Foreclosure Defense Law Blog

Court Permits Holder of Tax Certificate and Mortgage Interest to Intervene

In an unpublished decision, the Appellate Division of the Superior Court of New Jersey found that an entity may purchase a mortgage and thereafter, intervene in a foreclosure action. The property that was the subject of the action was subject to a mortgage initially held by David and Anita Dorffman. In addition, it was subject to two separate tax liens that had been acquired through the purchase of tax sale certificates. Generally speaking, tax sale certificates allow a private party to purchase the right to step into the shoes of the government and foreclose on real estate for unpaid taxes.

The first certificate had been acquired by Gladiator Investment Partnership-2, LLC (Gladiator) while the second had been acquired by the plaintiff in the matter, American Tax Funding (ATF). Gladiator filed a tax sale certificate foreclosure action based upon outstanding property taxes. Prior to the issuance of a final judgment in Gladiator’s action, however, the mortgage on the property was assigned to Cherrystone Bay, LLC (Cherrystone). Once it had acquired the mortgage, Cherrystone moved to intervene in Gladiator’s tax foreclosure action and redeem its tax lien. The lower court granted Cherrystone’s motion, reasoning that the $40,000 it had paid to acquire the mortgage exceeded nominal consideration. However, rather than redeem Gladiator’s tax lien, Cherrystone purchased an assignment of the lien from Gladiator. Accordingly, Cherrystone then held both the mortgage and the first tax certificate on the property.

In the meantime, ATF had initiated its own foreclosure action on its tax sale certificate. At the time ATF filed its action, Cherrystone held neither the mortgage nor the tax sale certificate it eventually purchased from Gladiator, and therefore was not named as a defendant in the action. Thus, after an order was entered in ATF’s action declaring the amount required to redeem ATF’s lien, Cherrystone moved to intervene and to be permitted to redeem the lien. Again the trial court granted Cherrystone’s motion, reasoning that it had paid more than nominal consideration for the redeemable interests it had acquired in the property.

The Appellate Division upheld the trial court’s ruling. In support of its decision, the Court cited to a previous case in which a court had used an “under-all-the-circumstances” approach to determine whether a litigant had paid more than nominal consideration. The Appellate Division noted several factors that should be considered in applying such an approach, including: (1) the amount paid for the property as compared to the market price at the time; (2) any windfall profit realized by a third party; and (3) the prior existence of financing arrangements. Taking the same approach, the Court concluded that Cherrystone had timely intervened in the matter and that it had a redeemable interest in the property for which it had paid more than nominal consideration.

In light of this decision, third party investors should note that courts will likely allow them to intervene in a foreclosure action, as long as they do so in a timely manner and have paid more than nominal consideration for their interest in the property.

Comments/Questions: ljm@gdnlaw.com

© 2008 Nissenbaum Law Group, LLC

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Good News for First Time Homebuyers

As part of the recently enacted “Housing and Economic Recovery Act of 2008,” Congress has created a temporary income tax credit to provide incentives for individuals who purchase new homes. Essentially, under the new law, a first-time homebuyer is entitled to a credit of 10% of the cost of the purchased home up to a maximum amount of $7500.00. This credit applies to the homebuyer’s tax return for the year following the closing. The homeowner is then required to pay the tax credit back in equal installments for following 15 years.

Under the newly enacted law, the term “first time homebuyer” is broadly defined as any individual who has not owned a primary house at any time during the previous three years. Moreover, individuals whose Form 1040 filing status is “single” are eligible for the tax credit if their income is no more than $75,000.00, and individuals who file jointly may qualify if they have a combined income of no more than $150,000.00.

In addition, the new law increases the length of time a lender must wait before starting a foreclosure action against a veteran returning from service from three months to nine months. It also provides returning veterans with a year of relief from mortgage rate increases. Further, the new law requires lenders to inform borrowers of the maximum monthly payments if their loans were to reach the highest interest rate level possible.

The provisions of the new law illustrate some of the rapid changes occurring in the housing market today as the government responds in the wake of the subprime mortgage crisis. Individuals looking to purchase homes should keep themselves informed of these ongoing changes in the law in order to take full advantage of any new developments that could potentially provide relief.

Comments/Questions: ljm@gdnlaw.com
© 2008 Nissenbaum Law Group, LLC

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New Jersey Governor Signs “Save New Jersey Homes Act of 2008” Into Law

On September 15, 2008, the Governor of New Jersey enacted the “Save New Jersey Homes Act of 2008,” a law designed to protect homeowners threatened by foreclosure in the wake of the subprime mortgage crisis. As discussed in our previous post, Proposed New Jersey Act to Protect Against Foreclosure Passes Both Houses, the new law allows for eligible borrowers to continue to pay introductory rates on their mortgages for a period of three years before facing an interest rate reset. These homeowners are still required to ultimately pay off the interest deferred during the extension period. However, the law provides them with a reasonable period of time to continue to make payments on their mortgages; hopefully avoiding foreclosure while searching for an alternative housing solution. The law also requires financial institutions to provide qualified homeowners with written notice of an impending interest rate reset both 60 and 30 days prior to the expiration of the introductory rate.

The law should provide some much-needed relief to homeowners in New Jersey. The State has been documented as having one of the highest foreclosure rates in the nation, particularly during the past year.

Comments/Questions: ljm@gdnlaw.com

© 2008 Nissenbaum Law Group, LLC

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Rights of Holders of Unsold Shares in a Cooperative

New York Caselaw: Foreclosure of a Co-op: In Sassi-Lehner v. Charlton Tenants Corp., the New York Appellate Division evaluated whether or not the individuals who had obtained stock in a cooperative that had been originally obtained through a foreclosure were entitled to rights as holders of “unsold shares” of the cooperative. Specifically, one unit of a cooperative was not sold during the initial conversion of the property. The sponsor of the “unsold shares” then sold his rights to another individual. That individual defaulted and the shares and proprietary lease were sold at a foreclosure sale. The plaintiffs’ parents purchased the shares and proprietary lease at the sale and the rights transferred to the plaintiffs’ upon their parents’ death. The question for the Court was whether or not the rights transferred were those of a traditional cooperative owner, or whether they maintained the characterization as “unsold shares.” Here, the Court held that they did not maintain the character of “unsold shares.”

In a cooperative housing corporation, “unsold shares” generally refer to those shares of stock that have not been purchased for residential purposes. For example, in Sassi, the stock was originally characterized as “unsold shares” because when the building was converted to a cooperative, a particular non-purchasing tenant did not vacate the apartment because the apartment was rent stabilized. In that scenario, the shares that represented the rented portion of the property were unsold shares. Unsold shares are generally held by a sponsor until they can be sold. However, according to the cooperative’s governing documents, when the shares were subsequently sold to an individual and/or entity for investment purposes, these shares maintained their identity as unsold shares. It is not until the sponsor himself or a subsequent purchaser resided in the apartment that the shares lost their status as unsold shares.

A holder of unsold shares of stock is often given preferable treatment in comparison to holders of sold shares. For instance, the cooperative board generally must give approval when an owner seeks to sell his shares or sublet his apartment. Holders of unsold shares do not need to obtain board approval to sell or sublet the apartment. Holders of unsold shares are also given differential treatment in other ways as may be set forth in the cooperative Offering Plan or proprietary lease.

Where a cooperative has many holders of unsold shares of stock, it could very well defeat the essence of a cooperative because a large number of individuals have broad discretion to do what they please with their unsold shares in comparison to the holders of sold shares of stock who are confined by the restrictions set forth in the offering plan or proprietary lease.

The Court indicated that a question of whether or not the transferred interest maintains its characterization of “unsold share” shall be governed by the cooperative’s governing documents. For instance, in Sassi, rules relating to “unsold shares” were set forth in the offering plan as well as the proprietary lease. The Court noted that the documents specifically stated that “unsold shares retain their character as such (regardless of transfer) until (a) such shares become the property of a purchaser for bona fide occupancy . . . , or (2) the holder of such shares (or a member of his family) becomes a bona fide occupant of the apartment.” Sassi-Lehner v. Charlton Tenants Corp., 2008 WL 3288075 (1st Dept. 2008). However, in further review of the documents, the Court noted that the “regardless of transfer” language could only be applied to those transfers effected by “individuals produced by the [s]ponsor pursuant to the [o]ffering [p]lan.” Id. Accordingly, because the plaintiffs had obtained the shares from their parents who purchased the stock in a foreclosure sale, they were purchased from someone who was not designated by the sponsor. Accordingly, the Court held that the plaintiffs did not have the added benefits as holders of “unsold shares.”

Comments/Questions: ljm@gdnlaw.com

© 2008 Nissenbaum Law Group, LLC

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Proposed New Jersey Act to Protect Against Foreclosure Passes Both Houses

Proposed Legislation: A bill (A-2780) which would extend foreclosure protection to thousands of New Jersey homeowners has passed both Houses, and now only awaits approval by the Governor to become official state law. The “Save New Jersey Homes Act of 2008” would offer direct aid to borrowers caught up in the growing national mortgage crisis by extending the period for repayment of introductory rate mortgages on residential property under certain circumstances.

Specifically, under the legislation, homeowners with introductory rate mortgages would be afforded the opportunity to continue their payments at the much lower pre-reset rate for up to three years before facing an interest rate reset. In addition, lenders would be required to provide qualified homeowners with written notice of an impending interest rate reset, both 60 days and 30 days before the introductory rate is set to expire. This notice must disclose, in plain language, the following information:

• The current interest rate under the terms of the introductory rate mortgage;
• The date on which the interest rate resets from a fixed introductory rate to a variable rate;
• An explanation of how the reset rate and monthly payments would be determined;
• An estimate of the monthly payment under the reset rate and the assumptions on which that estimate is based;
• A list of alternatives the borrower may pursue prior to the date of the reset, including any refinancing or renegotiation terms offered by the lender;
• An explanation of the borrower’s right to obtain an introductory rate extension and the procedure for obtaining such an extension; and
• A certificate of extension form to be completed by the borrower in order to obtain an introductory rate extension.

If the bill is signed into law by the Governor, New Jersey would become the first state to take such an approach. The proposed legislation would to provide borrowers with a reasonable window to find an alternative housing solution while continuing to make payments on their mortgages and therefore hopefully avoid foreclosure. At the same time, the measure benefits mortgage lenders in that they would continue to receive monthly revenue while avoiding the expense of having to own and maintain foreclosed properties. Moreover, allowing borrowers who face foreclosure to remain in their homes would also provide some administrative relief to the municipalities in which those homes are located, by sparing them cost of maintaining abandoned and unused properties.

NOTE: As of the date of this entry, the “Save New Jersey Homes Act of 2008” had not yet been signed into law.

Comments/Questions: ljm@gdnlaw.com

© 2008 Nissenbaum Law Group, LLC

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Litigating the Risks Involved In Investing In Subprime Mortgage Trusts

Commentary: In the past ten years, the amount of subprime mortgages provided to borrowers has increased dramatically. Generally, subprime mortgages are provided to those borrowers who have a low credit rating. The term “subprime” means that from a credit perspective, these are less than ideal debtors who will not qualify for the prime interest rate. Because the risk to the creditor is higher, the interest rate and penalties associated with subprime mortgages will also generally be higher. Mortgage lenders who place the loan usually assign it to another institution, such as Freddie Mac or Fannie Mae. Often, the mortgages are then collected into an investment pool, shares of which will then be offered in the public and private markets. It has now become public knowledge that many of the subprime mortgages were created with documentation concerning the borrower that was either faulty or outright fraudulent.

This means enhanced risk for those who invested in those pools. Simply put, mortgage backed investment pools are collapsing at record rates. Many investors had no idea that there were such serious risks involved in purchasing shares of a pool comprised of subprime mortgages. As more subprime mortgages are defaulting, investors are frequently turning to the Courts for redress.

So, where is the potential lawsuit? There are many approaches, but the most basic is this: a claim of breach of fiduciary duty against the trustees or underwriters of the pool. Think of a situation where false information and/or representations are made with respect to a particular trust of subprime mortgages. One could contemplate bringing a claim against the trustee (the individual and/or entity who manages the trust) and/or the underwriter (the individual and/or entity who markets the shares to the public). It is doubtful that these participants would be able to raise the business judgment rule defense. Under that defense, courts will generally refrain from reviewing the actions of those who control and manage a company, provided that such individuals act in good faith and with a reasonable belief their actions are in the bests interests of the company. However, when there is an allegation that the directors violated their duty of care, courts will typically closely examine the actions of those directors.

Accordingly, the most direct approach to seeking redress for a fraudulent mortgage backed investment pool will likely involve on some level a claim of breach of fiduciary duty against the trustees or underwriters of the pool.

Comments/Questions: ljm@gdnlaw.com

© 2008 Nissenbaum Law Group, LLC

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New Jersey Legislature Contemplates Setting Statute of Limitations for Residential Foreclosure Actions

Proposed Legislation: Currently pending in the New Jersey Legislature is bill A2263.  This bill seeks to codify previous caselaw and to amend the Fair Foreclusure Act to delineate the appropriate statute of limitations for lenders to institute residential mortgage foreclosures.  It provides that an action must be commenced upon the earlier of: (a) six years from the date that the last payment under the mortgage was supposed to have been made; or (b) twenty years from the date that the debtor defaulted on the mortgage obligations, if he has not properly cured that default. 

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New York Court Refuses Foreclosure Action Based on Improper Assignment

New York Caselaw:  In an unpublished opinion, the Kings County Supreme Court recently held that Wells Fargo could not proceed to foreclose on certain real property, based on the fact that it lacked standing to bring such an action.  The Court noted that "a 'foreclosure of a mortgage may not be brought by one who has no title to it and absent transfer of the debt, the assignment of the mortgage is a nullity.'"  In the instant case, Wells Fargo was seeking to foreclose on property based on a mortgage originally entered into by Argent Mortgage Company, LLC.  Wells Fargo apparently asserted that Argent had assigned that mortgage to Ameriquest Mortgage Company who then had assigned it to Wells Fargo.  The Court determined that these assignments were invalid, and that Wells Fargo therefore had no standing to pursue the foreclosure.  This determination was based on a few factors.  First, was that the assignments had not been recorded for more than fourteen months, and once recorded, they were recorded at the same time.  The Court also noted that the assignments were defective because they failed to include the required corporate resolution.   In addition, the Court noted that both assignments listed the same individual as the "agent," but both lacked a power of attorney showing that the individual had been granted the requisite authority to act on the companies'  behalfs. 

This case emphasizes the importance of adhering to corporate governance procedures and ensuring that all transactions are properly "papered" in accordance with state law.  It also demonstrates a valuable defense to a foreclosure action:  we strongly recommend that all of the recorded documents relating to the subject mortgage be scrupulously reviewed to ensure that they properly meet the law's requirements.

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New Jersey Appellate Court Holds that Foreclosure May Proceed Based on Defendant's Failure to Timely Respond

New Jersey Caselaw:  The New Jersey Appellate Division recently upheld the foreclosure of real property located in Phillipsburg, New Jersey.  The foreclosure was brought based on the owner's failure to pay property taxes.  The total unpaid taxes amounted to $3,281.04.  The City had placed a lien on the property, and when they remained unpaid, the City then held a tax sale to recoup the amount owed.  Thereafter, the tax sale certificate was sold, and a future purchaser of that certificate proceeded to commence foreclosure action to collect on the certificate.  Notably, the foreclosure action was commenced almost ten years after the accrual of the taxes for which the certificate was based. An order was entered, and the defendant then arrived to try to pay the balance at the last hour.  However, when he did so, he tried to pay with checks that were stale and a certified check that was in an improper amount. 

Over a year later the property was foreclosed upon and title was transferred pursuant to a default judgment.  The defendant tried to vacate that judgment even though (a) certain time periods to reconsider part of the matter had passed and (b) there did not appear to be a good basis to reconsider the balance of the claim. Therefore, the Court refused to vacate the judgment, and the foreclosure stood.  This decision appears to be based primarily on the fact that the defendant was well aware of the action and had proper opportunity to address it prior to the judgment being entered, and prior to the property being sold to a new bona fide purchaser.  The lesson here is clear:  you cannot delay or otherwise ignore a foreclosure proceeding.  If you do so, you can waive your rights.  Once that has occurred, you may not be able to go back and "fix it."  It is critical that you respond quickly and properly to a threatened foreclosure action, and to properly answer any court documents.

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