New Jersey Law Journal

Proposed Bill Limits Foreclosures To Record Holder Of Mortgage

New Jersey Law Journal — Friday, May 30, 2014

Mary Pat Gallagher, New Jersey Law Journal

A bill that has begun making its way through the legislature would limit the ability to bring mortgage foreclosure actions, allowing them to be filed only by the holder of record.

The practical effect would be that before being able to go to court on a foreclosure, a lender would have to make sure that any assignments of the mortgage were on record with the county clerk's office or the register of deeds.

The only exception to the holder of record requirement would be for a person or entity found by a court to own or have an interest in the mortgage, who would likewise be deemed an "established holder of a mortgage" under the bill, S-1346, which won unanimous approval from the Senate Community and Urban Affairs Committee on May 19.

Additional provisions would make mortgage servicers responsible to identify themselves to borrowers as the ones servicing the loan and provide them with an address and telephone number.

Any borrower who is not given correct information and misdirects a mortgage payment would be off the hook. The servicer would have to track down whoever was paid in error and try to collect from them.

The legislation, introduced on Feb. 27 by Sen. Ronald Rice, D-Essex, is based on recommendations made by the New Jersey Law Revision Commission in a report released last September.

The commission, based in Newark, is a statutory body created to review state laws and propose improvements to the legislature. It is comprised of the Judiciary Committee chairs from both houses, the state's three law school deans and four practicing attorneys.

The commission's retired executive director John Cannel, who now holds the title of reviser of statutes, said the report was a reaction to the confusion created by the fact that mortgages rarely remain with the original lender but are repeatedly assigned, and often serviced by yet another entity.

That creates "complications in the chain of title," which the bill addresses by requiring that the series of assignments that make up that chain be updated before foreclosing, he says.

The fact that courts have had to repeatedly step in to resolve disputes over who can foreclose demonstrates the need for a fix, said Cannel, referring to a series of appellate holdings that cases should be dismissed for lack of standing where the plaintiff did not have possession of the original mortgage note.

In addition, the Supreme Court held in 2012, in U.S. Bank National Association v. Guillaume, 209 N.J. 449, that the notice of intent to foreclose required by state law must name the actual lender and provide contact information for any loan servicer but that noncompliance did not necessitate dismissal.

The court followed up with an April 4, 2012, order that allowed mortgage lenders to correct deficient filings en masse by order to show cause. Forty six such actions affecting more than 31,000 foreclosures were filed by November 2013, when the court closed the door on the process.

"If the Supremes have weighed in and there are three or four Appellate Division decisions, you have a problem," remarked Cannel. "You shouldn't need that much judicial intervention."

He pointed out that mortgage assignments can also prove problematic when a mortgage is paid off and the name on the satisfaction of mortgage document does not match the name of the mortgage holder of record. The bill would solve that problem too, said Cannel.

Further, it would protect mortgage borrowers who are scammed into sending the payment to someone falsely claiming to be the new servicer, which the commission referred to as a real, albeit rare danger.

"If the mortgage debtor pays the thief, there is a question of whether he still owes a payment to the real mortgage holder," a question on which there is no case law, wrote the commission. The legislation would answer that question in the negative.

Cannel showed up at the May 19 committee hearing as did representatives of two other groups that support S-1346: New Jersey Citizen Action and the Housing & Community Development Network of New Jersey. No one showed up to testify against it.

That does not mean that the bill will meet no opposition as it moves forward.

The bankers "have been part of this whole discussion from the beginning" as the commission considered various approaches but have not yet weighed in on the Rice bill, said Cannel.

New Jersey Bankers Association Executive Vice-President Michael Affuso says the group is still looking at the bill but it appears "problematic," as does "anything that prevents an expeditious foreclosure."

E. Robert Levy, of Levy & Watkinson in Woodbridge, who is executive director and counsel for the New Jersey Mortgage Bankers Association, said the bill "generally looks okay" except for the "bizarre" provision that places the onus on the servicer to collect a mortgage payment when the borrower sends it to the wrong person.

The servicer has nothing to do with the criminal conduct, assuming it provides correct payment information, noted Levy.

Placing that additional burden on lenders and servicers will only reduce the amount of mortgage financing available in New Jersey and increase the cost of borrowing, he said.

Foreclosure is already more complicated and expensive here, Levy observed, as reflected by the Federal Housing Finance Agency's move last year to increase "adverse market fees" in four states with above-average foreclosure costs: New Jersey, Connecticut, Florida and New York.

There is also doubt on the other side of the aisle.

Linda Fisher, an attorney with the Seton Hall Law School Center for Social Justice who represents borrowers, sees the bill as "well-intentioned" but worries that it diverges from the Uniform Commercial Code's Article 9 requirement for possession of the original note and thus, might be interpreted to allow foreclosure without it.

On May 12, she filed a petition for certification in Citibank v. Kiegel that asked the Supreme Court to clarify what documents are needed for standing to foreclose, arguing that appellate courts have split on the issue.

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