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NJ Bankruptcy Lawyer Explains Housing and Economic Recovery Act of 2008


“In an attempt” to assist Homeowners who are struggling to make mortgage payments, the president signed the Housing and Economic Recovery Act of 2008 bill into law. The law permits the FHA to insure up to $300 billion in new loans, which is estimated to assist 400,000 households. According to the U.S. Department of Housing and Urban Development, the program will be implemented on October 1, 2008 and only applies to mortgages originated on or before January 1, 2008.

The law does not require an existing mortgage company to participate in the process, which is entirely voluntary. All existing mortgage companies (servicing companies) must voluntarily consent to refinance the present loan(s) with a thirty (30) year fixed rate loan that is FHA insured. At the refinance, the entire first and second mortgage(s) must be deemed satisfied. Also, any lien holders must voluntarily agree to participate in the process and deem the lien(s) satisfied.

To participate in this process, a mortgage company(s) must consent to reduce the entire principal of the loan(s) to an amount that is 90% of the fair market value of the real estate. The new FHA insured loan would replace all other loans to a maximum of 90% of the fair market value of the property.

The booming number of foreclosures are generally due to the origination of loans based on liberal underwriting standards, the slumping housing market and the sluggish economy. Also, many individuals are unable to pay or refinance their adjustable interest rate mortgage that has sky rocketed. It appears that the majority of the homeowners who are unable to pay their mortgage payments are living in a property with little or no equity and/or paying high interest rates based on adjustable rate increases.
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Consequently, any participating mortgage company would likely be accepting as full satisfaction of the loan, substantially less than the principal amount that is due on the loan. Why would a mortgage company voluntarily agree to lose money on a loan? The mortgage company would participate if they believe that the loss associated with the program regarding the new loan is less than the amount of the loss that would be incurred by not entering the program.

According to the Department of Housing and Urban Development, the law requires the following (not a complete list):

1. Lack of capacity to pay existing mortgage;
2. New loan may not exceed 90% of the appraised value of the real property;
3. Limitation on an individual’s right to obtain a second mortgage, after the issuance of the new loan;
4. The real estate to be refinanced is a primary residence;
5.The Individual’s debt to income ratio is in excess of 31%;
6. Extinguish and eliminate any and all liens and encumbrances on the property;
7.The borrower must meet the underwriting requirements that is necessary for approval of the loan;
8. The appraisal of the property is FHA approved;
9. Upfront mortgage Insurance premium, in addition to the annual premium.

The law requires that any individual who is able to participate in the program must share the real estate equity or appreciation, in connection with a sale or refinance, based on a five year schedule. In the event of a sale or refinance, within one year of the FHA refinancing under the program, 100% of any equity is paid to the government. Any sale or refinance of the property, within two years, three years, four years, and five years, after the FHA financing under the program, requires the individual to pay 90% of the equity to the government, 80% of the equity to the government, 70% of the equity to the government, and 60% of the equity to the government, respectively. Any sale or refinance of the property, after five years after the FHA financing under the program, requires the individual to pay 50% of the equity to the government.
The mortgage companies always have the right to voluntarily resolve any mortgage default matters with the homeowner by modifying the loan or entering into a forbearance agreement. A forbearance agreement is an agreement wherein the mortgage company consents to discontinue the foreclosure action by allowing the homeowner to cure the arrears over a specific time period. Although a loan modification or forbearance agreement does not place the burdensome additional requirements on the mortgage company as the new law, I, generally, find that a mortgage company will not easily modify an existing loan or enter into a forbearance agreement. I am skeptical that the implementation of the law will assist struggling individuals, as designed, because there are numerous requirements and hurdles involving both the mortgage company and borrower, associated with the law. A mortgage company who wishes to participate may not obtain the cooperation of another entity or the process may be terminated by factors such as the failure of the individual to qualify for the loan.

Generally, an individual who has defaulted on their mortgage or is in the foreclosure process with no or limited ancillary debt issues should first exhaust all resources in an attempt to resolve these matters with the mortgage company. However, often, this is not possible. In such circumstances, one may wish to consider filing for bankruptcy protection. In general, chapter 13 bankruptcy protection forces the mortgage company to stop the foreclosure action, immediately, and allow an individual the opportunity to pay the total arrears over a six year period. Bankruptcy is a right and does not require the consent of the mortgage company. In addition to saving your house, bankruptcy may allow you to eliminate all other debt.

For more information on bankruptcy laws in New Jersey, visit

Robert Manchel is a New Jersey attorney whose practice is limited to foreclosure resolution and bankruptcy law. For more information, please contact Mr. Manchel at (856) 797-1500 or go to his web site at

Robert Manchel
The Law Offices of Robert Manchel
1 Eves Dr. Suite 111
Marlton, NJ. 08053
(856) 797-1500

© 2008 Robert Manchel
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