Proposed Bill Offers Six-Month Grace Period for Underwater Mortgages

Joe Tyrrell | March 1, 2012 | More Issues
Sen. Rice sees legislation as a temporary fix to 'extreme circumstances'

Credit: Amanda Brown
Ron Rice
New Jersey homeowners facing foreclosure deserve a “forbearance period” to attempt to straighten out their finances and seek mortgage modifications, according to state Sen. Ron Rice (D-Essex).

The Newark city councilman has introduced legislation that would require creditors to extend a six-month reprieve before foreclosing on people whose mortgages are “underwater,” with property values that have dropped below the amounts of their loans.

With a foreclosure crisis looming in the state, the approach could help lenders ultimately retain much of the value on loans rather than take large losses, while preserving communities and neighborhoods by keeping people in their homes, Rice said.

The measure follows the announcement of an estimated $26 billion national settlement between most states and five major lenders: Ally Financial (formerly GMAC), Bank of America, Citibank, JP Morgan Chase, and Wells Fargo. Under the deal, which has not yet been filed, New Jersey and its residents would get about $837 million for housing and mortgage relief.

“I’m try to supplement the national settlement, because first of all, we don’t know how that’s going to work out,” so the state should be prepared with its efforts, Rice said. He pointed to legislation introduced earlier this month by state Sen. Raymond Lesniak (D-Union) to buy up foreclosed properties but make them available again as affordable housing.

Senate Democrats highlighted Rice’s legislation in a press release, and Jason Butkowski, their assistant communications director, said it stands a good chance of passage because it dovetails with the other measures.

“There are a lot of ideas right now about how to deal with foreclosures, and [Rice’s bill] could fit in with the others,” he said.

Rice was cautious, pointing out that Gov. Chris Christie has not weighed in on the legislation, but said he believes politicians across the spectrum in New Jersey want to keep people in their homes where possible. In cases where housing values have plummeted since the bursting of the housing bubble, borrowers should not be victimized by factors beyond their control, he said.

“Many, through no fault of their own, can’t keep up,” Rice said, pointing out the measure is designed to be a temporary fix to “extreme circumstances.”

Borrowers would be eligible if they had been in the home for two years prior to a foreclosure notice, if it were their primary residence, and if the principle amount on their mortgage were more than 110 percent of the property’s fair market value. Under the proposal, creditors would be required to give them a six-month period to work out loan modification’s through the Foreclosure Mediation Program.

Creditors would be exempt if they offered what Democrats describe as “a sustainable” loan modification, which the bill defines as a principal write-down or a reduction in the borrower’s monthly mortgage payment up to 30 percent or less of the borrower’s gross monthly income and approved by a court.

The program would sunset in three years, ending at the same time as the anticipated close of the bank payouts under the national settlement, Rice said. But if an individual forbearance period had not been completed by that date, it would be allowed to run its full course, he said.

The program is not anticipated to require state funds, “but since the Obama [settlement] money is going to be coming in, the question is if there’s anything the state could do” to assist homeowners without affecting its own budget, Rice said.

Rice noted that banks have been taking a beating on foreclosures, with the properties standing vacant or reselling for far less than the previous mortgage. In January, RealtyTrac reported that homes in the Trenton-Ewing Township area have the largest price gap in the nation between those that come on the market by normal means and those in foreclosure or already bank-owned.

With an estimated backlog of 50,000 to 100,000 foreclosures in the state, banks’ returns are likely to go down if they all come on the market quickly, Rice said.

“I’m doing this to help homeowners and communities, but also to help the financial institutions so they don’t take losses of the amounts they’re facing,” he said.

The foreclosure backlog built up during a moratorium initiated by New Jersey Chief Justice Stuart Rabner in December 2010, following a report from Legal Services of New Jersey highlighting abuses in foreclosure cases here and elsewhere in the nation.

Foreclosures dropped to a trickle in the first half of last year, as court-appointed masters looked at the internal document-handling procedures of the six largest lenders, and another group of two-dozen large banks that are active but not dominant in the New Jersey market.

As banks were approved to resume, foreclosures began to pick up but were still held down by two legal clouds. One apparently has been cleared up by the national settlement. In return for the money, the participating states would be barred from pursuing claims over the most commonly cited abuse, the use of falsely sworn affidavits to support foreclosures, often called “robo-signing.”

The state Supreme Court blew away the other on Monday, resolving conflicting appellate rulings in a decision that technically favored borrowers but at the same time dropped hurdles to foreclosure. The justices ruled that the name and location of the actual holder of a mortgage note must be properly listed on a notice of foreclosure.

But the High Court found that judges can allow errors to be rectified through a corrected notice — instead of throwing out the case and starting again. They also ruled that a $120 overcharge for a title fee is not sufficient grounds to rescind a creditor’s title claim.

Those issues had shrouded the status of many already filed foreclosure actions. They did not prevent lenders from filing new foreclosure notices that properly listed current lenders’ names and address. But some banks cited uncertainty over the outcome as a voluntary reason to delay.

Rice’s bill likely will be referred to the Senate commerce committee.