Foreclosure Defense Law Blog

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

Please visit our website at www.gdnlaw.com and our other blogs at www.nissenbaumlawblog.com; www.foreclosuredefenselawblog.com; www.saleofbusinesslawblog.com; www.internetdefamationlawblog.com; www.constructionlawinfoblog.com; www.filmproductionlawblog.com; www.internetlawinfoblog.com; and www.njbusinesslawblog.com