Menendez Bill Would Help N.J. Homeowners At Risk Of Foreclosure Stay In Their Homes

With record NJ foreclosure and underwater rates, bill will help families keep their homes and mitigate costs vacant homes impose on neighborhoods — Wednesday, June 17, 2015

By Moe Bedard

WASHINGTON, DC — As New Jersey continues to lead the nation in foreclosure rates — and specifically in "zombie" foreclosures — U.S. Senator Robert Menendez (D-NJ), Ranking Member of the Senate Subcommittee on Housing, Transportation and Community Development today introduced the Preserving American Homeownership Act, to help homeowners who are underwater on their mortgages remain in their homes. According to RealtyTrac, one out of every 594 New Jersey homes is in foreclosure. The Atlantic City region leads the nation among metropolitan areas of its size with one in every 297 properties in foreclosure.

"Far too many New Jerseyans are underwater on their mortgages and are all too familiar with the burden this brings," Senator Menendez said. "My bill aims to give homeowners the break they need by working with banks to find acceptable solutions for everyone. Not only can we help families stay in their homes, we can mitigate the impact zombie foreclosures have on our communities and our economy."

Phyllis Salowe Kaye, Executive Director of New Jersey Citizen Action, said: "The sad fact is that millions of homeowners still have underwater FHA and FHFA mortgages and many are facing foreclosure. Principal reduction is the most effective way to keep people in their homes, to prevent foreclosures and to stabilize neighborhoods that have been decimated by vacant and abandoned properties. Senator Menendez's bill offers real solutions. It should be supported and passed quickly by Congress. "

Further troubling for communities struggling with large numbers of homes in foreclosure, a recent report found New Jersey has the highest "zombie" foreclosure rate in the country, with one out of every 201 housing units vacated before a completed foreclosure. These owner-vacated foreclosure properties likely end up as short sales, foreclosure auction sales, or bank-owned sales.

The Preserving American Homeownership Act is specifically aimed at homeowners who owe more than their house is worth ("underwater"), which is currently estimated to be 5.1 million homeowners, or more than 10 percent of all homes with a mortgage, according to CoreLogic. About two million of these homeowners are underwater by a significant amount — they owe at least 25 percent more than the value of their home.

Even with home prices rebounding since the financial crisis, millions of homeowners are still underwater on their mortgages because of the broad national decline in home values that has occurred since 2007, which can be seen here. Because of this, homeowners may be at risk of foreclosure, unable to sell their home and move, or forced to walk away at great cost, further hurting the still-fragile market. Meanwhile, banks are reluctant to reduce the amount owed to them ("principal") because they are concerned about losing income.

The legislation seeks to help both parties — homeowners and lenders — by creating a program in which banks reduce the mortgage principal for eligible homeowners. In exchange, banks would be entitled to a portion of any increase in the value of the home down the road. The program is a win-win for everyone: underwater homeowners receive relief on their mortgages, while banks agree to take a short-term reduction for a long-term gain as the housing market recovers. In a similar program tested by a private mortgage servicer, almost 80% of homeowners who were offered the opportunity to participate chose to do so and had a re-default rate of only 2.6%.

Additional Details

Click here to download the full text of the bill.

The principal balance of the loan would be reduced to 100% or less of the re-assessed value of the home, provided the homeowner is able to make reduced payments; the principal balance would be reduced in 1/3 increments per year.

In exchange, the bank would receive a fixed share (of up to 50%) of the increase in the home's value when the home is sold or later refinanced, up to a maximum of twice the amount of principal reduced. The share depends on factors to be determined by the Federal Housing Finance Agency (FHFA) and Federal Housing Administration (FHA), including how much the bank initially reduced the principal.

Home values would be determined by independent third-party appraisers.

Two pilot programs would be established by the FHFA and FHA.

Homeowners are eligible no matter how far underwater they are, but they must make timely payments on the modified mortgage going forward or they will not receive any principal reduction.

Both primary and secondary residences are eligible.

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