In New Jersey, homeowners who have mortgages on their primary residence, referred to as “residential mortgages,” are entitled to certain protections under the New Jersey Fair Foreclosure Act (FFA) and the New Jersey Court Rules. In a decision approved for publication on June 25, Sturdy Savings Bank v. Roberts, No. F-15764-10, 2012 N.J. Super. LEXIS 106 (Ch. Div. Feb. 21, 2012), Superior Court Judge William Todd of the Chancery Division in Cape May County determined that a property that secures a residential mortgage, but which is not currently occupied by the debtor, no longer qualifies as residential.

As a result, the court agreed with the lender’s counsel that the debtor was not entitled to the protections afforded to borrowers under the FFA with respect to a right to cure any default. The court found, however, that the lender’s obligations as to service of papers under the Court Rules still had to be met. The Chancery Division’s determination in this case is significant as it may afford lenders, which have been suffering from extensive delays in completing foreclosures in New Jersey, an opportunity to expedite the process.

In Sturdy, Mr. and Mrs. Roberts purchased the property in question in 2003, secured by a mortgage, intending to use the property as a primary residence. Thereafter, the Roberts vacated the property and left the state. The Roberts defaulted on their mortgage, and Sturdy Savings Bank, as the holder of the mortgage, initiated foreclosure proceedings. During the foreclosure process, the bank attempted to comply with the notice requirements for residential mortgages under both the FFA and the Court Rules, but ultimately was unable to obtain any contact information for the debtors. After the bank was unable to locate the Roberts, it filed a motion asking the court to declare that the mortgage was no longer a “residential mortgage,” which would remove it from various protections and notice requirements under the act and the rules.

Reviewing the FFA, and analyzing whether a mortgage secured by property that was vacated falls within the definition of a residential mortgage, the court first turned to the language of the act and the definition contained therein. The court found that the act defines a residential mortgage as:

[A] residential property, such as a house, real property or condominium, which is occupied, … by the debtor, who is a natural person, or a member of the debtor’s immediate family, as that person’s residence… provided that the real property … shall be, or is planned to be, occupied by the debtor or a member of the debtor’s immediate family as the debtor’s or member’s residence at the time the loan is originated.

Sturdy Sav. Bank, 2012 N.J. Super LEXIS 106, at *8-9 (quoting N.J.S.A. 2A:50-55).

As the court noted, if a mortgage falls under this definition, the debtor is entitled to certain protections and notices. A mortgage covered by the FFA provides debtors with additional opportunities to cure their defaults. For example, under the act, a lender must send a pre-filing notice of intention to foreclose, and the debtor has the right to cure the default before initiation of any foreclosure action by the lender. N.J.S.A. 2A:50-56. Another opportunity to cure a default occurs before final judgment. Prior to obtaining final judgment, a notice has to be served on the debtor. In response, the debtor may submit a certified statement to the lender stating that there is a reasonable likelihood that the default can be cured within 45 days. When served with such a statement, the lender must wait 46 days before submitting proofs for entry of final judgment. N.J.S.A. 2A:50-58(a)(2) – (3).

In a precedent-setting opinion, the court in Sturdy determined that a mortgage on property that is no longer occupied as the debtor’s primary residence loses the protected status of a residential mortgage. “That interpretation is consistent with a literal reading of the first sentence of the definition…. [T]he statute defines the term ‘residential mortgage’ in terms of current occupancy.” The court supported its conclusion by examining the legislative intent behind the act, holding that “[t]he Act was enacted, at least in part, to give debtors multiple opportunities to correct a defaulted mortgage and retain possession of their home.” Based on similar language in the act, the court determined that the term “residential mortgage” under the act refers only to property currently occupied by the homeowners.

In reviewing the Court Rules, however, the court concluded that, regardless of the occupancy status of a home, the provisions of R. 4:64-1(a)(2) and R. 4:64-2(d) (which require the submission of certifications or affidavits of diligent inquiry by the lender or its counsel) should be applied in cases where the property has been abandoned, requiring the lender to submit such certifications in order to proceed. The court opined that, while the act contains a definitional section that provides some explanation of what a residential mortgage is, the rules contain no such guidance. The court concluded that, although a narrow definition of “residential mortgage” was appropriate under the act, there was no reason such a narrow reading should be applied to the rules. The court explained: “One central component of the statute is the right to cure. The focus of the rules, on the other hand, is insuring the integrity of the foreclosure process.” Thus, compliance with the rules, even if the debtors have vacated the property, is required.

Ultimately, the court found no reason to believe that the judiciary had intended to restrict the term “residential mortgage” from its broadest possible application, including a situation where a home that was occupied by the debtor at the time of the mortgage is now vacant.

The implications of this case are far-reaching, as the court has effectively authorized lenders to proceed with foreclosures on abandoned property without having to comply with the FFA. Although the decision was rendered in February of 2012, it was not published until June of 2012, long after any appeal period had expired. Because the opinion was rendered on an uncontested motion, it is questionable whether the decision will be followed by other courts. Further, lenders should be wary of relying on the decision, as they may not be able to obtain a certificate of regularity from an abstract company, which could affect the ability of the lender to obtain title insurance. Hopefully, the New Jersey legislature or a higher court will address this issue in the near future and echo its holding. Clearly, if one of the goals of the act is to afford homeowners every opportunity to keep their home, those protections are not needed once they have abandoned their property. Implicit in the court’s opinion is the idea that there is no reason to delay the foreclosure to give those homeowners more time to respond to a notice of intent to foreclose or the foreclosure complaint, when those homeowners have no intention of trying to keep the property.

With foreclosures in New Jersey at a standstill last year for a variety of reasons, and lenders facing many impediments to completing foreclosures in this state, this decision provides a glimmer of hope for lenders. New Jersey now has the second highest rate of foreclosures in the country with a total of 6.6 percent of all mortgaged homes in foreclosure. (Press Release, CoreLogic, Inc., CoreLogic® Reports 63,000 completed foreclosures in May (June 29, 2012).) As the New Jersey legislature has recognized, abandoned properties in New Jersey are a large part of the problem. To address that problem, a bill was proposed, entitled the New Jersey Residential Foreclosure Transformation Act, S1566 (introduced Feb. 9, 2012). The bill would have provided for the formation of a corporation to purchase foreclosed residential properties from institutional lenders and dedicate those properties for affordable housing. As the Assembly Housing and Local Government Committee stated in its report on identical Assembly Bill No. A2168 (Mar. 5, 2012): “This bill will take advantage of the glut of vacant foreclosed residential properties and historically low interest rates in order to address one of the most intractable problems New Jersey faces, the creation and preservation of housing for individuals and families of limited means.”

Most relevant to the precedent set by the Sturdy case, the report stated that the bill would have “establish[ed] an expedited foreclosure procedure for uncontested actions to enforce residential mortgage liens against vacant and abandoned real property.” If adopted, the Superior Court would have had the authority to enter final judgment in foreclosure and direct issuance of a writ of execution for the sale of the property to be held within 45 days. However, Gov. Chris Christie vetoed the bill on June 29. Hopefully, the court’s decision in Sturdy will stand and expedite the foreclosure process for owners of property who have no desire or intent to keep ownership of that property.