On January 9, 2009, New Jersey Governor Jon Corzine signed into law the Mortgage Stabilization and Relief Act (S-1599/A-3506) (the "Act"). The Act is designed to reduce the number of foreclosures of residential properties in New Jersey by offering assistance to qualified homeowners through the Mortgage Stabilization Program and the Housing Assistance and Recovery Program ("HARP") and by imposing new requirements and restrictions on creditors who seek to foreclose on residential property. The relevant provisions discussed below take effect on April 1, 2009.
Which Lenders Are Affected By The Act?
The Act applies to any "Lender," defined as "any lawfully constituted mortgage lender, mortgage investor or mortgage loan servicer that owns and is willing to refinance or is authorized to negotiate the terms of the homeowner's mortgage."
Mortgage Stabilization Program
The Mortgage Stabilization Program (the "Program") is designed to encourage lenders to modify or refinance first mortgage loans in imminent danger of foreclosure by offering qualified homeowners non-amortizing second mortgage loans not to exceed $25,000 ("Program Loans"). The Program Loans would be used to assist with the modification or refinance of the borrower's first mortgage loan.
- Which Properties and Borrowers Qualify?
To qualify for a Program Loan, the subject property must be a one, two or three family house or condominium unit and must be owner-occupied for at least one year prior to the homeowner applying for a Program Loan. In addition, the household's annual income cannot exceed 120 percent of the area's median income or the income limits imposed by the HMFA. Lastly, the homeowner cannot have an interest in any other residential property and must attend budget counseling sessions after obtaining the Program Loan.
- How Are Lenders Affected?
A Program Loan is only available if the first mortgage lender is willing to modify or refinance the first mortgage loan. The new first mortgage loan amount must: (1) result in an "affordable mortgage payment"; and (2) be less than the appraised value of the property at the time of modification or refinancing. An affordable monthly mortgage payment means less than 33 percent of the household's monthly average annual gross income. The first mortgage lender must also be willing to offer the borrower a second mortgage loan to help satisfy the difference between the new first mortgage loan amount and the appraised value of the property (see "Program Loans" below).
- Program Loans
Borrowers who qualify for assistance under the Mortgage Stabilization Program will ultimately have three new mortgage loans: a new first mortgage loan and two second mortgage loans that share co-equal positions - the Program Loan and a second mortgage loan made by the lender. Since the Program Loan only equals one-half of the difference between the appraised property value and the new first mortgage loan, participating lenders must make another second mortgage loan to account for the remaining difference. All of these loans are to be repaid by the borrower upon sale of the property.
Housing Assistance And Recovery Program (HARP)
HARP was enacted to disburse funds to certain non-profit organizations for the purposes of: (1) purchasing residential property from qualified homeowners facing imminent foreclosure; and (2) counseling those homeowners for at least one year on foreclosure prevention and default mitigation.
- What Properties and Borrowers Qualify?
To qualify for assistance under HARP, the subject property must be a one, two or three family dwelling that is the primary residence of the household. In addition, the household's annual income cannot exceed 120 percent of the area's median income or the income limits imposed by the HMFA.
- Lease-Purchase Agreement
Under HARP, qualified non-profit organizations can purchase residential property from qualified homeowners facing imminent foreclosure. However, the non-profit must enter into a lease-purchase agreement with the former homeowner, which permits the former homeowner to remain in the property for an agreed upon occupancy period (not to exceed 36 months) at an affordable monthly rent. At the end of the occupancy period, the non-profit must agree to re-sell the property to the former homeowner at a price not to exceed the price paid by the non-profit.
Requirements And Restrictions On Creditors Seeking To Foreclose
In addition to implementing the above provisions to assist homeowners facing foreclosure, the Act imposes additional requirements and restrictions on creditors seeking to foreclose on residential property.
- Initial Foreclosure Report and Quarterly Filings
Under the "Fair Foreclosure Act," which was enacted in 1995, creditors foreclosing on residential first mortgage loans are required to file a notice of intention to foreclose. That notice delays the time for filing a foreclosure complaint to provide borrowers with a final opportunity to cure their default before a foreclosure suit is commenced. The Act requires those creditors covered by the Fair Foreclosure Act to also file an initial foreclosure report (the "Report") with the Department of Banking and Insurance within 30 days of the mailing of the notice of intention to foreclose. The Report must contain: (1) the terms of the mortgage (interest rate, rate adjustments, and prepayment fees); (2) the date of the mortgage; (3) the maker of the mortgage; (4) the current holder and servicer of the mortgage; (5) any efforts made by the creditor to modify the loan; and (6) the amount due on the mortgage. Creditors must supplement this report with quarterly filings containing information regarding the progress of the foreclosure proceeding, including the creditor's attempts to negotiate loan modifications. Creditors who initiate foreclosure proceedings in New Jersey Superior Courts must, on a quarterly basis, inform the Department of Banking and Insurance of the number of mortgage foreclosure actions filed by the creditor in the State. The Department of Banking and Insurance will then publish that information on a quarterly basis.
- Six Month Forbearance Period
A creditor foreclosing on a "high risk mortgage loan" must grant the borrower a six month forbearance period to attempt to modify or refinance the loan. Borrowers must continue to make monthly mortgage payments during the forbearance period. If the borrower stops occupying the property during the six month period, the forbearance period will end. Once the forbearance period begins, the creditor and borrower must participate in mediation. This provision will remain in effect for two years following the passage of the Act.
- Notice of Intention to Foreclose Must be Served on Public Officer
A creditor foreclosing on residential property in New Jersey must serve the public officer of the municipality in which the property is located with a copy of a notice of intention to foreclose at the same time the notice is served on the homeowner. The Act imposes additional requirements if the property is an affordable housing unit or becomes vacant.
What This Means For Lenders
For lenders, the most significant provisions of the Act relate to the provisions requiring those seeking to foreclose on residential property in New Jersey to send all the requisite notices to borrowers, the municipality, and the Department of Banking and Insurance. The other provisions of the Act will enable borrowers to forestall foreclosures by obtaining funds that can be used to work with their lenders to modify their loans. Certainly, the modification of the loans will be at some cost to lenders, but may reduce the number of foreclosures in New Jersey, which skyrocketed in 2008.