NEW JERSEY FAIR FORECLOSURE ACT

The New Jersey Fair Foreclosure Act (the “Act”) becomes effective as to foreclosures commenced after December 4, 1995. The Act primarily focuses on the residential mortgage foreclosure process, but contains provisions of general application to all foreclosures.

A residential mortgage is defined under the Act as a mortgage on a one-to-four-family dwelling occupied by the borrower or a member of the borrower’s immediate family. While intended to apply to foreclosures by consumer lenders of residential mortgages, the act makes no distinction between those consumer loan situations and commercial loan situations where a mortgage is granted to a lender on a one-to-four-family dwelling occupied by the borrowing party or the borrowing party’s immediate family. The Act’s protections and procedures are imposed as to all residential mortgages currently in place or hereafter created.

Notice Requirements

The Act provides that, prior to acceleration of any residential mortgage obligation and the commencement of any foreclosure or other legal action, the lender must give at least 30 days prior written notice of intention to foreclose. The notice of intention to foreclose must include, among other things, a description of the debt; the nature of the default; the amount necessary to cure the default; the date before which default must be cured (which must not be less than 30 days of the notice); and that if default is not cured the lender may exercise remedies.

In addition to the pre-acceleration notice, the Act permits reinstatement of any residential mortgage loan by payment of the amount which would have been due in the absence of the default together with court costs and attorneys’ fees in an amount not to exceed those permitted by the New Jersey Court Rules. Although a residential mortgage loan may have been accelerated, the borrower may reinstate the loan by paying only the past due periodic payments, court costs and permitted counsel fees. If this reinstatement right is exercised, the default is nullified as of the date of the cure, and any acceleration of the underlying obligation is rescinded. The cure right may be exercised only once every 18 months as to any particular mortgage. The right to cure by payment exists at any time up to the entry of final judgment or the entry by the Office of Foreclosure of an order of redemption.

Sale Procedures

The Act allows an “optional foreclosure procedure without sale.” If the lender elects this procedure, once judgment of foreclosure is obtained, the need for a sheriff’s sale is eliminated and the mortgaged property may be sold and conveyed through an order of the Office of Foreclosure of the Superior Court. The optional foreclosure procedure may only be elected by the lender where the borrower has abandoned the mortgaged property, voluntarily surrendered the property through a deed-in-lieu of foreclosure or there is no equity in the property.

If the optional sale procedure is elected, the Office of Foreclosure may enter an order fixing the amount, time and place for redemption of the mortgaged property, which may be not less than 45 days or more than 60 days after the date of the order. The order must be mailed to the Borrower and all other defendants and each is advised of the terms and conditions under which a public sale may be requested. If no request for a public sale is made within 30 days of the date of the order, and upon proof of mailing of the order of redemption to all defendants, the lender will be entitled to a judgment foreclosing the equity of redemption of all defendants in the mortgaged property and adjudging the lender to be vested with a valid title in the mortgaged property. All of this is accomplished without a public sale. If, however, the borrower requests a public sale, a public sale will be held generally in accordance with the existing sale procedures.

If the optional sale procedure is used, the debt which was secured by the mortgage is deemed satisfied and the lender is not permitted to institute any deficiency actions for the collection of the debt.

Since the Sheriff’s officers are now processing sales quickly, there may be less advantage to using this new procedure until there is some experience with title companies’ willingness to insure such titles.

Effect on Commercial Mortgages

It is uncertain how the act will affect commercial lenders. It is clear, however, that the above provisions will apply likely to purely commercial situations, such as those in which individual guarantors of corporate commercial obligations grant mortgages on residences occupied by the guarantor or members of their families. The definition of “residential mortgage debtor” in the act includes any person who is “obligated to pay the obligation” secured by the residential mortgage.

Therefore, upon a default under the commercial loan, which is guaranteed by an individual and secured by a residential mortgage, before commencing a foreclosure on the residence, the lender must provide the same detailed pre-acceleration notice at least 30 days before acceleration as in a purely residential transaction. Also, the obligor will be extended the right to reinstate by payment of the past due periodic amounts due. The payment of these amounts (rather than the accelerated amounts), the right to reinstate, and the other procedural protections provided in the act may not be waived in any documentation. Any such waiver will be void as contrary to public policy.

Even though the procedures for recourse to the mortgaged property will be subject to the Act, the Act does not apply to collection of the obligation by means other than enforcing the lender’s lien on the residential property. Thus, the act should not limit the ability of a lender to proceed against other collateral or seek to attempt to obtain a collection judgment against the corporate borrower.

Additional Provisions

There are several provisions of the Act which may be helpful to Lenders. In particular, the Act states that unless there is an express agreement to the contrary by the parties, the debtor may tender, and the lender may accept, partial payment of any sum owing and due without either party waiving any rights. However, at minimum, it should put to rest long-standing concerns by lenders that acceptance of partial payments on a mortgage loan could be deemed to represent a waiver of defaults or other rights.

The Act streamlines the procedure by which the federal and state governments may enter noncontesting answers in foreclosures. Rather than being required to enter a formal answer, a simple appearance letter will be deemed sufficient where the governmental entity does not intend to contest the matter.

The Act requires the sheriff to conduct a foreclosure sale within 120 days of receipt of the writ of execution and, if unable to do so, permits the Office of Foreclosure to appoint a special master to conduct the sale. In connection with sales, sheriffs will now be permitted to allow only two 14-day adjournments, rather than two 30-day adjournments as is current practice. The act also contains a standard form of sheriff’s deed for all foreclosures and requires the sheriff’s deed to issue within two weeks of the sale provided the purchase price is timely paid.

The Act requires all judgment creditors, upon entry of judgment, to provide a current address for service and to update that address. Failing to do so will permit valid service on a judgment creditor named in a foreclosure merely by regular and certified mail without the need for more diligent inquiry or publication of notice. Finally, the Act extends the effective date of a lis pendens from three to five years.