New Foreclosure Law Aims to Inhibit Loss of Affordable Homes in NJ

Published July 15, 2019
By Colleen O'Dea

At start of proceedings, measure would give municipalities option to buy homes that are deed-restricted for low- and moderate-income purchasers

New Jersey municipalities have a new way to preserve affordable homes — by saving those that wind up in foreclosure.

A law signed recently by Gov. Phil Murphy requires that whenever a mortgage holder starts foreclosure proceedings on a home that is deed-restricted as affordable — meaning there is a cap on its sale price and it can only be purchased by those with low or moderate incomes — the mortgage holder must notify the municipality where the home is located. This will give municipal officials the option of purchasing the home if they think it makes sense.

The loss of a low-priced home in a state with some of the highest housing costs in the nation further exacerbates New Jersey’s affordability problem. It also could hurt municipalities that had already fulfilled prior housing obligations.

Under several state Supreme Court decisions known as the Mount Laurel Doctrine, every community is required to provide for its fair share of needed low-cost housing. Some 300 municipalities have built or approved the construction of affordable homes dating back as early as the mid-1980s. A municipality must replace a lost affordable unit, according to Murphy’s conditional veto of an earlier version of the bill.

The Housing and Community Development Network of New Jersey applauded the new law, signed late last month by Murphy.

Protecting public investment
“We feel it is critical New Jersey does not lose any affordable homes,” said Nina Rainiero, a spokeswoman for the network. “Public funds were invested into making these homes affordable and this bill ensures that public investment will not be lost because of foreclosure. Plus, it provides another family an opportunity to live in a home that’s affordable.”

The new law does not go as far as its sponsors had hoped. As sent to Murphy last March, the measure would have required that the deed restriction on an affordable home remain in force even after a foreclosure and thus ensure that it could be re-sold at a below-market price and only to those whose incomes qualify.

Murphy had conditionally vetoed the measure, S-362, last May, saying that while the bill was well-intentioned, it could have made it difficult for most low-income families to buy an affordable home. That’s because Federal Housing Administration regulations expressly prohibit the use of FHA loans to purchase a property whose deed restriction will not expire with a foreclosure.

“This bill may actually hurt the very low- and moderate-income families it is intended to benefit by making it more difficult for these families to obtain a mortgage,” Murphy wrote. “This bill would effectively preclude all prospective affordable unit homeowners from accessing any FHA loan or insurance products. This is problematic because many first-time low- and moderate-income homebuyers rely on FHA loan products to secure the financing necessary to purchase their homes ... Few low- and moderate-income applicants have the capital on hand to obtain a private loan and the universe of lenders providing loans for the purchase of homes with affordability controls is relatively small.”

Additionally, Murphy continued, it would “further disadvantage” prospective purchasers of affordable units because they would no longer qualify for a financial assistance program offered by the New Jersey Housing and Mortgage Finance Agency that includes a 3.5 percent down payment option and $10,000 to cover the down payment and closing costs. The HMFA is only allowed to provide this assistance to homebuyers getting FHA loans.

Preserving municipal options
Murphy retained the provisions in the legislation requiring creditors to inform municipal officials of their intent to foreclose on a home with an affordability restriction, saying that will put the question of trying to maintain a low-cost unit in the hands of local officials.

“This notice will ensure that municipalities do not miss an opportunity to intervene in foreclosure proceedings and, where appropriate, preserve a home’s affordability controls,” Murphy wrote in the conditional veto.

In his veto message, Murphy said municipal officials may choose not to maintain as affordable some older foreclosed homes but might decide to replace them with newer units.

Currently, municipal officials are in the midst of establishing new affordable housing obligations through 2025 under a process that is taking place in the courts. The Fair Share Housing Center, which has been part of legal actions and negotiations as part of this process, says it has now reached settlements with 289 municipalities, more than half of those across the state. The number of new units that these settlements call for is unknown, but Kevin Walsh, Fair Share’s director, said they could result in the construction of 50,000 new affordable homes.

In March 2018, a Superior Court judge estimated the need for new affordable units at close to 155,000 statewide. Municipalities do not have to build low-cost units, but they do have to put in place zoning that would allow for the construction of their obligated number of affordable units.

Other provisions
The new law also mandates that a mortgage holder provide a property owner with contact information for both the municipal housing official and NJHMFA so that the owner can consult with them and try to get help to retain the home.

Sen. Ronald Rice (D-Essex), one of the primary sponsors of the law, said these efforts are necessary because the large number of foreclosures in the state has led to the loss of affordable units, given that a significant portion of properties in foreclosure are deed-restricted. He said that last year, New Jersey finalized close to 70,000 foreclosures and led the nation for those procedures.

“It’s heartbreaking to know so many families are losing their homes,” Rice said. “But the situation is compounded when affordable housing properties go into foreclosure and are then stripped of the deed restriction that ensures their affordability. In times like this, when more and more New Jersey residents are faced with difficult economic conditions, we need more affordable housing protections, not less.”