrower's principal place of residence, and
- Which provides for an introductory payment rate option set at least three percent below the fully-indexed rate at the time the loan was originated and payments that may adjust by more than three percent regardless of whether the variable rate index has increased; or
- Which provides for (i) an interest rate that may adjust by more than two percent at the end of the initial fixed-rate period of the loan and which, notwithstanding the payment rate in effect, had an interest rate at origination of more than 200 basis points over the Freddie Mac 30-year conventional rates and (ii) an introductory rate set below the fully-indexed rate at the time the loan was originated and may adjust at the reset date regardless of whether the variable rate index has increased.
- An "Eligible Foreclosed Borrower" means the same as an "Eligible Borrower" except that an "Eligible Foreclosed Borrower" has already received a notice of intention to foreclose their mortgage pursuant to the Fair Foreclosure Act and, therefore, rather than extending the introductory interest rate, the Eligible Foreclosed Borrower is actually reinstating the introductory interest rate and suspending the foreclosure proceedings for the three-year extension period. The Eligible Foreclosed Borrower must make all required payments during that time period. The Act further clarifies that a person may only take advantage of the three-year extension once.
What Does the Act Require of Governed Mortgage Lenders?
All lenders governed by the Act are required to notify "Eligible Borrowers" of their right to extend their introductory mortgage rates by up to three years. At 30 and 60 days prior to the reset of the mortgage rate, those lenders governed by the Act are required to "provide a series of notices," conspicuous and distinct from their other mailings. The purpose of these mailings is to advise Eligible Borrowers of their current and future mortgage interest rates, estimated future payment amounts, and to provide a list of financial alternatives the borrower may pursue including an "explanation of the borrower's right to obtain a period of extension under this bill" in a manner that will ensure that they truly understand their rights.
A similar notice is required to be sent to "Eligible Foreclosed Borrowers" advising them of their right to reinstate their introductory interest rate. The required notices to Eligible Foreclosed Borrowers are to be sent:
- Within 10 days of issuing the notice of intention under the Fair Foreclosure Act; and
- At the time that the creditor applies for entry of final judgment of foreclosure.
How Do Borrowers Accept The Three Year Extension?
Eligible Borrowers who wish to obtain the extension must provide the creditors/lenders with a completed certification of extension form prior to the reset of the interest rate. This form, which is to be included in the mailings from the borrowers' creditor/lender, requires the Eligible Borrowers to:
- State their name, address of the property in question, and an affirmative statement that the Eligible Borrower lacks sufficient monthly income to pay the proposed new monthly payment, as well as a formal request for the period of extension;
- Agree to continue, during the period of extension, monthly payments which shall include principal and interest calculated at the introductory rate on the date that the introductory rate mortgage was originated, as well as amounts for taxes, insurance and any other amounts being paid under the terms of the mortgage prior to the interest rate reset;
- Agree to pay the creditor, at the time of the full repayment of the loan, any interest deferred on account of the period of extension; and
- Agree to sign a modification of mortgage form that contains the terms of the period of extension and any documentation necessary to establish or record the modification of the mortgage.
Upon receiving the certification, the creditor "shall grant the borrower the three year period of extension, which shall commence on the date that the introductory rate is due to reset under the terms of the introductory rate mortgage." In connection with granting the extension, the creditor must also send a written acknowledgment that the certification of extension has been received.
What is the Penalty for Violations of the Act?
Any governed lender who violates the Act may have an action brought against it pursuant to the Penalty Enforcement Law of 1999 by an Eligible Borrower, Eligible Foreclosed Borrower, or the Attorney General. Pursuant to the Act, any willful violation shall be punishable by a penalty up to $10,000 for the first offense, and not more than $20,000 for the second and subsequent offenses. Creditors cannot claim the parity provision of P.L. 1981, c.163 as a defense to compliance with the Act.
The requirements of the Act will necessitate that the mortgage lenders governed by its provisions undertake appropriate action to (i) audit their loan files in order to determine which loans and borrowers are entitled to the protections of the Act, and (ii) institute procedures to ensure compliance with the Act, and that proper notifications and required documentation are prepared and sent out to the Eligible Borrowers and the Eligible Foreclosure Borrowers in order to avoid any violations of the Act.