Housing Bubble Burst in late 2007
Foreclosures have a detrimental effect on society. Foreclosures blight neighborhoods, place financial pressure on families and drive down local real estate values. Furthermore, on a macro scale a crippled housing market burdens consumers who are more cautious and forced to spend less freely.
Since the housing bubble burst in late 2007, foreclosures have spiked across the country. New Jersey has continued to see an increase in foreclosure actions even ten years later. A 2012 analysis of national foreclosure rates revealed that despite a five-year low of home foreclosure filings, New Jersey’s foreclosure starts were among the largest annual increases (Gordon, 2012). The Mortgage Bankers Association released a report categorizing New Jersey as having a seriously delinquent loan rate of greater than ten percent, one of the highest in the nation (O’Neill, 2015). Given New Jersey’s high rate of foreclosures, fragile economic climate and sluggish housing market, New Jersey legislator’s need to return economic stability and protect its homeowners.
Through this paper, I will briefly address the background and framework of a foreclosure process in Part I, followed by a proposal on legislative changes that can actively aid in the rejuvenation of New Jersey’s economic climate and real estate market in Part II.
The continuance of the foreclosure crisis is due in part to the intricacy of the state’s foreclosure process. New Jersey is a “judicial foreclosure” state – meaning all foreclosure actions must be prosecuted by attorneys before judges in the court system. The purpose of this structure is to enforce a level of due diligence on lenders. However, due to an enigmatic legal processes, homeowners and lenders are incentivized to cut corners, thus making it all the more critical to adhere to proper foreclosure defense. The homeowner is essentially the most financially and emotionally invested in the house, thus they must be the one to stand up for their rights. However, the average homeowner is not a legal expert, nor do they truly have the resources to understand a growing and nuanced area of the law. And the key to asserting a proper defense is understanding your rights, your lender’s obligations, how the court system works, and the rules, statutes, and case law that control everything.
In a regular mortgage foreclosure, after a Notice of Intent and a formal complaint are sent, the defendant is expected to file an answer contesting or non-contesting the plaintiff’s right to foreclose on the property1. This entire process takes approximately five to six months from the first defaulted payment (Knapp). Further along, the foreclosure process is an additional year filled with red-tape.
The most effective ways to avoid foreclosure are to focus on combating the manual foreclosure process in court, enter into mediation with the state or file for bankruptcy. Under the states mediation program, the foreclosure process is not terminated immediately, only upon entering into a successful agreement. During a mediation opportunity, the homeowner has 60 days on average to negotiate a payment plan with the lender and file for a written agreement through court order to terminate the foreclosure timeline (Knapp). The second option would be to file for Chapter 7 or Chapter 13 bankruptcy. Under Chapter 7 bankruptcy, the court will discharge all unsecured debt. And under Chapter 13 bankruptcy, the homeowner will be required to pay the secured debt in installments over a five year period.
In addition to a genuine inability to pay taxes/mortgage payments being the cause of foreclosures recently, a decent increase of property foreclosures in New Jersey has been due to the complicated paperwork and due diligence process that has allowed for mortgage lenders and banks to “robo-sign” on foreclosure documents without accurately reviewing the information (Hopkins, 2014). Due to a large number of middle managers and temporary workers with virtually no understanding of the foreclosure process, the robo-signing scandal has emerged as yet another setback in the foreclosure field.
In an effort to reduce foreclosure loses for property owners and allow for a more accurate legal process, not only must the legal complexities be simplified, but also an overall procedural and legislative fix is warranted across the culture of red tape in the foreclosure market.
Many states have passed their own proactive legislation to address the foreclosure crisis. California, recognizing that homeowners and consumers needed even more through the foreclosure process, announced a legislation package to address this need on February 29, 2012, known as the Homeowner’s Bill of Rights2.
The California Homeowner Bill of Rights (“HBOR”) enabled all homeowners to have the same protections and rights regardless of which bank serviced their loan. Among the
2 http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201120120AB278&search_keywords; S.B. 900, 2011–2012
most significant aspects of the California HBOR’s provisions are the following: requiring servicers to provide notice to borrowers and service-members of their right to foreclose; mandating that the lender provide a single point of contact to the borrower; adopting civil penalties of up to $ 7,500 per loan for multiple and repeated recordings of unverified foreclosure documents; authorizing borrowers to seek legal redress of “material” violations of the legislation; and warning that material violations by lenders or servicers may put those institutions at risk for continuing to do business in California2.
At about the same time as the passage of California’s legislation, Massachusetts passed emergency legislation entitled “An Act Preventing Unlawful and Unnecessary Foreclosures” (Thomas, 2012). This law expanded important consumer protections for homeowners in Massachusetts by introducing a series of new steps that lenders must take before foreclosing on homeowners who have fallen behind in mortgage payments and creating a task force to study potential solutions for preventing unnecessary vacancies following foreclosures and for evaluating existing mediation programs throughout the United States.
New Jersey, passed legislation back in 1995 to protect residential mortgage debtors with the Fair Foreclosure Act (“FFA”). N.J. STAT. ANN. § 2A:50-53–73. (2013). However, since then, the New Jersey Legislature has failed to revisit the issue, thus leaving its residents insufficiently protected, with ensuing negative economic results. New Jersey Legislature should revisit the FFA and adopt a policy similar to HBOR to provide more active protection and assistance for troubled homeowner’s in the state who are on the brink of foreclosure and incapable of fighting the enigmatic legal system.
Overall, New Jersey’s economic stability has continued falter as foreclosure rates rise in the state. Homeowners will continue to lose faith in a system where they feel no one is looking out for their rights. New Jersey legislators have the ability to turn the tide, by enacting a bill that will help avoid unnecessary foreclosures, reduce government expenses and increase the quality of life for citizens.
Marcy Gordon, US Foreclosure Filings Hit 5-Year Low in September, TODAY (Oct. 11, 2012), http://economywatch.today.com/_news/2012/10/11/14362557-us-foreclosure-filingshit-5-year-low-in-september
Hopkins, Jamie Patrick and Pustizzi, Katherine, A Blast from the Past: Are the Robo-Signing Issues that Plagued the Mortgage Crisis Set to Engulf the Student Loan Industry? (March 24, 2014). 45 University of Toledo Law Review 239 (Winter 2014 Forthcoming).
Knapp, Amy. “New Jersey Foreclosure Procedures.” http://www.nolo.com/legal-encyclopedia/new-jersey-foreclosure-procedures.html. N.p., n.d. Web.
O’Neill , Erin. “N.J. has highest rate of distressed mortgages in nation, study shows.” NJ.com. N.p., 17 Aug. 2015. Web.
Thomas, David G . “Massachusetts Imposes Additional Restrictions on Residential Mortgage Foreclosures; May Now Require Loan Modification in Lieu of Foreclosure.” Massachusetts Imposes Additional Restrictions on Residential Mortgage Foreclosures; May Now Require Loan Modification in Lieu of Foreclosure – Greenberg Traurig LLP. GT Law, 5 Sept. 2012. Web. <https://www.natlawreview.com/article/massachusetts-imposes-additional-restrictions-residential-mortgage-foreclosures-may->.