On September 15, 2008, Governor Corzine signed the Save New Jersey Homes Act of 2008 (the "Act"), a sweeping piece of legislation that affects any State chartered bank, savings bank, savings and loan association or credit union or any person required to be licensed pursuant to the New Jersey Licensed Lenders Act. The Act restricts the rights of lenders to reset the rates on adjustable rate mortgages ("ARMs") in particular situations set forth in the Act. The stated goal of the Act is to prevent or lessen the flood of foreclosures that might otherwise envelope certain areas of New Jersey, hurting not only those foreclosed, but others owning homes in heavily foreclosed neighborhoods.
The Act does not affect all ARMs, but only those defined in the Act as an introductory rate mortgage. Introductory rate mortgage is defined in the Act to mean any loan secured by a mortgage on a one to four family dwelling which is the borrower's primary residence, which has (1) "an introductory payment rate option that is set at least 3 percent below the fully indexed rate at the time the loan was originated and payments may adjust by more than 3 percent at the reset date regardless of whether the variable rate index has increased" or (2) "an interest rate that may adjust by more than 2 percent at the end of the initial fixed rate period of the loan and which, notwithstanding the payment rate in effect, had an interest rate at origination of more than 200 basis points over the Freddie Mac 30-year conventional interest rate and which provides for an introductory rate that is set below the fully indexed rate at the time the loan was originated and may adjust at the reset date regardless of whether the variable rate index has increased."
While mortgage loans will need to be examined on an individual basis to see if they fall within the definition of an introductory rate mortgage, it is clear that the Act is meant to affect those loans which have become known as 'teaser rate' mortgages. Specifically exempted from the definition of introductory rate mortgages are ARMs where the initial rate is locked for a period of five years or longer and any ARM that only fits the definition of introductory rate mortgage due to the borrower's payment of bona fide discount points.
If a borrower has an introductory rate mortgage, the Act imposes disclosure requirements that must be made to the borrower. Included in these requirements is the date of the rate reset, the lender's best estimate of what the borrower's new payments would be, and a list of alternatives that may be pursued. The notification to the borrower must be in a "separate and distinct" correspondence, and provided at 60 and 30 day intervals prior to the reset date. In addition to those who are facing a rate reset, borrowers who are in foreclosure as a result of being unable to pay after a rate reset are also affected by the Act; different notification provisions may apply for those currently in foreclosure.
For borrowers who have introductory rate mortgages or who are facing foreclosure because of a rate reset, the Act allows the borrower to elect to postpone the reset by a period of three years. During the three-year postponement period, the creditor shall have the right to record a modification of mortgage to secure the repayment of the amount of interest deferred; the modification of mortgage shall have the same priority as the introductory rate mortgage. The deferred interest "shall only be due upon full repayment of the introductory rate mortgage."
The Act took effect on September 15, 2008 and will expire on January 1, 2011; these date limits apply only to the reset date, and any postponement period will continue for its full three years even if it carries past January 1, 2011. The Attorney General, after consulting with the Department of Banking and Insurance, will adopt regulations to enforce the Act, which should provide additional guidance on the implementation of the Act.
To determine how the implementation of the Act may affect any individual loan, a more detailed analysis is necessary.
