One of the most troubling aspects of the residential real estate market as it has evolved in recent years is the manner in which the foreclosure process has effectively shut out local communities without the means to purchase distressed properties. Many of these homes and vacant lots have been snatched up by private equity funds and banks that aggregate an enormous portfolio of acquisitions in neighborhoods to which they are not otherwise connected. This is a particular problem in New Jersey, given that it is one of the top states in the nation in terms of sheer volume of foreclosure matters.
The Community Wealth Preservation Program N.J.S.A. 2A:50-64 et seq. is a means of preserving generational wealth in communities that have traditionally suffered economic insecurity. The need has been compounded by the fact that New Jersey is one of the top three states in the country in terms of annual number of foreclosures.
The following are five frequently asked questions (FAQ) related to this new law.
FAQ #1 What is the “upset price” on a foreclosure?
A foreclosing plaintiff is typically a creditor whose loan to the property owner was not fully paid. Since that loan was secured by the property by virtue of a mortgage, the foreclosing plaintiff seeks to sell the property and use a portion of the proceeds to pay off the loan’s default balance. Accordingly, the foreclosing plaintiff will generally establish an “upset price.” The Act defines an upset price as the “minimum amount that a foreclosed-upon property shall be sold for in a sheriff’s sale as determined by the foreclosing plaintiff.” The upset price may not be increased more than three percent (3%) after it is posted online. That posting must be done at least four weeks before the foreclosure sale.
FAQ #2 What percentage of the upset price must be deposited in order for a party to be a successful bidder?
This is one of the main improvements to the foreclosure process for evening the playing field so that homeowners and those supporting them can compete for foreclosed properties with investor groups that have far more resources and enhanced access to obtaining loans. While the typical amount that must be deposited is twenty percent (20%), the Act changes that to 3.5%.
Having said that, the amount of the deposit that must ultimately be provided is still twenty percent. But only 3.5% needs to be put down initially, with the balance to reach twenty percent due within ninety business days. Presumably, this will allow local community residents or entities that do not have immediate access to a twenty percent downpayment to be given more time to raise that amount.
FAQ #3 Are there requirements to take advantage of the 3.5% initial downpayment?
There is an important requirement for having the right to utilize the procedure for providing the initially reduced downpayment: the individual must be willing to live in the residence for 84 months or longer. Additionally, they must be willing to participate in at least eight hours of homebuyer education through the United States Department of Housing and Urban Development (HUD).
FAQ #4 What happens if the ninety day period passes without the bidder providing the full twenty percent downpayment?
If the bidder does not augment the 3.5% initial downpayment to twenty percent within the required ninety day period, they not only cannot proceed to obtain full ownership of the property, but they also will forfeit the 3.5%, plus accrued interest, they did deposit. There are exceptions to this that generally relate to situations in which the failure to provide the full twenty percent was not the fault of the potential purchaser.
FAQ #5 What is the role of a nonprofit community development corporation in this process?
Obviously, there will be scenarios in which the foreclosed upon defendant is the property owner in a distressed community and does not have sufficient financing, nor other means of funding. In such event, the Act provides a second shot at preventing the property from being purchased by a person or entity that has no direct ties to the community.
Specifically, the Act provides that a nonprofit community development corporation (NCDC) has a “right of second refusal,” which allows it to step in so long as it has a contractual understanding with the person or entity that was foreclosed upon, their next of kin or tenant to provide the foreclosed defendant (and certain others related to that foreclosed defendant) with the right to remain in possession of the property. The NCDC has the same right to utilize the two-step process of providing a reduced downpayment of 3.5% initially followed up by the balance to reach twenty percent within ninety days.
The key point is that in the course of this process, the NCDC will have certain guardrails within which it must proceed. The aim is to preserve the distressed communities’ right to maintain property ownership; therefore, the NCDC must ultimately convey the property to an owner with a household income less than 120% of the median income. An alternative is to rent the property to a household that earns less than 100% of the median income.
FAQ #6 Are there ongoing restrictions that must be contained in the deed after the initial conveyance by the NCDC?
One of the more striking provisions of the Act requires the NCDC to “ensure that, in any future sale of the property…the property be subject to a renewable deed restriction, with the minimum number of affordability years being 30 years and with the option to renew, requiring any future property owner to sell the property to a household earning no more than 120% below area median income or rent the property as an affordable housing unit to a household who earns no more than 100% below area median income.”
Contact The Nissembaum Law Group With Questions
The Nissenbaum Law Group welcomes inquiries concerning legal matters relating to the New Jersey Community Wealth Preservation Program generally and the rights and responsibilities of nonprofit community development corporations in particular. Explore our Commercial Real Estate practice area and contact us with additional questions.