Bulletin: NJ000018

Dear Associates:

The Fair Foreclosure Act (hereinafter the "Act") becomes effective as to all residential mortgage foreclosure actions commenced on and after December 4, 1995. The primary intent of the new law is to provide an alternative method by which a foreclosing mortgagee may obtain title to the mortgaged property in a less time-consuming manner than the traditional sheriff's sale. The Act applies only to residential property (including condominiums) of one-to-four units which are the primary residence of the mortgagor(s) at the time the loan was made.

While the primary intent of the Act is to shorten the time it takes a foreclosing lender to obtain title, the Act does impose additional "consumer" protections on the lender by way of additional notices it must give to the debtor both before and during the foreclosure process. Accordingly, the Act makes certain procedural changes in the way foreclosure actions are conducted. For the most part the changes in procedure will be part of the review of the Chancery proceeding and, therefore, to the extent the review is "subcontracted" by the purchase of Chancery Abstracts, a detailed understanding of all the procedural changes may not be needed, However, the method by which title will vest in the lender changes under the Act from a deed to a judgment and must be carefully reviewed as part of the title examination.

Summary of Changes in Procedure Under the Act

1. The Act provides that thirty (30) days before accelerating the mortgage obligation and commencing a foreclosure the lender must give a very detailed specific notice to the debtor giving notice of the lender's intent to foreclose and the rights and alternatives available to the debtor. The exact requirements of the notice are specified in the Act. This notice is not required if the debtor has voluntarily surrendered the property.

2. The above notice is in addition to all other notices to which the debtor may be entitled, including the standard service of the summons and complaint in the foreclosure action.

3. The foreclosure complaint must allege that the new pre-foreclosure notice required by the Act was properly given.

4. The Act gives the debtor a new right to cure any default up to the entry of the final judgment. This means the debtor only has to bring the payments current, including charges permitted by the Act and the mortgage, in order to stop the foreclosure. Formerly, the lender had the right to "accelerate" the loan and require full payment "or redemption" after a foreclosure was commenced. The right to cure, however, under the Act is in addition to the old right of redemption of the borrower which still exists up to ten days after the sheriff's sale. The right to cure, if exercised after the date specified in the thirty (30) days notice, may only be exercised once every eighteen (18) months.

5. As noted above, the Act gives lenders an optional foreclosure procedure without sale.

The optional procedure is permitted only when:

a. The debtor has abandoned the property;

a. The debtor voluntarily surrendered the property by signing a deed in lieu; or

a. There is no equity in the property. (As defined in the Act, when the mortgage lien, taxes and judgments are equal to or greater than ninety-two (92) percent of the fair market value.)

6. If the foreclosure action is uncontested, the lender must give the debtor a "second" notice. If the lender chooses not to use the optional method, the notice must be given fourteen (14) days prior to submission of proofs for entry of foreclosure judgment. The notice must state that absent receipt by the lender of a good faith certification by the debtor that the debtor can cure within forty-five (45) days, the lender will submit proofs for entry of final judgment and upon entry of final judgment, the debtor will lose the right to cure.

If the lender chooses to use the optional method, the notice must be given fourteen (14) days prior to filing the affidavit or certification requesting an "order of redemption". The notice must advise the debtor that absent receipt by the lender of a good faith certification by the debtor that the debtor can cure within forty-five (45) days, the lender will file an affidavit or certification requesting entry of an order of redemption and that upon entry of the order of redemption, the debtor will lose the right to cure.

7. The Act prohibits the borrower from waiving any of its rights under the Act. If the debtor does not cure and an "order for redemption" is entered, the "order of redemption" or notice of the order shall be mailed to the debtor. The debtor has thirty (30) days to object to the optional procedure and request a public sale. If debtor does not object to optional procedure and request a public sale and does not redeem, the lender is entitled to a judgment debarring and foreclosing the equity of redemption and adjudging the lender by vested with a valid and indefeasible estate. A certified copy of the judgment shall be accepted for recording. The "judgment" is recorded as the vesting deed.

8. Upon entry of the judgment the lender is prohibited from seeking a deficiency judgment and the underlying debt is deemed satisfied.

Deed in Lieu

The Act also grants debtors' an additional right in deed in lieu situations. A deed in lieu of foreclosure must clearly and conspicuously provide that the debtor may rescind the conveyance within seven days.

Lis Pendens

The Act amends N.J.S.A. 2A:15-11 to extend the effective period of a lis pendens from three (3) years to five (5) years.

Underwriting Guidelines

All residential foreclosures commenced after December 4, 1995 must comply with the Act.

Where title is vested by judgment debarring and foreclosing the equity redemption, proof must be obtained that all notices required by the Act were property served.

Sheriff Sale/Adjournments

The Act also amends N.J.S.A. 2A:17-36 to limit adjournments of sheriff sales to two adjournments, not to exceed fourteen (14) days each.

Judgments/Current Address of Parties/Social Security Numbers

The Act also provides for a more efficient way of serving subordinate judgment creditors in foreclosure actions. The Act now provides that effective December 4, 1995, all judgment creditors must provide the clerk of Superior Court with their current address for the purpose of service when they are docketing their judgments. It also requires that the judgment creditor file a change of address form with the court if the creditor's address for service changes. Upon failure to notify the court of a current or a change of address for service, it is permitted that the plaintiff in the foreclosure action serve the judgment creditor by ordinary mail and certified mail at the address on the records of the clerk in the Superior Court. In addition, judgment creditors are now required to provide the debtor's social security number or the taxpayer identification, if known, when docketing the judgment.

As new judgments go on with this additional information it is going to become more important for us to verify a debtor's identity through the use of social security numbers. Therefore, the use of social security numbers should be utilized in determining the effect of similar name judgments. In order to fully utilize this new piece of information, it will be beneficial if we ask for social security numbers of sellers at the time the application is taken for the title order rather than waiting for that information at the closing table.

Form of Sheriff's Deed

The Act also provides for the use of an Uniform Sheriff's Deed after December 4, 1995. This will greatly facilitate our review of Sheriff's Deeds as they vary substantially from county to county at present. The form of the Sheriff's Deed was included in our previous memo as part of the Act. I am sure that quite shortly the new form of Sheriff's Deed will be available from legal printing companies. The Act specifically permits the attorney for the plaintiff to prepare the Sheriff's Deed in lieu of the sheriff preparing the deed.