New Jersey’s Balanced Mortgagor Protection Scheme

Mashie Rapoport
Monday, February 24, 2014

I. Introduction
        Foreclosure has deleterious effects on the families who lose their homes, as well as on the neighborhoods and communities encompassing the foreclosed homes.[1] Apart from the emotional toll of leaving a home and neighborhood,[2] a family displaced by foreclosure must immediately find new housing, an especially difficult task considering its credit has been devastated by the foreclosure and most landlords require a large cash deposit. The long term consequences borne by the family include the loss of their ability to borrow against home equity and the loss of a financial cushion in the event of unforeseen circumstances.[3]  Additionally, families living in close proximity to the foreclosed homes may bear a loss of wealth since foreclosures cause depreciation in neighboring home values.[4] Even the community encompassing the foreclosed home is affected by the foreclosure as it must bear the financial and non-financial costs of abandoned properties and the loss of tax revenue.[5]
        Because foreclosure typically imposes significant hardship on mortgagors and their communities, states have a strong interest in ensuring that the mortgagor does not experience an unjustified loss of his or her assets. Importantly, states are also interested in ensuring that the mortgagee is made whole by the foreclosure process so that the mortgagee will not be induced to restrict lending and/or charge higher interest rates to minimize loss, both to the detriment of all borrowers in the state.[6] In this light, Part II of this article will describe the problem that the typical foreclosure presents. Part III will then provide a general description of two consumer protection laws many states have enacted to prevent an unjustified loss of a foreclosed-upon mortgagor’s assets: 1) the statutory right of redemption,[7] and 2) anti-deficiency legislation.[8]  Finally, Part IV will discuss the interesting interplay of New Jersey’s version of these two laws.
II. The Problem Presented by the Foreclosure Process
        Most installment payment mortgage agreements provide for the acceleration of the entire mortgage debt upon a mortgagor’s default of a mortgage term.[9] Generally, if the mortgagor fails to timely pay the accelerated debt, the mortgagee may attempt to satisfy the debt by forcing the sale of the collateral and applying the proceeds against the indebtedness.[10]
        The foreclosure sale is intended to ensure fairness to the mortgagor.[11] It is supposed that through the application of competitive market forces, the property’s fair market value[12] will be realized. The realization of the property’s fair market value would allow any equity in the property over the outstanding mortgage debt to be returned to the mortgagor. Further, in the event the sale proceeds are insufficient to satisfy the debt, the sale price is utilized to establish the mortgagee’s deficit.[13] On the other hand, if an amount less than the property’s fair market value is realized at the sale, the mortgagor’s equity[14] may be depleted and/or the mortgagee may then obtain an inflated deficiency judgment against the foreclosed homeowner.[15]
        Although a sale of the property is utilized for its fairness and competitive nature, the reality is that even during a stable economic time foreclosure sale prices are often inadequate.[16] The inadequate foreclosure sale price is due mainly to the lack of competition the mortgagee faces at the sale.[17] There are several reasons the mortgagee is often the only bidder at the sale. First, while a third party bidder must invest new money to purchase the property, the mortgagee is allowed to bid up to the amount of the mortgagor’s debt without making any new investment of cash i.e., credit bid.[18]  Second, the mortgagee has an informational advantage over a third party purchaser.[19]  The mortgagee has already evaluated the condition of the property, its value, the neighborhood in which it is located, and its problems when it agreed to lend the money to the mortgagor, whereas the third party purchaser must invest more funds to make an informed bid.[20]
        The lack of competition at the sale allows the mortgagee to behave opportunistically.  By purchasing the property for an amount lower than the property’s fair market value, the mortgagee can obtain an artificially high deficiency judgment. If the mortgagee resells the property for market value and collects the artificially high deficiency, the mortgagee will experience a double recovery since collectively the value exceeds the mortgagor’s debt.[21] For example, Big Bank lends $200,000.00 to Mort Mortgagor to purchase a property. Mort Mortgagor defaults on his first installment payment under the mortgage agreement and the entire $200,000.00 debt becomes due and payable. If Big Bank buys the property at the foreclosure sale with a credit bid of $100,000.00, Big Bank may then pursue a deficiency judgment of $100,000.00. With the deficiency judgment obtained, Big Bank may collect the deficiency of $100,000 by levying on Mort Mortgagor’s assets, a move that will likely render Mort financially ruined. Big Bank will also sell the property for its fair market value of $200,000.00, resulting in Big Bank experiencing a windfall of $100,000.00.
        Although a mortgagee may be within its legal rights when it purchases the property for a price below market value, the sale of the property for an inadequate price allows the mortgagee to collect more than it is entitled to and unfairly harms the mortgagor. First, the mortgagor’s equity may be wiped out. And second, even if the mortgagor did not have any equity in the property, an inadequate sales price that does not satisfy the entire mortgage amount may lead to a mortgagee obtaining an inflated deficiency judgment with which it can unfairly levy on the mortgagor’s other assets to satisfy the judgment. Such inequitable potential results call for alterations to the foreclosure scheme.
III. The Remedies
        A. Anti-Deficiency Legislation
        If the foreclosure sale proceeds are insufficient to satisfy the mortgagor’s outstanding debt, the traditional rule is that the mortgagee may obtain a deficiency judgment for the difference between the foreclosure sale price and the mortgage debt.[22] Armed with a deficiency judgment, the mortgagee can levy the mortgagor’s property until the entire mortgage debt is satisfied. Although the specific nuances vary widely among the states, anti-deficiency legislation[23] generally relieves the mortgagor of personal liability for some or all of the 1) difference between the outstanding debt and the foreclosure sale price (hereinafter “non-recourse legislation”),[24] 2) or the fair market value of the property and the foreclosure sale price (hereinafter “fair value legislation”).[25]
        “Non-recourse legislation” prohibits deficiency judgments altogether. Consequently, “the homeowner is liberated from any possibility of personal liability.”[26] Depending on the statute, the prohibition may be based on whether the loan proceeds were used to buy a residence[27] or the type of foreclosure process the mortgagee utilized.[28] Comparatively, “fair value legislation” merely limits the deficiency judgment to the greater of the fair market value or the sale price. In other words, a deficiency judgment is allowed but only to the extent the debt exceeds the fair market value (if greater than the sale price) of the mortgaged property at the time of the foreclosure.  Depending on the statute, the availability of the fair value credit may depend on the status of the foreclosure sale purchaser[29] (whether the purchaser is the mortgagee or a third party) or the type of property involved.[30]
        Although this legislative remedy does not ensure an adequate price is obtained for the foreclosed property at the sale, anti-deficiency legislation decreases the harmful effects of foreclosure by reducing the number of deficiency judgments issued and by preventing the mortgagee from incurring a double recovery.[31] Another policy furthered by this legislation is that it shifts a loss in the property’s value due to a downturn in the real estate market to the mortgagee, the party believed to be better able to bear the loss.[32]  Many policymakers argue that in a housing crisis, “the lender is the more sophisticated party to the transaction, holds the tools to better predict market trends, and is not subject to personal ruin like the individual homeowner.”[33]
        A third policy furthered by this type of legislation is the placement of the risk of inadequate security on the mortgagee, thereby discouraging mortgagees from overvaluing the security and lending more money than the property justifies.[34] The mortgagee’s knowledge that it will have to rely on the collateral to satisfy the debt in event of the mortgagor’s default is intended to have “the effect of making the security satisfy a realistic share of the debt.”[35]
        There are several criticisms directed at anti-deficiency legislation and its rationales. First, it is argued that shifting the risk of a downturn in the real estate market and of inadequate collateral to the mortgagee actually harms mortgagors since the mortgagee will simply charge higher interest rates and/or reduce its lending to account for the heightened risk.[36] This harms the very people the legislation aims to protect, as well as all other borrowers in the state, perhaps even pricing some borrowers out of the market.[37]
        Second, when a third party purchases at the foreclosure sale, fair value statutes “tend to protect the mortgagor at the expense of the non-purchasing mortgagee, who receives the sale price rather than the market value for credit against the debt.”[38] The mortgagee can avoid this result by credit bidding against the third party purchaser up to the lower of mortgagor’s indebtedness or the property fair market value. Additionally, in some states, the fair value credit only applies if the mortgagee is the buyer at the foreclosure sale.[39]
        Third, in a state with non-recourse legislation, if the fair market value of the foreclosed property is less than the debt, a mortgagee is deprived of what it is entitled to under its contract with the mortgagor. The problem is illustrated in the following example: assume that Big Bank lends $200,000.00 to the Mort Mortgagor. Before even making one payment, Mort Mortgagor defaults under the mortgage. Unfortunately, at the time of default, the house is worth only $150,000.00. If the property is sold for $150,000.00 at the foreclosure sale, Big Bank is left $50,000.00 short of what it is entitled to under the contract.
        Fourth, anti-deficiency legislation does not protect a mortgagor who has equity in the property.[40] If the fair market value of the foreclosed property exceeds the mortgage debt, then the mortgagor is not entitled to a judgment for the surplus.[41] And finally, non-recourse legislation gives a homeowner a disincentive to expend effort to sell her home before she defaults (which would presumably result in a better sales price than will be obtained through a foreclosure sale) because she knows that ultimately she will not lose more than the home, and she can stay in possession during the foreclosure process.[42]
        B. The Statutory Right of Redemption
        The statutory right of redemption[43] allows a mortgagor whose property was sold in a foreclosure sale, to buy back the previously mortgaged property from a foreclosure sale purchaser, typically for the sale price and during a specified time after a valid foreclosure sale takes place.[44] Accordingly, this type of redemption is sometimes referred to as “redemption from the sale.”[45] Today, approximately twenty-nine states offer mortgagors the statutory right of redemption in some capacity.[46] As a creation of state law, the content of redemption statutes varies widely among the states that afford it to mortgagors.[47]
        The statutory right of redemption provides protection for borrowers in a couple of ways. First, it gives the mortgagor one last chance to reacquire his or her home.[48] The time provided under the statute gives the mortgagor in financial distress additional time to recover and secure the necessary financing to reclaim the property. This accommodation reflects many states’ public policy of providing special protection for the homestead.[49] Second, the availability of the statutory right of redemption encourages the mortgagee or third party purchaser to make a reasonable bid at the foreclosure sale.[50]  In other words, because there is the possibility that the right will be exercised, a bidder at the sale is encouraged to bid high to protect their purchase from loss by redemption. Moreover, the higher bids generated at the sale result in a lesser likelihood of the obtainment of an inflated deficiency judgment and the attendant double recovery by the mortgagee.
        However, many criticisms are directed at the statutory right of redemption. First, it is argued that the availability of the statutory right of redemption, a device chiefly created to result in adequate bidding, actually discourages bidding by third parties at the foreclosure sale, which likely results in lower sale prices.[51] One reason for the low number of third party bidders at the foreclosure sale is the defeasible nature of the title purchased at the sale.[52]Even if the prospective purchaser is willing to purchase the property notwithstanding the lack of finality attached to the purchase, the third party will likely lower its bidding price to account for the risk of redemption, thus frustrating the goal of raising the bidding price. 
        Second, in many states, the defaulting mortgagor may remain in the home during the redemption period,[53] a fact which many scholars argue results in fewer bidders and/or lower bidding. For example, prospective bidders desiring immediate possession will not bid. Even if the lack of immediate possession is not an issue, a bidder may reduce the bid to reflect the concern that the mortgagor, viewing his dispossession of the property as inevitable, may neglect or even destroy the property at the new owner’s expense. Third, some scholars argue that the mortgagor’s awareness that he can redeem the property after the foreclosure sale will make him less responsible in making mortgage payments.[54] Fourth, referencing the problems attributed to the right, commentaries have pointed to the rare usage of the statutory right of redemption.[55] Therefore, it is speculative whether the right’s availability is justified.[56]
        Fifth and finally, a bidder may lower his bid to reflect the cost of delaying maximization of the property’s value, either through resale or further investment in the property, until the redemption period expires. In most states, the foreclosure sale purchaser will not be reimbursed by the redeemer for the investment. Likewise, resale of the property by the foreclosure sale purchaser is complicated because of the uncertain status of the title offered for sale.[57]   To illustrate, consider that Fannie Mae and Freddie Mac are keeping homes off the market until the redemption period expires.[58]
IV. The Garden State’s Mortgagor Protection Scheme
        Foreclosed-upon mortgagors in New Jersey have the benefit of several consumer protection laws,[59]  including the statutory right of redemption[60] and the fair value form of anti-deficiency legislation.[61] New Jersey’s statutory right of redemption and fair value statute account for the positive and negative features of the typical form that these laws take. Employing the former and minimizing the latter, the statutes set a fair course upon which the down-on-his-luck mortgagor can proceed while protecting the interests of all borrowers in the state.
        In New Jersey, once a foreclosure judgment is entered,[62] a mortgagee has only three months[63] to file a separate action[64] for a deficiency.[65]  Once the deficiency action is instituted, the defendant has the right to dispute the amount of deficiency in his answer and to demonstrate the fair market value of the property at the time of foreclosure sale.[66] This statutory mechanism provides an opportunity for the mortgagor to show that the property sold for an inadequate price, that there were defects in the sale, or that the property was later sold by the mortgagee for a profit.  The mortgagor has this right regardless of whether the purchaser at the sale was the mortgagee or a third party.[67] If the mortgagor successfully demonstrates the fair market value[68] and it is a value higher than the amount obtained at the sale, the court will credit the mortgagor with the difference between the indebtedness and fair value of real property regardless of the foreclosure sale price.[69] The policy underlying New Jersey’s fair value credit is that “mortgagors should not be personally liable for more than difference between [fair market value] and the mortgage debt.”[70]
        If the mortgagor does not answer the complaint and a deficiency judgment on the mortgage note or bond is entered,[71] the mortgagor[72] has six months to bring an action to redeem his or her property.[73]  Unlike most “statutory jurisdictions” which set the price of redemption at the foreclosure sale price,[74] the cost of redeeming in New Jersey is:

the full amount of money for which the judgment in the foreclosure action[75] was granted, with interest to be computed from the date of the judgment in the foreclosure action, and all costs of the action for deficiency, and all reasonable expenses which the purchaser may have incurred in the meantime for taxes, assessments, other prior liens, necessary repairs upon the premises and interest on same, after deducting from the amount thereof, such income as the holder may have derived from the possession of the premises, either as rent or otherwise. [76]

Upon redemption under the statute, the foreclosure sale purchaser loses all title to the property.[77]
        New Jersey’s statutory right of redemption is essentially the equitable right of redemption which the defendant had prior to the foreclosure.[78] The cost is slightly higher since the debtor must pay the full debt amount plus interest and expenses to the foreclosure sale purchaser to account for the period after the purchase at the foreclosure sale.[79] The legislative purpose underlying New Jersey’s statutory right of redemption is to give the person liable for a deficiency, who may not have had notice of the foreclosure proceedings,[80]  a chance to exercise what is essentially the equitable right of redemption upon being given notice in the deficiency action.[81] Notably, the mortgagor’s right to redeem terminates if the person liable for the deficiency answers in the deficiency action and disputes the amount of deficiency.[82] This is because, as indicated above, the defendant is not entitled to receive anything more than the fair market value of the property, and this is precisely what the mortgagor would receive if he or she had redeemed and ultimately obtained the property.[83]
        In New Jersey, a mortgagor facing a deficiency judgment has a choice of remedies available to him or her. The mortgagor can walk away from the home and remain liable for a value not exceeding the difference between the home’s fair market value and the outstanding debt, or he or she can redeem the home for the same price. Importantly, exercise by the mortgagor of either of these remedies ensures that the mortgagor will not suffer an unjustified loss of his or her assets by effectively precluding the possibility of a double recovery.  In other words, by answering in the deficiency suit, the mortgagor can walk away from the property, surrendering its value and satisfying that portion of the debt, thereby remaining liable only for the difference between the fair market value of the surrendered property and the indebtedness. On the other hand, by allowing a deficiency judgment to be entered against him or her, he can repay the whole indebtedness, representing the value of the property plus what would be the deficiency, and regain his property. The latter option is invaluable to the mortgagor who lost his or her home due to temporary distress, for example a sudden loss of income, especially if the foreclosure sale price resulted in the depletion of the mortgagor’s equity. In that case, exercising the statutory right of redemption allows the mortgagor to regain his or her home and recapture the equity.
        Additionally, in New Jersey, the mortgagee is made whole in the foreclosure process, either through resale of the property and obtainment of the deficiency, or by acceptance of the full indebtedness upon redemption under the statute. This respects the mortgagee’s right under its contract with the mortgagor, and benefits all borrowers since both outcomes “lower the risk of not recovering the loan amount, [and therefore,] less risk needs to be compensated for in the interest rate.”[84]
        Further, since the price of redemption is the full judgment amount (i.e., the entire indebtedness) plus costs and interest,[85] there is a lesser likelihood of the mortgagor redeeming in New Jersey compared to the typical state which allows redemption upon payment of the foreclosure sale price. Although a foreclosure sale purchaser in the typical state holds uncertain title,[86] the expense of redemption in New Jersey renders its occurrence less likely and thus bidders have less risk to account for in making their bids at the foreclosure sale which should manifest in higher bidding prices.
        Interestingly, the uncertainty that necessarily surrounds the availability of New Jersey’s statutory right of redemption—due to the prerequisite of the mortgagee instituting a deficiency action—discourages reliance on the availability of the right. Thus, the criticism that the existence of the statutory right of redemption will cause a mortgagor to not expend adequate effort to make payments in reliance on the option of redeeming later is less relevant. In New Jersey, the mortgagor who fails to make payments incurs the risk that he or she will lose the home for good since the mortgagor can never be certain the mortgagee will institute a deficiency action.
        Finally, New Jersey’s legislative scheme accounts for the foreclosure sale purchaser’s need to market and sell the property. If the mortgagee plans to file a deficiency action, it is required to file[87] a notice of proposed action[88]with the clerk of the county where the mortgaged property is located.[89] Prospective purchasers are thereby advised by the public record that the property may be redeemed if a judgment is entered against the foreclosed-upon mortgagor.[90]  Because the mortgagee has only three months to file a deficiency action from the date of the foreclosure judgment, “if a title search does not reveal the filing of such a notice within 3 months from the date of sale or confirmation where required, there is no need to worry about entry of a subsequent deficiency judgment and resulting right of redemption.”[91]
V. Conclusion
        There are many arguments made with respect to the desirability and usefulness of statutory redemption rights and anti-deficiency legislation. Although the goal of these laws is to provide consumer protection,  many scholars and policymakers criticize these laws as creating costs that are passed on to all borrowers without generating significant benefits to the foreclosed-upon mortgagor.[92] Still, it is this author’s position that New Jersey’s consumer protection scheme, which incorporates both the statutory right of redemption and the fair value credit, fairly balances the interests of both the mortgagor and mortgagee.

 

* Mashie Rapoport is a May 2014 J.D. candidate at Rutgers School of Law – Camden.

[1] See CTR. FOR RESPONSIBLE LENDING, 2013 UPDATE: THE SPILLOVER EFFECTS OF FORECLOSURES 1 (2013), available at http://www.responsiblelending.org/mortgage-lending/research-analysis/201....

[2] See generally Margaret Jane Radin, Property and Personhood, 34 STAN. L. REV. 957 (1982) (arguing that property rights in a home are intertwined with an individual’s sense of personhood and thus deserve special protection).

[3] CTR. FOR RESPONSIBLE LENDING, supra note 1, at 2.

[4] Id. at 1 (“On average, families affected by nearby foreclosures have already lost or will lose $23,150 in household wealth, representing 8.8 percent of their home value.”).

[5] Id. at 2.

[6] See Ronald Goldstein, Reforming the Residential Mortgage Foreclosure Process, 97 COM. L.J. 255, 262 (1992). 

[7] See, e.g., ALA. CODE § 6-5-248(a) (West, Westlaw through the end of the 2013 Regular Session); ALASKA STAT. ANN. § 09.35.250 (West, Westlaw through legislation passed during the 2013 1st Reg. Sess. of the 28th Legislature); COLO. REV. STAT. ANN. §§ 38-38-301 to -306 (West, Westlaw through the First Regular Session of the Sixty-Ninth General Assembly (2013)); 735 ILL. COMP. STAT. 5/15-1603 to 1604 (West, Westlaw through P.A. 98-626 of the 2013 Reg. Sess.); IOWA CODE ANN. §§ 628.28 to 628.3 (West, Westlaw current with legislation from the 2013 Reg.Sess.); KAN. STAT. ANN. § 60-2414 (West, Westlaw through 2013 regular and special session); ME. REV. STAT. ANN. tit. 14, § 6322 (West, Westlaw through the 2013 First Regular Session and First Special Session of the 126th Legislature); MICH. COMP. LAWS § 600.3140 (West, Westlaw through P.A. 2013, No. 277 (end), of the 2013 Regular Session, 97th Legislature); Minn. Stat. § 580.23 (West, Westlaw though the end of the 2013 First Special Session); MO. ANN. STAT. §§ 443.400 to 443.430 (West, Westlaw through the end of the 2013 First Extraordinary Session of the 97th General Assembly); N.M. STAT. ANN. §§ 39-5-17 to -21 (West, Westlaw through Ch. 228 (end) of the First Regular Session of the 51st Legislature (2013)); S.D. CODIFIED LAWS §§ 21-52-1 to -32 (West, Westlaw through the 2013 Regular Session and Supreme Court Rule 13-17); UTAH CODE ANN. § 78B-6-906 (West, Westlaw through 2013 Second Special Session); WASH. REV. CODE ANN. §§ 6.23.010 to .120 (West, Westlaw current with all 2013 Legislation).

[8] See, e.g., CONN. GEN. STAT. § 49-14 (West, Westlaw through the 2014 Supplement to the General Statutes of Connecticut, Revision of 1958); Ga. CODE ANN. § 44-14-161(b) (West, Westlaw through the end of the 2013 Regular Session); IDAHO CODE ANN. § 6-108 (West, Westlaw through the end of the 2013 First Regular Session of the 62nd Legislature); ME. REV. STAT. ANN. tit. 14, § 6324 (West, Westlaw current with legislation through the 2013 First Regular Session and First Special Session of the 126th Legislature); N.J. STAT. ANN. §§ 2A:50-3 to -4 (West, Westlaw current with laws effective through L.2013, c. 222 and J.R. No. 13.); N.Y. REAL PROP. LAW § 1371 (West, Westlaw through L.2014, chapters 1 to 2); OKLA. STAT. tit. 12, § 686 (West, Westlaw through Chapter 23 (End) of the First Extraordinary Session of the 54th Legislature (2013)); UTAH CODE ANN. § 57-1-32 (West, Westlaw through 2013 Second Special Session).

[9] GRANT S. NELSON & DALE A. WHITMAN, REAL ESTATE FINANCE LAW § 7.6, at 580 (5th ed. 2007).

[10] Note that Connecticut allows primarily the usage of “strict foreclosure” pursuant to which no sale of the mortgaged property takes place. CONN. GEN. STAT. ANN. § 49-15 (West, Westlaw through the 2014 Supplement to the General Statutes of Connecticut, Revision of 1958); see also Brooklyn Sav. Bank v. Frimbereger, 617 A.2d 462 (Conn. App. Ct. 1992); Abascus Mortg. Ins. Co. v. Whitewood Hills Dev. Corp., 479 A.2d 1231 (Conn. App. Ct. 1984); Maresca v. Allen, 436 A.2d 14 (Conn. 1980); 6-51 DEBTOR-CREDITOR LAW § 51.05[1] & n.9 (Theodore Eisenberg ed. 2014) (noting that Connecticut is the only state with “strict foreclosure” as a “first resort”). Vermont’s primary “strict foreclosure” statute cited by the treatise was recently repealed and replaced via 2012 Vermont Laws No. 102, which limits the circumstances under which the procedure can be used. VT. STAT. ANN. tit. 12, § 4941 (West, Westlaw through the laws of the First Session of the 2013-2014 Vermont General Assembly (2013)); Bank of N.Y. Mellon v. Campbell, Nos. 229-4-10 to -12 Wrcv, 2013 WL 6631044, at *1 n.2, *8 (Vt. Super. Ct. Dec. 2, 2013) (“Strict foreclosure is also available for all properties if a plaintiff proves that there is no equity in the property.”).

[11] See generally Carteret Sav. & Loan Ass'n. v. Davis, 521 A.2d 831, 835 (N.J. 1987); Goldstein, supra note 6.

[12] Fair market value is “the price the property will bring when offered for sale by one who desires to sell, but is not obliged to sell, and is brought [sic] by one who desires to buy but is under no necessity of buying.” Greg Weselka, Note, Real Property Deficiency Judgments – Texas Enacts Fair Market Value Statutes – TEX. PROP. CODE ANN. §§ 51.003-.005 (Vernon Supp. 1992), 23 TEX. TECH. L. REV. 871, 897 (1992).

[13] Carteret Sav. & Loan, 521 A.2d at 835. (“The theory behind the public sale of mortgaged premises is to afford special protection to the debtor-owner, first by insuring the return of any equity represented by the surplus of the sale over the mortgage debt, and second by effectively establishing the fair market value of the mortgaged premises to avoid oppressively high deficiency judgments.” (citation omitted)).

[14] Equity is defined as “the extent to which the fair market value of the property exceeds the amount of debt secured by the property.” Debra Pogrund Stark, Facing the Facts: An Empirical Study of the Fairness and Efficiency of Foreclosures and a Proposal for Reform, 30 U. MICH. J.L. REFORM 639, 640 n.1 (1997).

[15] See Carteret Sav. & Loan, 521 A.2d at 834-35.

[16] Michael H. Schill, An Economic Analysis of Mortgagor Protection Laws, 77 VA. L. REV. 489, 493 (1991); Goldstein, supra note 6, at 257.

[17] See Steven Wechsler, Through the Looking Glass: Foreclosure by Sale as De Facto Strict Foreclosure—An Empirical Study of Mortgage Foreclosure and Subsequent Resale, 70 CORNELL L.REV. 850, 875 (1985).

[18]   See, e.g., United States v. Stadium Apartments, Inc., 425 F.2d 358, 368 (9th Cir. 1970) (Ely, J., dissenting).

[19] Goldstein, supra note 6, at 258.

[20] Id. 

[21] Robert M. Washburn, The Judicial and Legislative Response to Price Inadequacy in Mortgage Foreclosure Sales, 53 S. CAL. L. REV. 843, 889 (1980).

[22] See Restatement (Third) of Property: Mortgages § 8.4(a) (1997). Many states require the mortgagee seeking a deficiency judgment to comply with strict procedural requirements. See, e.g., N.J. STAT. ANN. § 2A:50-2 (West, Westlaw current with laws effective through L.2013, c. 222 and J.R. No. 13) (requiring the deficiency judgment be sought within three months after foreclosure).

[23] See NELSON & WHITMAN, supra note 9, § 8.3, at 715-16 (characterizing fair value legislation as one of the various forms of anti-deficiency legislation); Emily Gildar, Comment, Arizona’s Anti-Deficiency Statutes: Ensuring Consumer Protection in a Foreclosure Crisis, 42 ARIZ. ST. L.J. 1019, 1031 & n.72 (2010).

[24] See, e.g., ALASKA STAT. ANN. § 34.20.100 (West, Westlaw through legislation passed during the 2013 1st Reg. Sess. of the 28th Legislature); CAL. CIV. PROC. CODE § 580b, d (West, Westlaw current with all 2013 Reg. Sess. laws, all 2013-2014 1st Ex. Sess. laws, and Res. c. 123 (S.C.A.3)).

[25] See, e.g., IDAHO CODE ANN. § 6-108 (West, Westlaw through the end of the 2013 First Regular Session of the 62nd Legislature) (“No court in the state of Idaho shall have jurisdiction to enter a deficiency judgment in any case involving a foreclosure of a mortgage on real property in any amount greater than the difference between the mortgage indebtedness, as determined by the decree, plus costs of foreclosure and sale, and the reasonable value of the mortgaged property, to be determined by the court in the decree upon the taking of evidence of such value.”).

[26] Goldstein, supra note 6, at 263.

[27] See, e.g., ARIZ . REV. STAT. ANN. § 33-814(G) (1990); CAL. CIV. PROC. CODE § 580b (West,  Westlaw current with all 2013 Reg. Sess. laws, all 2013-2014 1st Ex. Sess. laws, and Res. c. 123 (S.C.A.3)) (prohibiting deficiency judgments when a purchase money mortgage or deed of trust is foreclosed, if the property is used as a dwelling by the borrower).

[28] See, e.g., Hull v. Alaska Fed. Sav. & Loan Ass’n, 658 P.2d 122, 124 (Alaska 1983) (“When a sale is made by a trustee under a deed of trust, as authorized by [ALASKA STAT. ANN.] §§ 34.20.070 - 34.20.130, no other or further action or proceeding may be taken nor judgment entered against the maker, his surety or guarantor, on the obligation secured by the deed of trust for a deficiency.” (quoting ALASKA STAT. ANN. § 34.20.100 (1983)); see also Prunty v. Bank of America, 37 Cal. App. 3d 430 (Cal. Ct. App. 1974). Additionally, judicial foreclosure is available in every jurisdiction. Thus, in a state which prohibits a deficiency judgment after a power of sale foreclosure, a lender desiring a deficiency will use the judicial method of foreclosure to obtain one.

[29] See, e.g., ME. REV. STAT. ANN., tit. 14, § 6324 (West, Westlaw through the 2013 First Regular Session and First Special Session of the 126th Legislature). (“In the event the mortgagee has been the purchaser at the public sale, any deficiency is limited to the difference between the fair market value of the premises at the time of the public sale, as established by an independent appraisal, and the sum due the mortgagee as established by the court with interest plus the expenses incurred in making the sale.”).

[30] See N.J. STAT. ANN. § 2A:50-2.3 (West, Westlaw current with laws effective through L.2013, c. 222 and J.R. No. 13) (exempting mortgages secured by notes for business and commercial properties from the fair value credit provision).

[31] See NELSON & WHITMAN, supra note 9, § 8.3, at 715; see also Cornelison v. Kornbluth, 542 P.2d 981, 990 (Cal. 1975) (stating that  the rationale of this legislation is to “prevent the aggravation” to a depressed real estate market when Homeowners lose their property and are burdened with personal liability”).

[32] See Gildar, supra note 23, at 1047 (“[I]ndividual home mortgagors cannot shoulder the cost of massive economic decline, foreclosure, and deficiency liability. It is unrealistic and cruel to act as if they could.” (citation omitted)).

[33] Id.

[34] See Walters v. Marler, 147 Cal. Rptr. 655, 669 (Ct. App. 1978).

[35] Roseleaf Corp. v. Chierighino, 378 P.2d 97, 102 (1963).

[36] Goldstein, supra note 6, at 262.

[37] Id. (“[A]nti-deficiency legislation simply diffuses and magnifies the harm to all borrowers, even those who do not default.”).

[38] Washburn, supra note 21, at 940 n.5.

[39] See, e.g., ME. REV. STAT. ANN. tit 14, § 6324 (West, Westlaw through the 2013 First Regular Session and First Special Session of the 126th Legislature. 2003).

[40] Washburn, supra note 21, at 909.

[41] See, e.g., Wilhelm v. Johnston, 30 P.3d 300 (Idaho Ct. App. 2001).

[42] Goldstein, supra note 6, at 262-63.

[43] Because this right is created by statute and was not recognized at common law, it is referred to as a “statutory right of redemption.” 55 AM. JUR. 2D Mortgages § 787 (Westlaw through Feb. 2014).

[44] 6-51, supra note 10, § 51.04[5][b].

[45] See NELSON & WHITMAN, supra note 9, § 7.1, at 570.

[46] The following twenty-nine states allow the statutory right of redemption: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Tennessee, Utah, Vermont, Washington, Wisconsin, and Wyoming. 6-51, supra note 10, § 51.04[5][b] n.105.

[47] First Nat’l Bank & Trust Co., Woodbury v. MacGarvie, 126 A.2d 880, 883-84 (N.J. 1956).

[48] See NELSON & WHITMAN, supra note 9, § 8.5, at 748.

[49] See, e.g., Payton v. New York, 445 U.S. 573, 601 (1980) (stating that “the sanctity of the home . . . has been embedded in our traditions since the origins of the Republic”); see generally Curtis J. Berger, Response, Home is Where the Heart is: A Brief Reply to Professor Epstein, 54 BROOK. L. REV. 1239, 1240-41 (1989); Radin, supra note 2, at 994.

[50] Washburn, supra note 21, at 931.

[51] See Grant S. Nelson, The Impact of Mortgagor Bankruptcy on the Real Estate Mortgagee: Current Problems and Some Suggested Solutions, 50 MO. L. REV. 217, 248-49 (1985) (stating that it is “likely that the defeasible nature of the purchaser's title coupled with the fact that the mortgagor often retains possession during the redemption period serve to suppress rather than enhance bidding and, hence, may depress the ultimate foreclosure price.”).

[52] Id.

[53] See, e.g., Harper v. Sallee, 23 N.E.2d 27 (Ill. 1939); Banker’s Trust Co. of Detroit v. Rose, 33 N.W.2d 783 (Mich. 1948); W.T. Watts, Inc. v. Sherrer, 571 P.2d 203 (Wash. 1977); see also Schill, supra note 16, at 495 (“[M]ost states permit the mortgagor to remain in possession of the property throughout the redemption period.”).

[54] Darryl A. Hart, Comment, The Statutory Right of Redemption in California, 52 CALIF. L. REV. 846, 848 (1964).

[55] See, e.g., Schill, supra note 16, at 497 (citing Warren L. Shattuck, Security Transactions, 36 WASH. L. REV. 303, 311 n.3 (1961) (0.4% of mortgagors in Washington State redeemed from 1956-1960); Note, Foreclosures, Redemptions and Homeowners, 1975 U. Ill. L.F. 335, 351–52 (1975) (1.4% and 0.8% of mortgagors redeemed in Cook County, Illinois in 1964 and 1974, respectively); but see Patrick S. Bauer, Statutory Redemption Reconsidered: The Operation of Iowa’s Redemption Statute in Two Counties Between 1881 and 1980, 70 IOWA L.REV. 343, 369 (1984–85) (10.4% of mortgagors in two Iowa counties redeemed from 1881-1980); Terry Schaplow, Comment, Oregon's Statutory Right of Redemption-Any Redeeming Qualities?, 16 WILLAMETTE L. REV. 891, 903-04 (1979–80) (9.8% redemption rate in three Oregon counties over an eight to ten year period during the 1970s)).

[56] See James B. Hughes, Jr., Taking Personal Responsibility: A Different View of Mortgage Antideficiency and Redemption Statutes, 39 ARIZ. L. REV. 117, 135 (1997).

[57] 30A N.J. PRAC., Law of Mortgages § 39.10 (2d ed.).

[58] Jon Prior, Nearly Half of Fannie Mae REO Unable to Reach Market (Aug. 22, 2012 12:55 PM), http://www.housingwire.com/articles/nearly-half-fannie-mae-reo-unable-reach-market (“Roughly 14% of Fannie's entire REO inventory is redemption status, meaning the time frame borrowers and second-lien holders can redeem the property under various state laws. The timelines vary and have come under much change across the country.”).

[59] N.J. STAT. ANN. §§ 2A:50-1 to -12, -22 to -28 (West, Westlaw through L.2013, c. 222 and J.R. No. 13).

[60] § 2A:50-4.

[61] § 2A:50-3.

[62] § 2A:50-2.

[63] Id. (“The action for any deficiency shall be commenced within 3 months from the date of the sale or, if confirmation is or was required, from the date of the confirmation of the sale of the mortgaged premises.”).

[64] § 2A:50-1 (“No judgment shall be rendered in any action to foreclose a mortgage for any balance which may be due plaintiff over and above the proceeds of the sale of the mortgaged property, and no execution shall issue therein for the collection of any such balance.”).

[65]  21 N.J. PRAC., Skills And Methods § 33:60 (3d ed.) (citing § 2A:50-8) (“Failure to bring an action within the time period established by the statute forever bars a mortgagee from commencing a suit under its bond or note.”). Further, the mortgagee has no right to a deficiency if the person answerable on the mortgage note or bond had not been made a party to the foreclosure action. § 2A:50-2.

[66] § 2A:50-3. “The judgment of foreclosure sets the amount due on the debt and this determination is res judicata among the parties, but a subsequent suit on the bond for a deficiency is an independent proceeding.” McCloskey v. M. P. J. Co., 205 A.2d 469, 470 (N.J. Super. Ct. Law Div. 1964) (citing 76 Montclair Sav. Bank v. Sylvester, 192 A. 811, 813 (N.J. 1937); Natovitz v. Bay Head Realty Co., 59 A.2d 423, 425 (N.J. 1948)).

[67] McCloskey, 205 A.2d at 471.

[68] Alternatively, if all parties agree, “the court may accept as the fair market value of the mortgaged premises the value fixed by three appraisers, to be named by agreement of all the parties to the action, which agreement shall be evidenced by a stipulation to be filed in the action.” § 2A:50-3; see also 79-83 Thirteenth Ave., Ltd. v. De Marco, 210 A.2d 401 (N.J. 1965) (holding that mortgagors did not demonstrate the property’s fair market value because the only proof of fair market value of property was “vague, non-expert, conclusory suggestion and only two of the four [defendants] swore that they had insufficient resources to pay the mortgage debt or protect their interests”).

[69] § 2A:50-3.

[70] 79-83 Thirteenth Ave., 210 A.2d at 407.

[71] Unlike other “statutory jurisdictions,” in New Jersey there is no general statutory right of redemption after the foreclosure sale. First Nat’l Bank & Trust, 126 A.2d at 883 (citing § 2A:50-4). Rather, New Jersey’s statutory right of redemption comes into existence only upon the entry of a deficiency judgment.  Id.

[72] Id. (limiting the right of redemption to “the person against whom the judgment has been recovered”); accordHauseman v. Johnston, 159 A. 786, 787 (N.J. Ch. 1932) (statute limits right of redemption to judgment debtor).

[73] § 2A:50-4. The mortgagor may redeem even if the judgment is entered in another state. Id.; see also McGlathery v. Dorman, 127 A. 40 (N.J. Ch. 1924).

[74] See 30 N.J. PRAC., supra note 57, § 20.12 (citing OSBORNE, MORTGAGES §§ 307–310 (2d ed. 1970); 4 AM. L. PROP. §§ 16.174–177 (James Casner ed. 1952)).

[75] McCloskey, 205 A.2d at 470 (“The judgment of foreclosure sets the amount due on the debt.").

[76] § 2A:50-4.

[77] See P.L.J., Inc. v. Hinners, 188 A. 496, 497 (N.J. Ch. 1936); see also Lobsenz v. Micucci Holdings, Inc., 316 A.2d 59, 61 (N.J. Super. Ct. App. Div. 1974) (“The purchaser at a mortgage foreclosure sale bids and buys with actual or implied knowledge of the existence of the right to redeem, and with full awareness that his purchase is subject to being defeated by timely exercise thereof.”).

[78] 30 N.J. PRAC., supra note 57, § 20.12 (“A deficiency judgment on the mortgage note or bond after the foreclosure sale will revive the ‘equitable right’ of redemption of the persons against whom the deficiency judgment was entered . . . .”).

[79] 30A id. § 39.10.

[80] Pa. Co. for Ins. of Lives v. Marcus, 99 A. 405, 406 (N.J. 1916) (“[M]any persons, after giving a bond and mortgage, would sell the property, subject to the mortgage, and on its foreclosure have no notice thereof, and thus no opportunity to protect himself by redemption of the property, by purchase or otherwise, and would be compelled to pay a deficiency, although the mortgaged premises might in fact have a market value greater than the debt, or at least the obligor in the bond might be willing to take the property for the debt.”).

[81] See § 2A:50-2 (requiring the person answerable on the mortgage note or bond to be made a party to the foreclosure or the mortgagee cannot sue for a deficiency).

[82] § 2A:50-5.

[83] 30A N.J. PRAC., supra note 57, § 39.11.

[84] Goldstein, supra note 6, at 259 n.17.

[85] See § 2A:50-4.          

[86] See, e.g.Carteret Sav. & Loan, 521 A.2d at 835 (“It is likely that the low turnout of third parties who actually buy property at foreclosure sales reflects a general conclusion that the risks of acquiring an imperfect title are often too high.”).

[87] See Bus. Men's Bldg. & Loan Ass'n v. Tumulty, 180 A. 772 (N.J. Cir. Ct. 1935) (a failure to file a proper notice is a valid defense to the action).

[88] See 2A:50-6 to -7.

[89] 2A:50-6.

[90] See O'Connor v. Briscoe, 196 A. 436, 437 (N.J. 1938).

[91]  30A N.J. PRAC., supra note 57, § 39.10.

[92] Schill, supra note 16, at 496.