Gov. Phil Murphy conditionally vetoed a proposed overhaul of New Jersey’s home foreclosure process Thursday, rejecting the bill the Legislature sent him and asking it to rework language dealing with caps to auction prices, properties that don’t sell at sheriff’s sales and other tweaks.
“I wholeheartedly support the overarching objectives of this bill and agree that we must act to limit rapid investor-driven homebuying and provide individuals and families with a fair opportunity to compete for the purchase of homes in foreclosure,” Murphy wrote. “Nevertheless, I have serious reservations regarding the legality, practicality, and unintended consequences of several of the proposed mechanisms for achieving these goals.”
New Jersey families experiencing foreclosure, or their next of kin, would have the first shot when the property goes up for auction, or the right of first refusal at the bid price under the bill, A793/S1427, called the “Community Wealth Preservation Program.” The legislation aimed to even the playing field between large investors flipping foreclosed properties on the one side, and lower-income bidders and community nonprofits preserving affordable housing on the other.
In the largest change, Murphy struck out a section of the bill that said the upset price — or minimum price accepted by a bank — must be capped at no higher than 50% of the outstanding mortgage, interest, fees or other costs owed. The cap was meant to be a principal rate reduction, or decrease in what is owed on the mortgage, something offered to property flippers and less often to homeowners or nonprofits, said Assemblywoman Britnee Timberlake, D-Essex, the bill’s sponsor.
The New Jersey Bankers Association worried the provision could be exploited, with borrowers purposefully defaulting on their mortgages to have a family member or next of kin bid on the home for half of what they owe.
“These provisions may operate to force lenders to take large losses on mortgages in default even when the market would enable them to recoup most or all of their investment,” Murphy wrote. “In addition to raising legitimate constitutional concerns, such a system could also harm borrowers by restricting access to credit and mortgages in New Jersey, as lenders would be forced to factor these potential losses into their lending decisions.”
Murphy’s move will disappoint supporters of the bill: More than 100 housing advocates and community development organizations signed a letter in August urging him to sign the bill into law as written in order to close the racial wealth gap and keep homes affordable and locally-owned.
“We are very disappointed with the governor’s conditional veto of this bill, which is intended to advance equity in foreclosures and help close NJ’s racial wealth gap,” said Staci Berger, president and CEO of the Housing and Community Development Network of New Jersey. “We look forward to working together to address the concerns raised in the conditional veto without any further delay so that New Jersey residents and community organizations can protect properties in foreclosure and preserve generational, neighborhood wealth.”
Michael Affuso, head of the New Jersey Bankers Association, said the group “appreciates the changes and most of our fears have been allayed.”
In a conditional veto, a governor suggests amendments to a bill, and the Legislature can accept the changes with a simple majority vote, or override the veto — to keep the original language — with 27 votes in the Senate and 54 votes in the Assembly. The bill did not garner those thresholds when it passed both chambers with a 22-15 vote in the Senate and a 46-30 vote in the Assembly.
The bill gives a community development group or nonprofit the second right of refusal, or second shot at the bid price, if a distressed homeowner can’t secure financing. In that case, the housing nonprofit would be required to rent or sell the property to a low-income family at an affordable price. If a community nonprofit wins the bid and intends to sell the property, the house must include a 30-year deed restriction that keeps the sale price affordable for low-income families to live in.
Currently, a winning bidder at a sheriff’s sale must immediately pay a deposit of 20% of the property purchase price in cash or a cashier’s check to the sheriff. The legislation seeks to help lower-income families who don’t possess that amount of cash on hand by lowering that deposit amount to 3.5% for those intending to live in the home for at least seven years, and giving that bidder 90 business days to complete the sale, more than the currently required 30 days to put the rest of the money down.
Under the bill, bidders can buy the property using financing if they provide documentation that they were preapproved by a financial institution regulated by the state Department of Banking and Insurance and prove they have completed eight hours of homebuyer education counseling.
Murphy’s conditional veto eliminated a section that would have applied the new process to real estate-owned (REO) properties, or homes owned by a mortgage lender or investor that did not sell at a sheriff’s sale. Lenders often rehabilitate such homes and try to sell them quickly in a private sale.
“Applying procedures meant for sheriff’s sales to wholly private transactions is redundant and impractical, as the mechanisms created by the bill will have already been available to prospective buyers at the sheriff’s sale,” Murphy wrote. “Requiring private parties to repeat them would be time-consuming, costly, and difficult to enforce, while doing little to further the bill’s objectives.”
Murphy also suggested language that would require lenders to post the starting bid price online two weeks before the auction.
The bill would fine a buyer $100,000 if he finances the bid and doesn’t live in the property for the required seven years, except in extenuating circumstances: if the bidder or a close family member died or became disabled, the bidder gets divorced or is deployed, or the home is foreclosed.
Murphy added a handful of other circumstances that would allow a bidder to sell the house before living in it a full seven years: if the person loses income or has to move for his job, if their family size changes — such as having more children and needing more space — and if they need to move to care for a family member for at least six months.
The bill requires sheriffs to monitor and enforce whether people live in the home for the required period of time. Murphy’s conditional veto tweaks the process slightly, saying a county clerk or registrar of deeds can monitor the properties, and the county counsel would file a suit in court to enforce the law.
To prevent disingenuous nonprofits from popping up to take advantage of these benefits, legislators added a provision saying a nonprofit must have been created at least three years before the bill is enacted, Timberlake said. Murphy tweaked the requirement to be that a nonprofit must have formed three years before the sheriff’s sale it wants to participate in, not the law going into effect.
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