Measure Would Create 6-Month “Forbearance” Period, Incentives for Lenders to Help Homeowners Avoid Foreclosure Through Mortgage Modification
TRENTON – Senator Ronald L. Rice introduced legislation on Monday designed to address New Jersey’s foreclosure crisis by creating a 6-month forbearance period to give homeowners an opportunity to straighten out their finances before a foreclosure could proceed.
“New Jersey homeowners are facing the threat of foreclosure at an increasingly alarming rate,” said Senator Rice, D-Essex. “Folks who are working hard and playing by the rules find themselves paying into an underwater home loan, and many, through no fault of their own, just can’t keep up. This bill provides a temporary period of relief to allow homeowners to negotiate loan modifications to stay in their homes and continue to be productive members of the community.”
The bill, S-1746, would require that, whenever a creditor seeks to foreclose on an underwater residential mortgage loan – meaning the mortgage principal exceeds the home’s value – the creditor must grant a residential borrower a six-month period of forbearance in order to give them time to work out loan modifications which would be amenable to both the lender and the borrower. Under the bill, the creditor would be required to notify the borrower of his or her right to forbearance at the time they’re being served a summons and complaint in a foreclosure action. Borrowers would be eligible for this program if the property has been the borrower’s primary residence for two years prior to the foreclosure action, and if they owe a principle amount on a mortgage that is in excess of 110 percent of the fair market value of the property.
Creditors would be required to grant a period of forbearance from foreclosure action upon the written request from en eligible borrower, at which time the lender and the borrower would work out mutually-amenable loan modifications through the Judiciary’s Foreclosure Mediation Program or some other means of finding common ground. A creditor would be exempt from the forbearance requirement if, at the time of foreclosure, they offer a sustainable loan modification – 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 – that meets court approval. The provisions of the bill would expire three years after implementation, with the provision that a six-month period of forbearance granted just prior to the expiration of the bill would be allowed to play it, notwithstanding the expiration of the bill.
“These are really extreme circumstances, and they require some out-of-the-box thinking in order to provide relief to struggling homeowners,” said Senator Rice. “Hopefully, in three years time, the real estate market will have stabilized some, and the need for forbearance won’t be quite as drastic.”
Senator Rice noted that New Jersey is facing an unprecedented foreclosure crisis, caused in large part to the sudden and drastic drop in home values, resulting in people paying more for their homes than they’re worth. As underwater homeowners default on the terms of their mortgages, increased foreclosures within a community can put downward pressure on home values within the community, creating more underwater loans and more foreclosures in what the Senator termed as “a vicious cycle.”
“Between the bottom falling out of the real estate boom, and the fact that many homeowners who had traditionally paid their bills on time were losing their jobs and unable to find meaningful employment, we are in a state of serious crisis,” said Senator Rice. “As the number of foreclosures increase around the State, property values drop further, exacerbating the issue and putting more homeowners at risk. We need to stop this cycle in its tracks, in order to keep folks in their homes and avoid vacant properties becoming a blight on neighborhoods still struggling to recover from a global economic crisis.”
The bill will likely be referred to the Senate Commerce Committee.