helping the hardest hit njhmfa

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The Woodrow Wilson School’s Graduate Policy Workshop Helping the Hardest Hit: Actions to Alleviate the Home Foreclosure Crisis in New Jersey Recommendations to the New Jersey Housing and Mortgage Finance Agency Authors Diego Aragon, Paul (PJ) Berg, Alex Correa, Dan Fichtler, Larry Handerhan, Jacob Hartog, Wes Joines, Laura Noonan, Vanessa Ulmer Project Advisor David N. Kinsey, FAICP January 2012

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Page 1: Helping the Hardest Hit NJHMFA

The Woodrow Wilson School’s Graduate Policy Workshop Helping the Hardest Hit: Actions to Alleviate the Home Foreclosure Crisis in New Jersey Recommendations to the New Jersey Housing and Mortgage Finance Agency Authors Diego Aragon, Paul (PJ) Berg, Alex Correa, Dan Fichtler, Larry Handerhan, Jacob Hartog, Wes Joines, Laura Noonan, Vanessa Ulmer Project Advisor David N. Kinsey, FAICP January 2012

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Acknowledgements The authors thank the following experts who graciously shared their time and insights. We also thank our professor, David N. Kinsey, as well as the staffs of the Woodrow Wilson School and the New Jersey Housing and Mortgage Finance Agency, who made this workshop possible.

The analyses and recommendations in the report are solely the responsibility of its authors, and should not be construed as the expressed or implied views of any other individuals or entities.

Sundee Aungkhin, Boston Community Capital SUN Initiative Michael Blair, Cenlar FSB Lavea Brachman, Greater Ohio Policy Center Gary Braunstein, California Housing Finance Agency Gary Brown, MassHousing Michele Byrd, City of Oakland Jackie Campbell, City of Oakland Wayne Chen, City of San Jose Alejandra Herrera Chávez, City of San Jose Elyse Cherry, Boston Community Capital Mark Cherry, New Jersey Judiciary Mediation Program Chad Coffman, Michigan State Housing Development Authority Marcus Conklin, Nevada State Assembly; University of Nevada, Las Vegas Carrie Cornwell, California State Senate Transportation and Housing Committee Nasser Daneshvary, University of Nevada, Las Vegas Jeanne Fekade-Sellassie, NeighborWorks America Scott Fergus, Mercy Housing, Inc. Eileen Fitzgerald, NeighborWorks America Cynthia Flaherty, Ohio Housing Finance Agency Cami Freeman, Illinois Housing Development Authority Bruce Gilbertson, California Housing Finance Agency Richard Godfrey, Rhode Island Housing Stephanie Greenwood, City of Newark Katherine Hempstead, Robert Wood Johnson Foundation Chris Herbert, Joint Center for Housing Studies at Harvard University Curdina Hill, City Life/ Vida Urbana Vanessa Hill, Illinois Housing Development Authority Robert Huether, New Jersey Housing and Mortgage Finance Agency Dana Irlbacher, New Jersey Housing and Mortgage Finance Agency Dee Ivanovs, Affordable Homes of Millville Ecumenical (AHOME) Kiki Jamieson, The Fund for New Jersey Aaron Kabaker, U.S. Department of the Treasury Jerome Keelen, New Jersey Housing and Mortgage Finance Agency Jenny-Ann Kershner, The Fund for New Jersey Ryan Kim, Aura Mortgage Advisors LLC Jeffrey Levin, City of Oakland Robert Lopez, City of San Jose

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Alan Mallach, Brookings Institution; Federal Reserve Bank of Philadelphia; National Housing Institute Anthony Marchetta, New Jersey Housing and Mortgage Finance Agency Eric Maxx, New Jersey State Office of Dispute Settlement, Office of the Public Defender Mark McArdle, U.S. Department of the Treasury Joe McGavin, Illinois Housing Development Authority Charles McManus, California Housing Finance Agency Steve Meacham, City Life/ Vida Urbana Kevin Mello, MassHousing Jodi Mercer, Michigan State Housing Development Authority Wayne T. Meyer, New Jersey Community Capital David Miller, Cenlar FSB Christine Miller, Legal Aid Center of Southern Nevada Ean Nesselrotte, U.S. Department of the Treasury Eileen Newhall, California State Senate Banking, Finance, and Insurance Committee Kathe Newman, Edward J. Bloustein School of Planning and Public Policy, Rutgers University Thomas Norton, MassHousing Mortgage Insurance Fund John Olson, Federal Reserve Bank of San Francisco Cathy Paniccia, Rhode Island Housing Dawn Parreott, New Jersey Housing and Mortgage Finance Agency Laura Pontelandolfo, NJ State Office of Dispute Settlement, Office of the Public Defender Dory Rand, Woodstock Institute Diane Richardson, California Housing Finance Agency Scott Richman, Cenlar FSB Lena Robinson, Federal Reserve Bank of San Francisco Jacob Rugh, Woodrow Wilson School of Public and International Affairs, Princeton University Lesley Salado, Boston Community Capital SUN Initiative Deborah Schwartz, Macarthur Foundation Hubble Smith, Las Vegas Review-Journal Colleen Smith, New Jersey Housing and Mortgage Finance Agency L. Steven Spears, California Housing Finance Agency Samantha Spergel, Greater Ohio Policy Center Gregory Stankiewcz, New Jersey Community Capital Joan Straussman, Housing and Community Development Network of New Jersey Sondra Stumpf, Ohio Housing Finance Agency Mary Townley, Michigan State Housing Development Authority Donna Turner, Affordable Homes of Millville Ecumenical (AHOME) Katy Twining, Michigan State Housing Development Authority William Uffelman, Nevada Bankers Association Peter Walsh, Rhode Island Housing Kevin Wolfe, New Jersey Administrative Office of the Courts Larry Zeno, Pioneer

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List of Abbreviations

• ARM Adjustable-rate mortgage

• DTI Debt-to-income ratio

• GSEs Government Sponsored Entities (Fannie Mae and Freddie Mac)

• HAMP Home Affordable Mortgage Program

• HARP Home Affordable Refinance Program

• HFA Housing Finance Agency

• HHF Hardest Hit Fund

• HMFA New Jersey Housing and Mortgage Finance Agency

• HomeKeeper New Jersey HomeKeeper Program

• HUD U.S. Department of Housing and Urban Development

• LTV Loan-to-value

• MAP Mortgage Assistance Pilot Program in New Jersey

• MRF Mortgage Resolution Fund

• MSP Mortgage Stabilization Program in New Jersey

• NSP Neighborhood Stabilization Program

• REO Real Estate Owned property

• Rescue Homeownership Preservation Refinance Program in New Jersey

• Treasury U.S. Department of the Treasury

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List of Figures and Boxes Figure 1: Percent of First-Lien Mortgages in Foreclosure, Q3 2011

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Figure 2: New Jersey Housing Stock by Number of Units, 2009

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Figure 3: New Jersey Vacancy Rate by County, 2009

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Figure 4: Owner-Occupancy by County (Actual versus Reported at Origination), 2009/2010

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Figure 5: New Jersey Unemployment Rate by County, 2003-2011

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Figure 6: Negative Equity Report by Metropolitan Area, Q2 2011

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Figure 7: Loan Performance in New Jersey by Loan Type, 2010

13

Figure 8: Foreclosure Risk Index in New Jersey, 2011

15

Figure 9: Housing Market Index in New Jersey, 2011

15

Figure 10: Illinois Mortgage Resolution Fund Model

25

Figure 11: Geographic Market Screens Proposed for NJ Mortgage Resolution Fund

26

Figure 12: Case Study – Newark and South Orange Neighborhood Map

46

Figure 13: Case Study – Newark and South Orange Home Sale Prices, 2001-2010

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Box 1: New Jersey’s Housing Market in Brief

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Box 2: Indices to Target Foreclosure Prevention Funds

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Box 3: Mediation as an Effective Foreclosure Prevention Strategy 19

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Table of Contents EXECUTIVE SUMMARY

2

INTRODUCTION 3 Methods and Evaluative Criteria

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SECTION I: The Foreclosure Crisis and Federal Policy Response 5 National Picture 5 Hardest Hit Fund

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SECTION II: The Foreclosure Crisis in New Jersey: A Needs Assessment 8 Overview of New Jersey Housing Stock 8 Causes of Foreclosure 10 Foreclosure Trends and Hardest Hit Counties 13 Principles for Policy Response 14 Stakeholders of Foreclosure Policy

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SECTION III: Evaluation of HMFA Foreclosure Prevention Initiatives 17 Lessons Learned from Past HMFA Programs 17 Applying Lessons to HomeKeeper

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SECTION IV: Recommendations 21 1. Expanding HomeKeeper Eligibility 21 2. Creating a New Jersey Mortgage Resolution Fund 24 3. Implementing a Principal Reduction and Equity Sharing Program 29 4. Implementing a Transition Assistance Program 33 5. Establishing a Reserve Fund 35 6. Establishing a Foreclosure Data Intermediary 37 7. Strengthening the Role of Counseling

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CONCLUSION

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APPENDICES 42 Appendix A: Use of Hardest Hit Fund Resources Across States 43 Appendix B: Case Study – Home Values in Newark and South Orange, 2001-2010 45 Appendix C: Calculation of the Expected Impact of Expanding HomeKeeper Eligibility 47 Appendix D: Glossary of Key Terms

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NOTES 50

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Executive Summary

The State of New Jersey has been engaged in a tremendous effort to forestall residential foreclosures and stabilize communities throughout the current economic downturn.

To assist in this task, the New Jersey Housing and Mortgage Finance Agency enlisted a team of graduate students from the Woodrow Wilson School of Public and International Affairs at Princeton University to explore the relevant issues, identify replicable best practices from around the nation, and make recommendations for the use of New Jersey’s allocation from the federal Hardest Hit Fund.

This report examines the primary areas of foreclosure prevention need within New Jersey and analyzes the challenges facing current and prior HMFA programs. Our key findings include:

• Given differences in housing market strength and foreclosure risk across the state, there is a need for geographically-targeted interventions.

• As over sixteen percent of New Jersey homes with mortgages are underwater, there is a need for interventions that target negative equity positions.

• HMFA program eligibility restrictions exclude many homeowners who need and deserve assistance. Analysis of statewide data can lead to adjustments that better reflect current needs.

• Mortgage counseling contributes to the long-term sustainability of homeownership.

Based on our findings, we offer the following seven recommendations:

Expanding HomeKeeper Eligibility: By opening HomeKeeper to a larger pool of applicants, HMFA can ensure that the program has greater impact and keeps more deserving New Jerseyans in their homes.

Creating a New Jersey Mortgage Resolution Fund: By partnering with New Jersey Community Capital, HMFA can make a targeted impact on neighborhoods currently destabilized by foreclosures.

Implementing a Principal Reduction and Equity Sharing Program: Though other states have had mixed success in establishing this type of program, principal reduction is the most effective way to resolve affordability and willingness-to-pay problems, thus reducing future risk.

Implementing a Transition Assistance Program: Given the high cost of rental housing in New Jersey and the risk of displacement through the NJ Mortgage Resolution Fund, HMFA should aid families who cannot remain in their current homes.

Establishing a Reserve Fund: Keeping some Hardest Hit Fund resources in reserve will allow HMFA to expand and accelerate programs that have demonstrated success.

Establishing a Foreclosure Data Intermediary: By collecting, analyzing, and disseminating data about foreclosure filings, market trends, and program effectiveness, HMFA can better use data to inform policy makers and drive future policies.

Strengthening Counseling: By improving counseling capacity and the processing of program applications, HMFA can deliver help where and when it is needed most.

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Introduction

Five years in, the home foreclosure crisis in New Jersey continues and threatens to worsen. Its impacts are pervasive, as the crisis stresses homeowners and families, destabilizes communities, and depresses real estate markets and the broader economy. Foreclosure starts have increased dramatically since 2006, and in many local markets, housing prices do not appear to have yet bottomed out. Vacancies are rising statewide. The lifting of a judicial moratorium on new foreclosure filings will likely introduce another wave of foreclosures in the state. Meanwhile, unemployment continues to hover over nine percent.

In September 2010, New Jersey received $300 million in funding through the federal Hardest Hit Fund (HHF) to assist homeowners at risk of foreclosure. The challenge facing the State lies in finding effective and equitable ways in which to deliver this aid to prevent foreclosures and stabilize housing markets.

This report is prepared for the New Jersey Housing and Mortgage Finance Agency (HMFA), the lead agency in New Jersey addressing the home foreclosure crisis and the implementing agency for the state’s HHF programs. Our central objective is to recommend initiatives that HMFA can pursue to make effective, strategic use of the state’s HHF resources to yield the greatest benefits to New Jersey residents and communities. We provide up-to-date data on the foreclosure crisis in New Jersey to explain the basis for our recommendations, and include examples of relevant actions taken in other states to point readers toward best practices.

Following an explanation of our research and analysis methods, the remainder of the report is structured as follows: Section I begins with a concise summary of the housing crisis and key federal responses to the surge in foreclosures, particularly the Hardest Hit Fund. Section II presents a needs assessment specific to New Jersey. Section III reviews lessons from HMFA foreclosure relief programs to date. Section IV provides policy recommendations for the use of Hardest Hit Funds and the research findings that support them. The report concludes with closing reflections on the opportunities for HMFA to respond to the foreclosure crisis in New Jersey.

Methods and Evaluative Criteria This report draws on academic and policy research pertaining to the home foreclosure crisis, with an

emphasis on literature analyzing policy interventions. We conducted interviews with state and federal stakeholders to research best practices and promising initiatives from across the nation for addressing the foreclosure crisis. We also undertook site visits in the following states, almost all of which receive Hardest Hit funds: California, Illinois, New Jersey, Nevada, Ohio, Massachusetts, Michigan, and Rhode Island, as well as the District of Columbia. To analyze trends and needs in the New Jersey housing market, we used publicly available data from sources including the Federal Reserve Bank of New York, the U.S. Census American Community Survey, the NJ Association of County Tax Boards, and a variety of nongovernmental research organizations.

To assess potential foreclosure mitigation strategies and weigh them against alternatives, we focused on issues of impact, equity, and feasibility.

Impact. The impact that interventions will likely have in mitigating the foreclosure crisis is central to our analysis. Cost-effectiveness (impact per dollar) is also important in order to extend the reach of limited resources. A primary metric of success for HMFA will be the number of homeowners assisted through HHF programs. Often this will mean the number of borrowers kept in their homes after assistance, and related metrics like the proportion of borrowers who reinstate their mortgage or achieve an affordable modification and no longer require aid. Where retaining homeownership is not possible, impact can be defined as helping families reduce their financial instability and transition to a new residence.

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Neighborhoods with concentrated foreclosures are also at risk, and we see neighborhood stabilization as an important objective for certain HHF programs. Where this goal is relevant, we recommend tracking outcome-oriented measures like changes in market values or the volume of real estate activity.1

Timing of the impact is critical. We considered how quickly funds could be disbursed as well as short- and longer-term effects. In the short term, giving a homeowner time to get their finances in order is a concrete benefit. In the long term, we favor programs that can encourage sustainable homeownership and help stabilize the New Jersey housing market.

Equity. We are sensitive to the need for HMFA to aid homeowners in an equitable manner. Our recommendations aim to avoid unnecessarily excluding groups of homeowners who demonstrate financial hardship, while also guarding against the potential for helping those who are either not truly in need or who knowingly took on debt in an irresponsible manner. This is not an easy or straightforward task. We further balance the objective of neighborhood stabilization in specific hard-hit areas with a desire to make sure that homeowners in all parts of the state have access to needed aid. We view procedural equity as a priority, in that aid should be delivered in a transparent, consistent, and timely manner.

Feasibility. In the course of our analysis, we examined the feasibility that potential programs could be implemented successfully. We considered the degree of difficulty for HMFA, alone or in conjunction with partners, to design and implement programs in a timely manner. We aimed to avoid excessive delays and administrative complexities, and to identify programs where capacity to implement is evident. All potential programs were assessed within the context of federal guidelines for the use of HHF resources.

For recommendations on primary program allocations, we delineate four potential risk categories: operational, financial, political, and reputational. Many strategies rely on the cooperation of third party stakeholders, or on assumptions about markets, which are outside the immediate control of HMFA. We evaluate the risks posed by these external factors as well.

The foreclosure crisis is not a simple problem; as such, solutions are unlikely to be simple. Social, economic, and political hurdles must be cleared for any policy intervention to be implemented, and even upon implementation, interventions must conform to issues of feasibility and scope. The foreclosure crisis is a national problem, and one that is highly dependent upon global economic processes. New Jersey cannot solve the problem alone, but it can take positive steps to hasten recovery and to provide relief to its citizens in need. This is the demanding challenge and the exciting opportunity that this report seeks to confront.

                                   

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Section I

The Foreclosure Crisis and Federal Policy Response

National Picture The steady growth in U.S. housing prices for over three decades contributed to the widely held belief

that such a reliable market simply could not take a sharp, prolonged downturn. However as the bubble of inflated housing prices burst and the subprime mortgage crisis unfolded, the U.S. housing market experienced just such a downturn. Home values plummeted, and foreclosures began to amass at an alarming rate. The 2006-2007 collapse of the U.S. housing market was the proximate cause of the global financial crisis and is largely responsible for the nation’s continued economic distress, including elevated unemployment.

Foreclosures have a variety of pernicious effects on households and communities. Homeowners who have undergone foreclosure suffer worsened health2 and employment prospects,3 stress, disrupted social networks, and lasting damage to their credit. Negative spillovers in neighborhoods and communities with elevated foreclosure rates include depressed property values, vacant and blighted properties, lost tax revenues, and direct costs to local governments related to managing the foreclosure process, maintaining or demolishing abandoned properties, and increased burden on police and fire departments.4

Among U.S. mortgages originated between 2004 and 2008, 6.4 percent have ended in foreclosure, and an additional 8.3 percent are at immediate, serious risk.5 Foreclosure patterns are strongly linked to patterns of risky lending. Foreclosure rates are consistently worse for borrowers who received high-risk loan products that were aggressively marketed before the housing crash, such as loans with prepayment penalties and hybrid adjustable-rate mortgages (ARMs).

While the majority of people affected by foreclosures have been white families, borrowers of color are more than twice as likely to lose their home as white households. This reflects the fact that African Americans and Latinos were consistently more likely to receive high-risk loan products, even after accounting for income and credit status.6

The average speed of the foreclosure process varies greatly by state, from under six months in states with non-judicial foreclosure to over two years in states with judicial processes, like New Jersey. In part owing to its lengthy process, New Jersey has the second largest percentage of its state’s mortgages in the foreclosure process nationwide (Figure 1).

Following disclosure of fraudulent foreclosure processing (so-called “robo-signing”), state attorneys general across the country engaged in a long series of negotiations with major banks and servicers in 2010 and 2011, during which time foreclosures were halted in many states. Following the resumption of foreclosures in August and September 2011, many states are confronted with an even larger backlog of homes facing foreclosure.

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Figure 1: Percent of First-Lien Mortgages in Foreclosure, Q3 2011

Data Source: Mortgage Bankers Association, Q3 2011.

In a depressed housing market, mortgage holders and troubled borrowers would likely both be better off if they were able to renegotiate their loans and avoid foreclosure. But when mortgages have been securitized, such loan modifications are very difficult. The majority of home loans are, moreover, held by government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae. These mortgage giants are now in government conservatorship under the Federal Housing Finance Agency, which has been particularly reluctant to reduce principal on loans that are effectively owned by taxpayers.

The Obama Administration has attempted to stem foreclosures and revive the housing market in several ways. The following are the three largest federal anti-foreclosure programs, all administered by the U.S. Department of the Treasury (Treasury).

Home Affordable Mortgage Program (HAMP) uses funds from the Troubled Asset Relief Program to pay lenders that modify the mortgages of troubled homeowners to create more affordable payments. As of October 2011, about 883,000 homeowners nationwide received permanent modifications of their mortgages through HAMP7, saving a median of $525 each month on their mortgage payments.8 The Obama Administration initially expected the program to help up to 4 million homeowners.

Home Affordable Refinance Program (HARP) allows borrowers with little or no equity in their home to refinance into lower-interest rate mortgages. Borrowers must have mortgages backed by Fannie Mae or Freddie Mac and can have negative equity. As of August 2011, 894,000 borrowers have refinanced under the program9, but this is fewer than the four to five million expected. The deadline has been extended to June 2012.

The Hardest Hit Fund provides aid to struggling homeowners in states that were most severely affected by the economic and housing market downturn, as described in greater depth below.

President Obama also supported legislation, dubbed the “cramdown” bill, that would have allowed judges to unilaterally modify mortgage terms on primary residences during bankruptcy, but the U.S. Senate voted down this controversial proposal.

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Hardest Hit Fund The Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (Hardest Hit

Fund) is a federal program administered by Treasury and implemented by state housing finance agencies (HFAs) to prevent foreclosures and stabilize housing markets. First announced in February 2010, the Hardest Hit Fund has since expanded to target eighteen states, as well as the District of Columbia, that face home price declines greater than 20 percent, concentrated economic distress, or unemployment rates above the national average. Funds are available until December 31, 2017.

Within broad guidelines, the Hardest Hit Fund is intended to give state HFAs the flexibility to develop programs that reflect the needs of each state. HHF programs must satisfy the requirements for funding under the Emergency Economic Stabilization Act of 2008, and accordingly must be designed to prevent avoidable foreclosures, preserve homeownership, promote economic growth, protect home values, and restore liquidity and stability to the financial system. HFAs are required to track homeowners helped and to report quarterly on operational and performance metrics based on their stated program objectives.

Appendix A provides a snapshot of the primary methods by which states are using HHF resources to assist borrowers at risk of foreclosure, which include: (1) mortgage payment assistance for unemployed and underemployed borrowers; (2) assistance to pay arrearages and reinstate the mortgage (or return the loan to active status after the lender files foreclosure); (3) principal reduction to help homeowners get into more affordable mortgages; (4) funding to remove second liens, which can prevent modification of the first mortgage; (5) transition assistance for homeowners who need to move to new housing; programs to (6) enable loan modifications or (7) facilitate short sales; and mechanisms to (8) purchase and restructure delinquent mortgages. Typically HFF assistance is provided in the form of a zero interest, non-recourse loan that is forgivable over a given period of time. HHF resources cannot be used to provide homeowners with legal or counseling services, but counseling agencies can be paid for applicant intake. States can modify their HHF programs through 2017, subject to review and approval by Treasury.

State HFAs continue to develop and refine their HHF programs, most of which have been operational for less than one year. While offering flexibility, the decentralized nature of the Hardest Hit Fund has required states to build program infrastructure where none previously existed. Gaining the participation of large servicers also has proven challenging, in part because state-level rules and assistance structures add complexity for national servicers. Treasury created a more standardized unemployment and reinstatement program to facilitate large servicer participation, and works to share good practices and broker communication among HFAs and servicers.

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Section II

The Foreclosure Crisis in New Jersey: A Needs Assessment

New Jersey’s home foreclosure crisis is a complex problem affecting a diverse range of homeowners and neighborhoods. The following assessment suggests that New Jersey’s policy response to mitigate the foreclosure crisis – including the state’s HHF programs – should account for the different borrower profiles, housing types, and economic conditions found across the state, and further should address the multiple underlying causes of borrower distress, including unemployment, declining property values, and unsustainably high levels of household debt.

Overview of New Jersey Housing Stock

New Jersey has a population of almost 8.8 million, and contains over 3.5 million housing units.10 About 1.9 million homeowners in New Jersey have mortgages. There is no such thing as a “typical” residential property in New Jersey, as housing characteristics vary by neighborhood, town, and county. Key differences across geographic areas include the number of units per structure, incidence of vacant properties, and tenure status (owner- versus renter-occupied).

Suburban and exurban counties have a higher share of one-family homes, up to 87 percent of the housing stock in Hunterdon County. Urban counties in the northeastern part of the state have a higher share of multi-family residences, with only 16 percent of the housing stock in Hudson County and 42 percent in Essex County made up of one-family homes (Figure 2). Vacancy rates are also highest in the urbanized counties in the northeast of the state (Figure 3).11

Variation in housing tenure merits scrutiny, as the owner-occupancy rates reported by mortgage lenders are likely inflated. The suburban Sussex and Hunterdon Counties have the highest share of owner-occupants (85 and 87 percent, respectively) while Hudson and Essex Counties have the highest share of renters (66 and 53 percent, respectively). Yet Figure 4 shows that owner-occupancy in mortgaged properties as reported at mortgage origination is relatively constant from county to county. Strikingly, over 90 percent of active subprime loans in the state were reported as owner-occupied at origination.12 Fraud is a likely explanation for the discrepancy: borrowers have an incentive to claim occupancy because lenders offer lower down payments and interest rates to owner-occupants.

Box 1: New Jersey’s Housing Market in Brief:

• 3.5 million housing units • 1.9 million home mortgages • 8 percent of mortgages past

90 days delinquent • 2 years of supply of distressed

properties not yet on the market

• Foreclosures now take an average of over 2.5 years

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Figure 2: New Jersey Housing Stock by Number of Units, 2009

Data Source: U.S. Census Bureau, American Community Survey 2005-2009 Five-Year Estimates

Figure 3: New Jersey Vacancy Rate by County, 2009

Data Source: U.S. Census Bureau, American Community Survey 2005-2009 Five-Year Estimates

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Figure 4: Owner-Occupancy by County (Actual versus Reported at Origination), 2009/2010

Data Sources: U.S. Census Bureau, American Community Survey 2005-2009 Five-Year Estimates; Federal Reserve Bank of New York, Q3 2010

Causes of Foreclosure The high rate of foreclosure in New Jersey stems from three distinct underlying problems: (1) high

rates of unemployment and underemployment; (2) declining property values; and (3) unsustainable debt obligations among homeowners, caused in part by irresponsible mortgage lending practices that were widespread in the industry. These three problems vary in severity across the state.

Unemployment and Underemployment. The unemployment rate is a key predictor of loan performance, since homeowners who lose income face a significant challenge to remaining current on their payments. New Jersey’s unemployment rate stands at 9.1 percent of the labor force, with significant variation across counties (Figure 5), compared to a U.S. rate of 8.6 percent as of November 2011.13 The highest unemployment rates occur in the southern part of the state (Cumberland, Atlantic, Cape May, Salem, Camden, and Gloucester Counties) and the northern urban areas (Passaic, Essex, and Hudson Counties). Wealthier suburban counties face the lowest rates of unemployment. While unemployment has increased dramatically since 2007, the hierarchy of counties from highest to lowest rates of unemployment has remained more or less stable, indicating that structural economic problems exist in those counties with the worst employment prospects.14

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Figure 5: New Jersey Unemployment Rate by County, 2003-2011

Data Source: U.S. Bureau of Labor Statistics, Local Area Unemployment Statistics, 2003-2011. September 2011 data are not seasonally adjusted.

Declining Property Values. New Jersey saw a dramatic rise in real estate values over the first half of the last decade and a sharp decline following the crash of the housing market. The peak and fall of home values has triggered foreclosures as homeowners find themselves unable to refinance their mortgage, and in cases where they owe the lender more than the current market value of their house (i.e., they hold negative equity in the property), unable to afford to sell.

Market performance since the crash has varied by location. Urban and exurban homes have seen the largest drop in home values, while higher-end homes in suburban counties – especially those located near Manhattan-bound rail lines – have seen prices stabilize and even begin to increase in some cases.15 A case study of two neighboring New Jersey municipalities presented in Appendix B suggests that home values are trending differently depending on neighborhood type, with urban properties performing poorly after the peak compared to nearby suburban properties.

About 308,000 (16.3 percent) of New Jersey homeowners with mortgages have negative equity as of Q3 2011.16 Figure 6 shows the share of residential properties with negative equity statewide and in particular metropolitan areas. A smaller share of properties in the northern and central suburbs faces negative or near-negative equity positions relative to urban areas like Newark and Camden.

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Figure 6: Negative Equity Report by Metropolitan Area, Q2 2011

Data Source: CoreLogic Negative Equity Report, Q2 2011

Unsustainable Levels of Debt. Finally, homeowners fall behind on mortgage payments because they hold a high level of debt in relation to their income. Financial counselors express concern when “back-end debt” payments, or the sum of home, auto, student, and consumer debt, exceeds half of household income. For some homeowners, spending patterns need to be addressed through financial counseling and behavior changes.

The mortgage lending industry bears substantial responsibility for the foreclosure crisis, as industry actors used weak underwriting practices and high-risk mortgage products to enable borrowers to take on more debt than they could handle. Predatory lending occurred at particularly high rates in urban neighborhoods with large minority and non-English-speaking populations.

The most likely borrowers to be delinquent are those with subprime or other exotic types of mortgages. As of 2010, only 40.5 percent of subprime borrowers in New Jersey were current on their mortgage payment, compared with 87.9 percent of prime mortgage borrowers (Figure 7). Accordingly, the rate of subprime lending in an area during boom years of the last decade is a key predictor of future foreclosures. As discussed above, other indicators include a high unemployment rate, high vacancy rate, and a steep drop in home prices.

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Figure 7: Loan Performance in New Jersey by Loan Type, 2010

Data Source: Federal Reserve Bank of New York, 2010

Foreclosure Trends and Hardest Hit Counties Given the wide variation in housing market conditions across the state, it should come as no surprise

that distressed loans are concentrated in certain areas. As of 2010, the highest rates of serious delinquency (defined as loans that are 90 days past due or in foreclosure proceedings) occurred in Essex, Passaic, Hudson, and Union Counties in the northern part of the state.17 High rates of serious delinquency were also recorded in Atlantic and Camden Counties in the southern part of the state.

Statewide, the Center for Responsible Lending projects a total of over 235,800 foreclosures in New Jersey during 2009-2012.18 The statewide inventory of homes (the stock of homes that are in some stage of foreclosure but not listed for sale) amounted to a 24-month supply as of the third quarter of 2010. According to October 2011 estimates by RealtyTrac, foreclosures in New Jersey take an average of over 31 months, the second-longest process in the nation.19

Policy makers should anticipate that the number of homes entering foreclosure will increase significantly in coming years. New Jersey's unemployment situation has not improved since 2010, suggesting that a growing number of households are missing loan payments because of financial pressures. Moreover, New Jersey's state courts recently lifted a moratorium on foreclosure cases, allowing lenders to again move properties into foreclosure proceedings.

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Anecdotal evidence also suggests that lenders may be intentionally keeping properties tied up in foreclosure proceedings rather than repossessing the properties and adding them to their books as real estate-owned (REO) assets. This possibility is particularly worrisome in the most distressed areas, where properties may not be worth the bank's time and money to repossess. Such a property will remain "frozen," unable to be sold or rehabilitated.

Principles for Effective Policy Responses Foreclosure trends in New Jersey make the need for policy intervention clear; simply allowing the

market to run its course would impose large costs on state residents, including those who bear no direct responsibility for the home foreclosure crisis.

This assessment further suggests that HMFA should tailor HHF programs to address the variation in needs across different geographic areas in the state. Given limited resources, it is important to target some programs at specific geographic areas in which investments will likely have the greatest impact. Determining where to target funds is a challenging process, but it can be accomplished with a transparent allocation formula.

The U.S. Department of Housing and Urban Development (HUD) offers one such allocation model. HUD was charged by Congress to allocate funds through its Neighborhood Stabilization Program (NSP) to the 20 percent of U.S. neighborhoods with the highest rates of subprime loans, delinquencies, and foreclosures. To accomplish this mandate, HUD developed a Foreclosure Needs Score using factors including the rate of subprime loans originated, the increase in the unemployment rate, and the fall in home values from peak to trough.20

Similarly, the Center for Housing Policy has developed a pair of indices to help state officials target public funds for foreclosure mitigation, described in Box 2.

Box 2: Indices to Target Foreclosure Prevention Funds

The Center for Housing Policy (CHP), in partnership with the Urban Institute, Local Initiatives Support Corporation, and the Annie E. Casey Foundation, developed two indices to help state and local officials allocate funds in a way that maximizes the impact of foreclosure response policies.21

The Foreclosure Risk Score predicts the rate of foreclosures using the following factors: share of first-lien mortgages in foreclosure, share of first-lien mortgages that are subprime, share of first-lien mortgages that are more than thirty days delinquent, and share of properties that are vacant.

The Housing Market Index measures the health of the housing market using the following factors: median value of recent first-lien mortgages, share of recent mortgages that exceed standard APR or closing fees, and origination rate in recent years compared with ten years ago.

CHP recommends that foreclosure prevention policies aim to maintain momentum in markets that are in the process of regaining strength, while avoiding spending money in very strong or very weak markets. Thus, officials should target funds in census tracts that score in the intermediate range in the Housing Market Index while also scoring in the intermediate to high range in the Foreclosure Risk Score. In weak markets where foreclosure prevention efforts are likely to have less impact, CHP recommends targeted demolitions and land banking programs.

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Stakeholders of Foreclosure Policy While multiple stakeholder groups have an interest in HMFA’s use of HHF resources, we focus on those stakeholders who have the most direct potential to either enable or undermine program effectiveness.

Homeowner participation is integral to program success. While a priority for many struggling homeowners will be to stay in their current homes, others’ primary goal will be to get on with their lives with as little damage to their family’s well-being and finances as possible.

Bank and mortgage servicer cooperation is also essential for the success of many HHF programs. The primary motivation of these lenders is to minimize financial losses and the costs of servicing loans which may not be fully recovered. However, banks may also make decisions that do not seem to meet this standard in order to delay or avoid recognizing losses on their balance sheets. In addition, servicers’ actions are often influenced by their obligations to the GSEs and private mortgage-backed security investors.

Elected officials at the state-level have been fairly quiet on the topic of foreclosures relative to the reach of the issue, but they are likely to become more involved if any program appears to disadvantage the residents of their districts. County executives and mayors may play important roles in determining the political acceptance of geographically targeted programs. U.S. Senator Robert Menendez, who represents New Jersey, has been quite active with respect to foreclosure issues on a federal level, and could serve as an ally in advocating for federal policy changes.

Public opinion among New Jersey residents can influence decision makers, including Governor Christie, the HMFA board, and other state and local officials. The media very often shapes public opinion. In terms of attracting negative press and public outcry, the greatest risks are programs that can be perceived as rewarding irresponsible borrowers or simply handing money to banks.

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Section III

Evaluation of HMFA Foreclosure Prevention Initiatives

Since the fourth quarter of 2007, HMFA has directly managed five major statewide foreclosure prevention initiatives. At present, HMFA’s flagship initiative is the New Jersey HomeKeeper Program (HomeKeeper), officially launched in May 2011 and funded by a $112 million transfer from Treasury’s Hardest Hit Fund. In addition, the multi-agency Judiciary Foreclosure Mediation Program operates separately from other HMFA programs; this complementary process of structured homeowner-lender communication is described in Box 3.

A review of HMFA’s early programs to mitigate New Jersey’s foreclosure crisis suggests that an initiative’s success: (1) depends on “smart” flexibility of beneficiary eligibility; (2) requires lender buy-in (or at least avoids lender obstruction); and (3) often relies on keeping homeownership with distressed borrowers. Past HMFA programs have had limited and varying success. This section describes lessons from past New Jersey foreclosure prevention initiatives, and uses these lessons to develop a framework to evaluate the current design of HomeKeeper.

Lessons Learned from Past HMFA Programs Lesson 1: Program success depends on “smart” flexibility of program eligibility.

The Homeownership Preservation Refinance Program (Rescue) was HMFA’s first foreclosure prevention initiative, rolled out in late 2007 with a funding capacity of $30 million. It established a mortgage refinancing facility to swap out poorly underwritten home loans characterized by high or variable interest rates, among other “exotic” features, with a more traditional and affordable fixed-rate mortgage. Given that the average mortgage in New Jersey is valued at about $200,000, the facility could have reached at least 150 homeowners in its first cycle. In the end, only one loan was disbursed.

Rescue failed to reach its potential because of a disjuncture between its eligibility criteria and product offering. HMFA was right to make Rescue available to beneficiaries with FICO scores as low as 575, since exotic mortgages were aggressively marketed to high-risk borrowers. However, the program was flawed in restricting eligibility to borrowers with homes with a loan-to-value (LTV) ratio of no more than 100 percent; i.e., applicants could not maintain negative equity in their homes. This restriction excluded many of the homeowners that Rescue was intended to assist, as a significant share of borrowers with exotic mortgages were underwater. Exotic products encouraged borrowers to have little to no equity in their homes, creating weak buffers against the drop in housing prices.

In contrast, HMFA’s Mortgage Assistance Pilot Program (MAP) stands out for being oversubscribed since its launch at the end of 2008. MAP provides distressed homeowners with up to $20,000 to become current on their mortgage through a zero interest, non-amortizing loan (i.e., borrowers pay only the principal lent when they sell their home). Determination of the final sum is contingent on participation in budget counseling sessions, which seek to improve an applicant’s ability to resume paying housing costs. In this regard, MAP can be considered “smart” in its design by maximizing access, while mitigating the potential for unsustainable outcomes. Over the past three years, MAP’s annual State appropriation of $2 million has been fully disbursed, closing on over 100 loans – with an additional 50 under review – and providing over 300 applicants with foreclosure prevention counseling.

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MAP’s strong take-up can be explained in part by its broad eligibility requirements. For example, MAP has no LTV ceiling. Applicants are eligible if they meet an expansive definition of hardship – which includes unemployment, underemployment, death of a family member, medical disability, or exposure to a poorly underwritten mortgage – and earn up to 120 percent of the average median income of families of varying size across New Jersey, as defined in guidelines by set forth by HUD.22 This income level is quite inclusive at about $108,000.23

Lesson 2: Program success requires lender buy-in, or at least avoids lender obstruction

In the first quarter of 2009, then-Governor Corzine endorsed the Mortgage Stabilization Program (MSP) to reduce the negative equity faced by underwater borrowers. Under the program, HMFA offered a non-amortizing, zero interest loan of up to $25,000 to cover half of a homeowner’s mortgage debt overhang (or the value of the mortgage in excess of the value of the home), provided that the lender forgive the residual.

Ultimately, no funds were disbursed under MSP because lenders were not willing to reduce principal. Analysts suggest that this reluctance stemmed from economic incentives such as mortgage insurance that only pays lenders the outstanding balance in the event of foreclosure. In the absence of any national policy that forces lenders to absorb losses, foreclosure prevention initiatives should allow flexibility to incent bank participation or mitigate bank obstruction that would limit the effectiveness of a given program.

Lesson 3: Program success often involves keeping ownership with the distressed borrower

Foreclosures result in banks repossessing vacant properties, known as REOs, until they can be sold in a secondary market. In the current housing market, REOs are largely purchased by investors. Typically investors seek to buy properties in communities where prices are likely to rebound the fastest – not in distressed inner city neighborhoods, where unsold REOs are at risk of devolving into blighted properties. When investors do purchase REOs in less desirable areas, they may be motivated to extract short-term rental income and later abandon the properties, continuing the downward price cycle that precipitates foreclosures.

Keeping distressed borrowers in their home avoids the social cost of uprooting residents and often prevents property disrepair. Outside of homeownership, this can be achieved by transforming borrowers into tenants via short sales to would-be landlords. HMFA’s Housing Assistance Recovery Program, launched in January 2009, provided up to $25,000 for non-profits to buy homes in danger of foreclosure and enter into a lease-to-purchase agreement with the original homeowner. Only one non-profit has used the program to purchase six homes, with one home sold back to the homeowner to date. This limited impact reflects the lack of entities with the capacity required to manage a lease-purchase type program for scattered-site properties.

Given the harmful effects of concentrated foreclosures and the difficulty of converting homeowners into tenants in their own properties, New Jersey housing policies should aim to keep homeownership with the original borrower.

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Box 3: Mediation as an Effective Foreclosure Prevention Strategy

The NJ Judiciary Foreclosure Mediation Program serves as a resource for a broad range of homeowners seeking to avoid mortgage default. Stakeholders involved in its operations include the Judiciary, HMFA, the Office of the Attorney General, the Department of Banking and Insurance, and Legal Services of New Jersey.

The program was established in December 2008 with an allocation of $12.5 million. Of this initial (and only) allocation of State funding, the Department of Community Affairs received $12 million to train and compensate housing counselors and lawyers through HMFA, and the Judiciary received $500,000 to provide foreclosure mediator services to homeowners.24

New Jersey’s foreclosure mediation process is voluntary for homeowners. When homeowners opt in, they engage a powerful foreclosure prevention technique – formal and structured communication between the homeowner and lender. Mortgage servicers are required to participate and to make an individual with decision-making authority available by phone to discuss solutions with all parties in the room.25

Through October 2011, the program has proven successful in preventing foreclosures, as 36 percent of all completed mediations resulted in at least a provisional loan modification. Of the New Jersey homeowners who have reached settlements through mediation, 89 percent have remained in their homes as opposed to agreeing to vacate by deed-in-lieu or short sale.26

However this decentralized mediation system is currently strained and able to process only about 5 percent of the current foreclosure pipeline in a timely manner.27 In the hardest hit counties, local chancery courts are log-jammed. Mediation works best when homeowners are given access to housing counselors or legal services, but the supply of professionals available to provide these services falls short of the need. In Section IV of this report, we recommend ways that HMFA can strengthen housing counseling and the foreclosure support network.

Applying Lessons to HomeKeeper HomeKeeper, the flagship foreclosure prevention program initiated by HMFA under the

administration of Governor Christie, provides up to $48,000 in the form of a zero interest, non-amortizing loan for mortgage payment or reinstatement assistance to households that have experienced unemployment or underemployment.28 A review of HomeKeeper through the lens of the lessons described above highlights the program’s strengths as well as its gaps.

From May through mid-December 2011, only fifty-five HomeKeeper loans have been approved, despite strong interest from struggling homeowners. HMFA has received approximately 1,700 completed applications to date, most of which are still under review. This backlog is largely attributable to insufficient staffing, which HMFA recently took steps to address by hiring additional program staff and contract underwriters. HomeKeeper’s eligibility guidelines further contribute to the initiative’s underperformance.

Eligibility. HomeKeeper is correct to focus on providing assistance to unemployed and underemployed borrowers since national trends show that negative income shocks are increasingly driving foreclosures. This trend appears to hold in New Jersey, as counties with a high share of mortgages in foreclosure are among those with the highest rates of unemployment in the state. Moreover, counties with a high intensity of foreclosure filings have and continue to experience steep drops in housing prices, often a harbinger of future foreclosures.

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The New Jersey counties hit hardest by these three mutually reinforcing forces – unemployment, foreclosures, and falling home prices – were also at the heart of the state’s exotic mortgage bonanza in the mid-2000s. As a result, they contain a high share of mortgages that are underwater or near negative equity. To the degree that there is overlap between unemployed homeowners and distressed underwater borrowers in these counties, HomeKeeper was initially hamstrung, unable to assist many of the homeowners it was meant to serve.

In December 2011, HMFA staff proposed revisions to the HomeKeeper Program Guidelines to allow borrowers with a first-mortgage LTV ratio of up to 135 percent to be eligible for HomeKeeper, among other modifications to the eligibility criteria. These changes will result in additional HomeKeeper approvals while still ensuring that deserving applicants receive assistance.

Lender Participation. A double-edged feature of HomeKeeper is that it requires only limited participation from lenders and servicers, which accept payments from HMFA but are not obligated to modify mortgage terms or forgive debt. Indeed, lenders benefit from the program, as they receive monthly payments or clearance of arrears. This has the tactical advantage of not allowing lenders to stymie outcomes, but the possible political disadvantage of raising doubts about the fairness of HomeKeeper, since the State bears the entire burden of borrower relief. This cost, however, is likely outweighed by the public reaction and economic losses that would follow program failure. HMFA is correct to be sensitive to lender incentives.

Preserving Homeownership. As its name implies, HomeKeeper seeks to maintain homeownership with the distressed borrower. This feature is consistent with the lesson learned from HMFA’s experience with its Housing Assistance Recovery Program. However, one criticism levied against HomeKeeper is that its mortgage payment assistance program only provides short-term support, not addressing long-term affordability and borrower willingness to pay. Critics argue, for example, that there is no guarantee that borrower incomes will recover by the time assistance expires and, thus, the program may end up forestalling inevitable foreclosures.

Such criticisms may not appreciate that the temporary assistance offered by HomeKeeper can reach a substantially larger number of New Jersey homeowners with the available HHF resources as compared to a principal reduction program that is designed to permanently lower the borrower’s housing payment. A substantial reduction in mortgage principal – of about $50,000 per home by some estimates – is needed to meaningfully lower monthly payments. Moreover, the latter strategy requires lenders to make loan modifications, increasing transaction costs.

In considering possible HHF programs, HMFA will need to weigh the number of homeowners that each program can reasonably be expected to assist against additional considerations such as the sustainability of the intervention, the opportunity to target resources to stabilize neighborhoods, and the ways in which demonstration effects might impact market actors.

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Section IV

Recommendations

Recommendation #1: Expand the eligibility criteria for New Jersey HomeKeeper.

A financial assistance program’s success cannot be defined purely by the level of funds disbursed; such a program’s failure, however, can certainly be defined by a lack of disbursed funds. The fact that the majority of HomeKeeper applications have been denied does not necessarily indicate that the program does not have the potential to provide effective foreclosure relief. A lesson learned from HMFA’s experiences with Rescue and MAP is that expanded eligibility criteria could allow for greater disbursement of funds. Subsequently, we recommend that HomeKeeper expand eligibility in three ways.

1.1: Expand eligibility to include borrowers with negative equity.

The precipitous decline in housing prices in the past five years has left many homeowners with negative equity in their properties. In New Jersey, over 16 percent of homeowners with mortgages have LTVs greater than 100 percent29; they owe their lenders more money than the current market value of the house.

Even if they can afford their monthly payments, there is concern that deeply underwater homeowners may decide that defaulting is more sensible. Those who choose to default despite maintaining the resources to make their mortgage payments are known as strategic defaulters.

The transaction costs associated with default, including foreclosure and transition to a new residence, make it irrational for a borrower who has a small amount of negative equity (LTV just above 100 percent) to default if he or she can afford to continue making payments. Economists at the Federal Reserve studying underwater homeowners from states with sharp declines in housing prices estimate that borrowers typically make payments until their LTVs are quite high.30 Their study found that “the median borrower who ‘strategically’ defaults does not walk away from the mortgage until the amount owed exceeds the value of the home by 62 [percent].”31

It is rational to place an eligibility cap on the level of negative equity to curb aid disbursement to strategic defaulters. There is little justification, however, for such a cap to be set at an LTV of 100 percent, as has been the case for HomeKeeper since its inception. This issue is especially critical because the roughly 300,000 underwater homeowners in New Jersey represent a nontrivial share of the state’s population.

Furthermore, underwater homeowners do not violate the spirit of HomeKeeper’s eligibility requirements purely because of their underwater status. That is, HMFA (as well as Treasury) seeks to aid homeowners who are distressed through no fault of their own. There is no indication that mortgage-holders who meet all other HomeKeeper eligibility requirements – and who maintain LTVs greater than 100 percent – are any more personally responsible for their distress than those who meet the requirements and maintain positive equity in their homes.32

Recent proposed changes to HomeKeeper that raise the LTV ceiling to 135 percent reflect these concerns. Research on strategic default indicates that homeowners are rarely willing to discontinue payments (despite maintaining the financial ability to pay) until LTVs rise above this level.33

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1.2: Expand the definition of hardship to include family medical emergency, divorce, and death in the family; given this expansion, discontinue MAP.

Some borrowers are unable to remain current on their mortgage payments due to an increase in expenses rather than a decrease in income. Temporary increases in expenses may include emergency medical bills or the costs associated with divorce or the death of a family member.

Expenses such as these often operate as de facto income reductions (or, more accurately, reductions in non-emergency income). The high cost of a medical procedure, for example, may leave a homeowner without sufficient income to afford their mortgage payment through no fault of his or her own. In a scenario of underemployment (which is covered by HomeKeeper), similar results occur. Income is reduced, and fewer resources are available for the provision of basic necessities, resulting in missed mortgage payments.

By allowing HomeKeeper aid to be disbursed only to unemployed or underemployed homeowners, HMFA is prioritizing this particular hardship over those listed above. The rationale for providing HomeKeeper funds, though, is to support homeowners who are distressed through no fault of their own. Medical emergency, divorce, and the death of a family member are not the fault of the homeowner, and it is therefore inappropriate to disqualify applicants with these hardships while aiding those who are unemployed or underemployed.

Given this expansion of the permissible hardship for HomeKeeper eligibility, HMFA should discontinue MAP. A key difference between HomeKeeper and MAP is that MAP allows fully employed homeowners to receive aid; that is, MAP defines hardship to include medical emergency and substantial and permanent changes in household composition. If this difference were eliminated, the justification for operating two separate programs would be largely negated. Instead, the $2 million allocated to MAP annually could be diverted into other foreclosure-related activities, streamlining HMFA’s service delivery operation.

Alternatively, HMFA could maintain HomeKeeper's focus on unemployed and underemployed borrowers and create a new, complementary HHF program to provide temporary mortgage payment and reinstatement assistance to borrowers who have suffered a broader range of financial hardships. Michigan, Ohio, and Rhode Island have taken this approach.

1.3: Expand eligibility by allowing one-to four-family homes to receive aid.

As noted earlier, urban centers in New Jersey contain far fewer single-family homes as a percentage of their total housing stock (only 16 percent in Hudson County, for example) than other regions in the state. Granting eligibility to properties that house three or four families rather than one or two would enable HomeKeeper to reach more distressed borrowers in these urban centers, where multi-family homes are more common.

By expanding eligibility criteria to increase the size of acceptable properties to residential structures with one to four units, HMFA can not only provide relief to more homeowners, but can also better accomplish the goal of stabilizing communities like Newark, Trenton, and Camden that are in the midst of severe economic unrest.

This strategy does entail the provision of aid to landlords who oversee as many as three units (properties eligible for HomeKeeper funds must be owner-occupied, so the landlord must live in one of the units). While HomeKeeper is not intended to subsidize landlords of large-scale properties, the prevalence of three- and four-unit properties in distressed urban centers amplifies the justification for this approach. This is not an uncommon practice; California, Ohio, and Georgia allow eligibility for homes with up to four units in their HHF assistance programs.

Innovative marketing strategies and hiring models can also bring about increased uptake in HomeKeeper. Appendix A offers insights from Michigan, Ohio, and Rhode Island.

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Expected Impact

An expansion of HomeKeeper eligibility will allow more New Jersey homeowners to claim foreclosure aid.

The expected impact of this action, however, it constrained by the available resources. The proposed changes could increase HomeKeeper eligibility by more than 30,000 households (see Appendix C for these calculations), though New

Jersey’s HHF allocation cannot provide adequate foreclosure relief to such a large group.

Given the $112 million currently allocated to HomeKeeper, the program has the potential to provide aid to roughly 2,300 households if it awards the maximum funding ($48,000) to each household. If the average funding per

household were half of that amount ($24,000), HomeKeeper could extend its reach to roughly 4,600 households. To date, however, many HomeKeeper applicants have been denied funding, suggesting that eligibility expansions may

be needed to allow the program to disburse the entirety of its $112 million.

Potential Risks

Type of Risk Mitigation Strategy

Operational:

• Determination of hardship resulting from medical emergency, divorce, or death of a family member may more difficult to obtain. This information may be more sensitive, which could limit cooperation from applicants.

• Official documentation of qualifying events can be easily obtained by the applicant. This documentation is often required for other official processes, and therefore can reasonably be expected as a prerequisite for the provision of aid.

Financial:

• Expansion of eligibility criteria will increase the outlays of the program; HMFA must re-evaluate its timeline for disbursing HomeKeeper funds based on the new guidelines.

• Given the low level of accepted applications at the onset of the program, HMFA should be seeking ways in which to increase the speed with which funds are disbursed.

Political:

• Since urban regions have undergone the largest declines in housing prices in the state and exhibit the highest levels of negative equity, increasing the LTV ceiling could be viewed as an expansion of aid to urban regions at the expense of suburban and rural areas.

• Larger proportions of the housing stock in urban regions are three- and four-family properties. Increasing the maximum number of units in eligible homes could be viewed as an expansion of aid to urban regions at the expense of suburban and rural regions.

• Data on the increasing prevalence of negative equity in the state can be used as a justification for a higher LTV ceiling. Skeptics can also be given information on mortgage payment assistance programs in other states, which in many cases allow for LTVs greater than 100 percent.

• Skeptics can be given information on mortgage payment assistance programs in other states, which in many cases allow for properties with up to four units.

Reputational:

• An increased LTV ceiling introduces the risk that strategic defaulters may receive foreclosure aid.

• An increased ceiling on the number of units in eligible properties introduces the risk that wealthy landlords may receive foreclosure aid.

• Research on strategic default can be used to rebut the claim that a significant number of homeowners with LTVs below 135 will discontinue mortgage payments due to an unwillingness to pay.

• The prevalence of three- and four-family properties in the most distressed regions of the state should offset the risk of payments to landlords who do not require financial assistance.

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Recommendation #2: Allocate $50 million in HHF funds to create the New Jersey Mortgage Resolution Fund as proposed by New Jersey Community Capital, Mercy Housing, and partners. Disburse funds in two rounds of $25 million each, with release of the second round contingent on satisfactory Fund performance.

Depressed housing prices and escalating foreclosure rates have made it abundantly clear that traditional policy levers have failed to adequately address the housing crisis. Recognizing the need to consider innovative approaches, HMFA is considering a proposal by New Jersey Community Capital (NJCC), the Housing and Community Development Network of New Jersey, Mercy Housing, Inc., and additional national partners to create the NJ Mortgage Resolution Fund (NJ MRF) with an allocation of the state’s HHF resources. This program would build on the model of the Illinois Mortgage Resolution Fund that was established in July 2011 with Treasury’s approval.

The MRF model aims to prevent foreclosure and stabilize neighborhoods by using HHF resources to: (1) purchase delinquent residential mortgages (notes) from lenders at a discounted price consistent with the mortgage’s net present value and the underlying property value; (2) modify the mortgages of qualifying households to an affordable level; and (3) provide households not eligible for modification with support for property disposition and transition to new housing, while finding a buyer for the property. Figure 10 summarizes the Illinois MRF.34

Several strategic features of NJ MRF motivate our recommendation to fund this proposal. First, the Fund can directly implement, and thus test, a promising foreclosure prevention strategy: coupling meaningful principal reduction with mandatory counseling and debt-to-income targets. Currently, lenders have largely refused to reduce principal balances. If the MRF approach to restructuring distressed mortgages reduces the likelihood of re-default, it may influence broader market practices and policies. Second, NJ MRF will focus resources in an attempt to help stabilize neighborhoods, which is likely to have important spillover benefits. Lastly, the Fund is designed to be scalable and revolving.

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Figure 10: Illinois Mortgage Resolution Fund Model

Source: Graphic developed by the authors based on key informant interviews and Summary Guidelines for the Mortgage Resolution Fund Program, Illinois Housing Development Authority and Mercy Housing, August 2011.

2.1: Set transparent criteria to determine which geographic areas and mortgages are eligible for NJ MRF assistance.

From the standpoint of neighborhood stabilization, NJ MRF should target note purchases in defined geographic areas to maximize neighborhood impact within resource constraints. Stabilizing a neighborhood involves fostering market recovery, which will broadly benefit homeowners in the area. Conversely, just one or two vacant properties on a block can depress home values, contribute to blight, and cause further disinvestment. Effective neighborhood stabilization typically requires focusing limited resources on areas where small numbers of at-risk or foreclosed properties are undermining the vitality of otherwise viable communities, and where a modest investment can have a substantial impact.35,36 Since the New Jersey foreclosure process is so lengthy, gaining control of distressed notes early also improves the chances of preventing property abandonment, deterioration, and loss of value.37

We recommend the following eligibility screens:

Geographic Market Screens. The criteria developed by MRF appropriately target areas with intermediate-to-high foreclosure risk and viable market strength. Census tracts must score between 12 and 19 on the HUD NSP-2 index of estimated need, have a USPS vacancy rate of 10 percent or less, and be considered a viable housing market.38 See Figure 11 for a map of the geographic areas that meet these criteria and have been proposed for NJ MRF assistance.

HHF Eligibility Screens. Eligible loans must have first-lien position for an owner-occupied home with one to four units. To enable workouts, loans with second mortgages should be excluded from purchase. Loans should not be excluded because of LTV, credit score, interest rate, amortization term, origination date, or mortgage insurance.

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Thresholds for Note Availability. HMFA must determine not only what types of areas to target through NJ MRF, but also how many target areas are realistic given the resources available. The current NJ MRF proposal identifies 215 eligible census tracts spread across fifty-four zip codes in twelve counties. Since it is difficult to predict where pools of distressed notes will be available for purchase, it is appropriate to designate many census tracts as eligible. However, actually purchasing notes in all twelve counties would very likely spread resources too thin, diluting their impact. The initial round of NJ MRF should target perhaps five counties where the Fund determines that it is able to purchase sizable loan pools. Before a note purchase occurs in any eligible census tract, some threshold number of eligible loans should be available in that tract plus immediately adjacent tracts.

Figure 11: Geographic Market Screens Proposed for NJ Mortgage Resolution Fund

Data Source: New Jersey Community Capital and the Mortgage Resolution Fund, LLC.

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2.2: Set transparent guidelines for what happens to the notes and properties that NJ MRF acquires.

HMFA staff has expressed concern that the NJ MRF may inadvertently purchase notes that are ineligible under HHF guidelines, such as a property that is not owner-occupied. In this event, HMFA would need to reimburse Treasury for any funds expended on the ineligible loans. We consider this risk to be low, provided that NJ MRF follows sound due diligence practices. Sufficiently detailed information is available from market databases and servicing records to screen out loans on investment and vacant properties. On the other hand, assessing market risks and making judgments about what price to pay for distressed notes will be a challenge for NJ MRF.

For notes purchased by NJ MRF, it is important to establish clear and consistent guidelines as to how acquired mortgages are to be modified and how properties are to be transferred. To facilitate an equitable process we recommend:

Sound Underwriting. Decisions on whether and how to modify a mortgage must be based on sound ability-to-pay underwriting. MRF modifications should provide homeowners with principal balance reduction, a fixed-rate mortgage, and an affordable housing payment of no more that 31 percent of gross monthly income. Homeowners who receive modifications should be required to participate in homeownership and credit counseling.

Planning for a Variety of Disposition Strategies. When homeowners are ineligible for or uninterested in a modification, MRF should plan for variety of disposition strategies to transfer the property. Core strategies include short sales in the market, perhaps providing a “first look” to non-profit or for-profit organizations that are working with an established neighborhood stabilization program; sale of REO properties to affordable housing developers or other entities for rehabilitation and re-sale or rental; direct sale of properties as affordable housing; and strategic land banking. Consistent guidelines do not imply that all sales must be on the same terms; e.g., HMFA may want to adopt different rules for non-profit entities, for-profit developers, and buyers who will live in the home. We recommend that NJ MRF avoid pursuing a lease-to-purchase strategy, as substantial infrastructure is required to manage such a program.39

It is important that the guidelines for NJ MRF eligibility, mortgage modification, and property transfers be clearly expressed prior to the program launch and readily available on the Internet and in print to all interested parties.

Successful management of the NJ MRF program requires a broad skill set and multiple capacities, including the ability to evaluate and acquire notes, to refinance and service loans, and to manage and convey properties efficiently and at scale. In our judgment, the NJ MRF is a capable non-profit partnership, which has both local and national expertise and has identified specialized firms for loan trading and servicing. It further makes sense to utilize and develop the capacities of existing organizations, which will persist after the HHF program has ended. Within a partnership structure, it is important to be clear about how policy guidelines will be established and which organization(s) have the authority to make programmatic decisions.

Based on the experience of the Illinois Housing Development Authority, HMFA should expect to dedicate significant staff time to the development of NJ MRF program guidelines and the oversight of note purchases and restructuring. HMFA may want to hire a designated NJ MRF Program Coordinator.

Expected Impact

According to the economic model developed by MRF, LLC40, if NJ MRF purchases notes at 40 cents on the dollar of unpaid principal balance (or 60 cents on the dollar of current property value), an HHF allocation of $50 million would enable the Fund to acquire and restructure about 350 notes while recouping all associated costs. If market conditions

allow for the sale of stabilized loans to revolve the HHF investment, up to 700 homeowners may be directly assisted. If NJ MRF resources are effectively targeted to stabilize neighborhoods and housing markets, additional homeowners will

benefit in the affected areas.

Estimated number o f bene f i c iar i e s : 350 – 700 (depending on whether funding i s r evo lved)

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Potential Risks

Type of Risk Mitigation Strategy

Operational:

• It is unclear if MRF LLC will be able to purchase notes at a discount sufficient to reduce principal balances and recoup administrative costs.

• It is unclear if MRF LLC will be able to purchase notes with sufficient geographic concentration to foster neighborhood stabilization and market recovery.

• Limited investor appetite for re-performing notes may limit the ability to revolve funds.

• The ability to finance bulk buys appears necessary to participate in the distressed mortgage market.

• The market is trading based on underlying property values; prices of 50 to 62 cents on the dollar of property value are typical nationwide. Prices may be lower in NJ owing to the length of the foreclosure process.

• MRF LLC builds in a 25 percent loan-loss-reserve fund as a credit enhancement.

Financial:

• NJCC and Mercy Housing project that the Fund will earn a positive financial return on investment, but this projection is sensitive to the price at which notes are purchased.

• The program’s expenditure-per-beneficiary is high, particularly if funds are not revolved.

• This program can be touted as the only model being considered that seeks to get Treasury’s investment back, and therefore is a responsible use of public dollars.

• It is appropriate for public sector investments to take into account both financial and social returns.

Political:

• Political considerations might suggest that NJ MRF should address all twelve eligible counties simultaneously, but this will likely dilute impact.

• Accusations of favoritism in mortgage workouts or property transfers would undermine credibility.

• Negative optics of HMFA assuming the role of a landlord and evicting residents whose notes cannot be modified.

• A transparent and data-driven planning process may convince elected officials and citizens of the merits of targeting limited resources, while clear eligibility criteria and guidelines are critical to avoid any appearance of favoritism.

Reputational:

• Perhaps 40 percent of homeowners whose mortgages are purchased by MRF LLC could be dislocated, either through short sale, a deed in lieu arrangement, or foreclosure, though this estimate is uncertain.

• MRF LLC may inadvertently purchase some mortgages where the owner is not eligible for aid, such as investment properties.

• Offer transition assistance, and in certain cases the right to rent, to people who cannot retain ownership.

• In Illinois, a third party subcontracted by MRF LLC will physically visit properties to vet for vacancy. In addition, the goal of stabilizing neighborhoods takes priority over the occasional errant purchase.

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Projected investment outcomes are sensitive to varying note purchase prices, delineated in the following stress-test of the MRF Program Economic Model:

Projected Outcomes from Investing $50M in MRF Under Varying Scenarios

Scenario 1 Scenario 2 Scenario 3

60% Mods - 35% Short Sale - 5% Foreclosure

60% Mods - 30% Short Sale - 10% Foreclosure

50% Mods - 30% Short Sale - 20% Foreclosure

Price of Notes (cents on dollar)

No. Loans Return No. Loans Return No. Loans Return

0.30 445 29.55% 444 28.08% 433 24.81% 0.35 391 13.96% 390 12.68% 382 10.17% 0.40 344 0.20% 343 -0.89% 337 -2.85% 0.45 307 -10.59% 306 -11.53% 301 -13.10%

Notes: Prices reflect rate that MRF LLC will pay on the unpaid balance of mortgages it buys; in practice, distressed notes are trading based on assessed property values. “Mods” refer to mortgage modifications.

Scenarios describe share of notes that result in projected outcomes: the distressed borrower stays in their home (modification) or leaves their home (short sale or foreclosure).

Number of loans is projected for the funds first cycle; note that reach of future cycles depends in part on the financial outcomes of the original cycle - i.e., gains increase reach; losses decrease reach.

Recommendation #3: Allocate $25 million to a principal reduction and equity-sharing program in which lenders match State funds on a one-to-one basis, thus relieving the borrower’s negative equity position.

To date, most federal and state policies have addressed temporary affordability and unemployment issues while ignoring the problem of negative equity. However, such programs only “buy time” whenever the underlying asset is worth less than what the borrower owes the lender. According to CoreLogic’s third quarter negative equity report, 22.1 percent of all residential mortgages in the U.S. were in negative equity. New Jersey’s negative equity numbers stand at 16.3 percent of all mortgages, while an additional 4.3 percent of mortgages are near negative equity.41 For interventions to be sustainable in the long run, this issue must be addressed.

Furthermore, although most borrowers with negative equity continue to make their mortgage payments, high LTV ratios from house price depreciation increase delinquency and foreclosure rates through two channels. First, LTV ratios well above 100 percent encourage strategic defaults due to a debt overhang problem (i.e., any local increase in the home value primarily increases the value of the mortgage lien, rather than benefiting the homeowner). Second, high LTV ratios reduce the borrower’s ability to refinance or renegotiate the mortgage, making the borrower more sensitive to negative economic shocks or payment resets.

A principal reduction program is the best way to resolve both the affordability and the willingness-to-pay dilemma. The program we recommend has two components. The first part consists of writing-down the principal balance on the mortgage to the current property value. The cost of the write-down will be shared between the lender and HMFA. The second part consists of restoring positive equity through an equity-sharing arrangement between the borrower and HMFA. The lender may also enter the equity-sharing agreement, giving them the opportunity to benefit from any future property value appreciation.

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3.1: Target principal reduction initially to regional/community bank and HMFA-owned loans.

Previous principal reduction programs have struggled with low lender uptake, particularly from the so-called Big Five lenders. Since community banks likely will be more receptive, we recommend establishing partnerships with such banks as a means to roll out the program. This will also provide an opportunity to measure the success rate of the program, and these numbers can be used in future negotiations with other lenders. Additionally, for HMFA-owned loans, the matching component of the program may be bypassed. A potential limitation of this strategy is that loans owned by community banks are less likely to be distressed, thus limiting the universe of borrowers that can be assisted. If implemented successfully, this program could be a model for scaling up principal reduction programs with the Big Five banks and the GSEs, which hold the majority of mortgages42 and therefore are crucial in efforts to stabilize the housing market.

3.2: Be prepared to ramp up when national conditions change, allowing for principal reduction on a larger portfolio of loans.

Conditions for principal reduction may be shifting as a result of the ongoing negotiations related to the robo-signing scandal. News reports have suggested that major banks could be required to commit billions of dollars to reduce principal balances under a proposed deal to settle allegations of impropriety. This deal may prompt banks to expand principal reduction programs to more homeowners.43

Layout of the Program

Eligibility Requirements. Borrowers with FICO scores below 650 are not eligible for the program. Current LTV ratio needs to be between 105 percent and 135 percent. Full documentation must be provided for the underwriting of the restructured loan. Only owner-occupied, one and two-unit single-family homes are eligible. Origination amount may not exceed $429,619 for one-unit dwellings and $550,005 for two-unit dwellings. The borrower must have a front-end debt-to-income ratio (DTI) over 31 percent. Borrowers may not own any other real estate or be in bankruptcy. Finally, the borrower does not need to be delinquent on the loan in order to qualify for the program.

Special consideration will be given to borrowers who became delinquent on their loan as a consequence of an income shock. In these cases the borrower could at most have missed one payment in the twelve months prior to the income shock. In addition, if currently under/unemployed, the borrower needs to be eligible for at least twelve months of unemployment insurance or payment assistance through another program in order to qualify.

Principal Reduction Cost Sharing Structure. HMFA and the lender will share the cost of reducing the principal balance to the current market value of the house. However, HMFA’s write-down contribution will be performance-based. This means that a higher share will be provided for borrowers who have historically remained current on their loan. In no case should HMFA’s contribution exceed $50,000 or 50 percent of the total reduction, whichever is lower. The lender will also agree to cancel any late fees or penalties the borrower has incurred during delinquency. If the front-end DTI on the resulting principal balance exceeds 31 percent, then the lender is required to reduce the interest rate and/or increase the term of the loan on the mortgage to bring the new DTI to 31 percent.

Equity Sharing. HMFA will take a 10 percent equity position on the property. The lender has the choice to enter the equity agreement. If they decide to do so, the combined shared equity position may not exceed 15 percent, of which HMFA’s position should be no less than 5 percent. This equity position will provide a buffer to the borrower should home prices decline further. The borrower will be required to make a monthly equity payment on top of the regular monthly payment. The equity position can be thought of as a low interest rate bridge loan; the interest rate will equal the interest rate paid on HMFA Series A bonds or 3 percent, whichever is lower. This will bring the combined DTI to no more than 34 percent on the restructured mortgage. If there is a co-signer on the mortgage, then their income can be taken into consideration when calculating the DTI.

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The borrower’s equity share accumulates with each payment. While the borrower may accelerate payments on the mortgage debt, they may not accelerate the equity payments. The borrower must also agree to an expedited settlement process in the event of default under the restructured mortgage. When the house is sold, any capital gains or losses will be shared proportionately between HMFA, the lender, and the borrower based on their respective equity shares at the date of the sale.

HMFA Safeguards. HMFA’s share of the principal write-down and the equity investment will be held in escrow until the restructured mortgage meets a performance guarantee of six timely payments. When this guarantee is met, the escrow account plus interest will be released to the lender. If the performance guarantee is not satisfied, then the escrow account plus interest will be returned to HMFA. This will incentivize the lender to carry out the appropriate due diligence on the loans they submit for approval to the program, thus limiting the logistical burden on HMFA, and will avoid a scenario where the lender is tempted to keep the “good” credit-risk loans on its own portfolio.

Expected Impact

Considering that approximately 90 percent of mortgage loans in New Jersey are first-lien loans and assuming that this

proportion is the same for loans in negative equity, there is a potential of 279,000 first-lien loans in negative equity. Using the First American CoreLogic House Price Index (HPI) to estimate the current value of the home, 60 percent of all loans in negative equity fall between the 105 percent and 135 percent LTV range. This reduces our target population to 167,400. Taking into account that the percentage of owner occupied homes stands at 80 percent and that one- and

two-unit dwellings account for 80 percent of homes, and further assuming that 30 percent of borrowers will not qualify for the program due to poor performance, lack of documentation or low FICO scores, we arrive at a target population of 75,000 mortgages. If in addition we consider that GSE or privately securitized loans will not initially participate, our

potential target population falls to approximately 7,500 loans.

Since the average loan in the state has a value around $240,000 and assuming that the average loan in our target population has an LTV of 120, the total amount of negative equity in this group totals $300 million. This means that if HMFA uses $25 million of Hardest Hit funds and this amount is matched one-to-one by lenders, approximately 16.7 percent of the target population will be helped. Seen another way, if the average HMFA aid provided per borrower is

$25,000, then the principal reduction program will help approximately 1,000 homeowners.

Estimated number o f bene f i c iar i e s : 1 ,000

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Potential Risks

Type of Risk Mitigation Strategy

Operational:

• Getting this program off the ground may be challenging since many holders of mortgage debt are reluctant to embrace principal reduction because they would have to recognize their losses upfront, generating massive write-downs on their balance sheets and higher upfront costs. This could also deter community and regional banks from participating in the program.

• This presents a large implementation barrier, but we believe that the equity-sharing component of the program minimizes this risk. Additionally, HMFA could hold preliminary conversations with local banks to gauge appetite for the proposed program. This operational risk does not apply to loans held in HMFA’s books.

Financial:

• A common concern regarding principal reduction is that the program’s expenditure-per-beneficiary is high and that lenders are tempted to keep the safest loans in their books; thus, the principal reduction contribution could be seen as “wasted” funds should the borrower re-default.

• We believe that the likelihood of re-default is minimized under principal reduction modifications. Additionally, since HMFA’s principal reduction and equity-sharing contribution will be held in escrow until a series of timely monthly payments is met, the lender is incentivized to perform the appropriate due diligence in each case.

Political:

• The primary political risk for any principal reduction program is that it will be rejected by policy makers and/or resented by taxpayers. Many taxpayers do not want tax dollars to be used to help irresponsible borrowers or lenders.

• The transparent guidelines required by the proposal may reduce the skepticism of policy makers and taxpayers.

Reputational:

• It is possible that some borrowers benefiting from principal reduction may be seen as “undeserving.” The program may also be seen as rewarding irresponsible behavior, generating concerns of moral hazard.

• This risk is moderated as a result of HMFA’s principal reduction contribution being performance based.

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Recommendation #4: Allocate $2 million for Transition Assistance for delinquent borrowers who face dislocation as an outcome of the NJ MRF program or whose mortgages are in HMFA’s portfolio.

Many distressed borrowers do not have the financial means to stay in their home even with loan modifications that increase affordability. Transition Assistance programs that encourage short sales or deeds-in-lieu of foreclosure ensure that families that must move have the means to do so.

Transition Assistance is vital to New Jersey for two reasons. First, the high cost of rental housing in New Jersey relative to other states may make transitioning to new housing particularly difficult, even for borrowers who realize their current home is not sustainable. Second, the extraordinarily long process of judicial foreclosure in New Jersey (currently an average of over 900 days) helps create a large “shadow inventory” of distressed homes and prevents housing markets from reaching equilibrium. Additionally, if the NJ MRF proposal is approved there will be a number of homeowners displaced.

We recommend ameliorating these issues by encouraging short sales and deeds-in-lieu of foreclosure through payments to distressed borrowers. Hardest Hit Funds have been used in five states (California, Ohio, Oregon, Rhode Island, and South Carolina) to subsidize transition assistance programs. Such programs include payments of between $2,000 and $5,000 to borrowers to help transition to new housing, payments of up to 10 percent of the values of second liens on property, and payments to lenders in exchange for agreement to short sales and forgiveness of deficiency judgments.

4.1: Offer $5,000 to borrowers with an HMFA or NJ MRF loan who complete a short sale or deed-in-lieu of foreclosure.

This money could be used for moving costs, security deposits on new housing, and to pay off second liens. Delinquency judgments would also be forgiven for these borrowers. We recommended a payment on the higher end of the spectrum because of the high cost of rental properties in New Jersey and the poor credit of most distressed borrowers, which can make it particularly difficult to find new housing close to their current homes. Ultimately, this small investment can encourage temporary and long-term solutions that reduce the risk of homelessness associated with foreclosure.

Participation in similar Transition Assistance Programs has been limited. This is a result of several barriers, including lenders administering larger payments for cash-for-keys programs than the assistance offered by states; restrictions on participation to only borrowers denied an alternative loan modification (such as HAMP); and private mortgage insurance payments that are disbursed to lenders who complete the foreclosure process but are not available to lenders who agree to short sales.

However, NJ MRF models estimate that 40 percent of borrowers in program will not be eligible for modification, and will not stay in their homes. Such borrowers should be helped to a “graceful exit” from their homes in ways that will be least disruptive to families and neighborhoods.

In addition, there are struggling homeowners whose loans are part of HMFA’s portfolio who also would be candidates for transition assistance. As of October 2011, HMFA held almost 11,000 mortgages for owner-occupied homes in New Jersey, of which 1,148 loans (10.6 percent) were listed in "Critical Delinquency,” including 890 loans listed as potential foreclosures and 142 loans over 3 months delinquent. If only one-quarter of the loans listed as potential foreclosures were actually foreclosed, that would constitute over $1 million of additional transition assistance eligibility, at the $5,000 per family level of assistance.

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4.2: Offer homeowners in NJ MRF properties right of first refusal to rent the property if MRF, LCC or a local community development corporation assumes ownership.

Under this proposal, rental rates would be fair market price for two to three years. Allowing borrowers to rent their current property reduces the glut of foreclosed homes on the market and the blight associated with vacant homes, and prevents the disruption to family life associated with foreclosures. Additionally, encouraging borrowers to exit the judicial foreclosure process early and transition to renting can help reduce the backlog of foreclosures clogging the courts. Such a program should exclude speculators by limiting eligibility to borrowers who have been in their properties for at least two years and who own only one home.

A successful “Right to Rent” pilot program executed for distressed properties acquired through NJ MRF could encourage more wide-scale participation by other lenders and servicers, including GSEs, which have hitherto been reluctant to allow former borrowers to remain in their homes as renters

Expected Impact

An allocation of $2 million to a Transition Program has the potential to aid 400 households if it awards $5,000 to each household. This is a conservative estimate of the number of borrowers who will be unable to keep their homes across

the distressed loans in the HMFA portfolio and those that may be acquired through a NJ MRF purchase.

Estimated number o f bene f i c iar i e s : 400

Potential Risks

Type of Risk Mitigation Strategy

Operational:

• Existing Transition Assistance Programs, including the Home Affordable Foreclosure Alternatives (HAFA) program of the Treasury Department as well as the HHF programs administrated by state HFAs, have struggled to attract participation by both servicers and borrowers.

• This proposal calls for tightly targeting potential clients, so program could be better marketing to individuals in the MRF and HMFAs portfolio.

Political:

• The optics of paying homeowners to leave their properties that have been purchased by the MRF could reflect poorly on HMFA.

• Sell transition assistance as the state taking responsibility to ensure that MRF homeowners are being looked after. Transition Assistance could actually generate favorable publicity.

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Recommendation #5: Allocate $73 million from the initial HHF allocation to create a Reserve Fund that is used to expand the most successful program(s) by 2015.

The foreclosure landscape in New Jersey and across the country is continuously changing.

Recommended programs, including NJ MRF and principal reduction, rely on participation by third parties or other events outside the direct control of HMFA to fully succeed. To allow for the greatest potential impact across programs under different future scenarios, we recommend creating a $73 million HHF Reserve Fund, in addition to earmarking funds to specific programs as outlined in the recommendations above. We believe this balances the need to disburse HHF funds quickly with the flexibility required to expand support to the highest performing programs.

The Reserve Fund will set aside $73 million from the initial HHF allotment that will be allocated in later program years to expand the most successful program(s). We anticipate the following potential uses of the Reserve Fund:

Expand HomeKeeper. We anticipate that the expansion of eligibility guidelines will enable many more approvals through the HomeKeeper program. As such, we recommend using some or all of the additional Reserve Funds to expand assistance through this program if the initial funds can be obligated.

Fund a Third Round of NJ MRF. The MRF model is promising but not yet proven. While we

believe that the potential risks have been appropriately mitigated through program design, we recommend an initial allocation of $50 million for this program, rather than the $100 million originally sought by the nonprofit partners, due to the untested nature of the program. If the NJ MRF proves to be successful, the Reserve Fund may be used to make additional loan purchases.

Expand Scope of Principal Reduction Program. While we believe principal reduction to be an

important foreclosure mitigation strategy, we have recommended beginning with a pilot program serving only loans held by community and regional banks. This is based on our findings surrounding the noncooperation of major national banks and GSEs. However, if the Federal Housing Finance Agency allows GSEs to reduce principal on their loans, or if the largest mortgage servicers are required to participate in principal reduction through the upcoming robo-signing settlement, we recommend using the Reserve Fund to expand our proposed program to include all servicers.

We recommend that the HMFA board assess possible allocations in the first quarter of 2013 to decide if funds should be distributed, revisiting the issue every six months thereafter until all funds are allocated. To ensure distribution within the HHF Treasury timeline, we recommend that all Reserve Fund money be allocated by the end of the first quarter of 2015.

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Expected Impact

The expected beneficiaries of these funds will vary widely based on a range of factors, including program allocation,

timing of disbursement, and the health of the New Jersey housing market.

Potential Risks

Type of Risk Mitigation Strategy

Operational:

• Programs may not be able to efficiently incorporate a large influx of additional funds in later program years.

• Programs should be designed with the possibility of an allocation of future funds in mind. In addition, allocation decisions should consider the operational capacity for programs to effectively use the Reserve funds.

Reputational:

• The Reserve Fund could be negatively portrayed to the public as not using all funds available to help homeowners, giving the perception that HMFA is not doing enough to mitigate foreclosures in New Jersey.

• Communication will be key. HMFA should stress that all monies will be spent within the program period, and the Reserve Fund ensures that HHF money will be spent in the most effective way possible, by allowing HMFA to react to changes in the foreclosure landscape.

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Recommendation #6: Establish a Foreclosure Data Intermediary in conjunction with local academic and philanthropic partners.

The expansive scope and unpredictable outlook of New Jersey’s foreclosure crisis has increased the

importance of data-driven policy interventions. While data has always been essential for HMFA programming, the need to disburse HHF dollars rapidly means that HMFA and its stakeholders must calibrate programs to the current needs and future trends of many highly variable markets. While some of the best data is held by public entities, it can be difficult to locate and access. Proprietary data is also extremely valuable, but can be expensive to purchase and may lack transparent collection methodology. Furthermore, research suggests that when academics and practitioners analyze data collaboratively, access and usability increase.44

We recommend that HMFA work with local philanthropic partners and academic institutions to create a New Jersey data center that focuses on local foreclosure-related indicators. This initiative could enhance HMFA’s efficiency by maintaining reliable foreclosure figures, providing timely market analysis, and evaluating HHF programming. This would streamline data collection and analysis functions, freeing up HMFA staff for other roles. Additionally, a central data repository would lower barriers to sharing data among public, private, and non-profit stakeholders, enabling the state as a whole to better address the foreclosure crisis.

The use of non-governmental partnerships to enhance data collection and analysis has a proven track record in HHF states. In Illinois, local and state agencies contract with the Woodstock Institute to collect and clean mortgage origination data that is distributed publically through easily-manipulated spreadsheets. In Michigan, foundations partnered with local governments to found Data Driven Detroit, a “one-stop-shop” data intermediary for policy makers. In New York, The Furman Center for Real Estate and Urban Policy at NYU has a publically available Data Search Tool with access to robust housing databases.

6.1: Approach the Center for Urban Policy Research at Rutgers and request that they host the Data Intermediary.

The Center for Urban Policy Research, part of the Bloustein School of Planning and Public Policy at Rutgers, is an ideal home for this project. It is a respected institution with a track record of prioritizing local urban issues. Furthermore, Bloustein faculty member Kathe Newman, who has professional interest and expertise in the foreclosure crisis, believes that a data center would add value to New Jersey partners, and has expressed interest in implementing such a proposal.45 Since Rutgers is a sister state agency, HMFA would be able to easily contract with the program for such an initiative.

6.2: Solicit local funders to establish and staff such a project.

HMFA is in a unique position to call for such an intermediary, but would not necessarily have to sponsor associated personnel and technical costs. Potential funding could be drawn from local philanthropies that have previously worked on foreclosure policy. The philanthropic community has a strong track record of data collection, and there are also numerous funders interested in this area in New Jersey. For example, The Fund for New Jersey has funded Professor Newman’s work in the past and would be appropriate to approach with this proposal.46 Other possibilities include The William Penn Foundation and the Open Society Foundations.

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Recommendation #7: Strengthen the role of counseling in the foreclosure support system to improve applicant intake and outcomes for HMFA programs.

The dramatic surge of foreclosure filings means that housing counselors are more crucial now than

ever before. Counselors provide a critical foundation in the foreclosure support system: an Urban Institute study found that homeowners receiving assistance through the National Foreclosure Mitigation Counseling (NFMC) program47 were more likely to receive loan modifications and remain current on their mortgages after counseling, compared with a group of non-NFMC borrowers with similar observable characteristics.48

Many counseling agencies have struggled to reconcile their ongoing operations with increased demand for their services and support. This was exacerbated by the recent decline in federal funding for post-purchase or foreclosure intervention counseling, most notably in the FY2011 appropriations bill.

The scope of the crisis and anticipated increase of foreclosure filings warrants a closer examination of how HMFA and its counseling agency partners collaborate. HMFA relies heavily on counselors to assist homeowners eligible for HomeKeeper, while partner agencies increasingly rely on HMFA and its foreclosure prevention initiatives to provide vital revenue in a time of vastly reduced federal support for counseling services.

However, slow application turnaround time has been a challenge in the past and will only become more difficult with anticipated expansions of HHF programming. Additional challenges include providing effective communication channels and delivering consistent geographic and technical counseling services. HMFA staff have observed variance in service delivery across counseling agencies, particularly around the quantity of cases processed. Counselors have observed inconsistencies in communication and would like more opportunities to collaborate on service delivery mechanisms. These challenges mirror those of other HFAs that struggle to align their expectations and priorities with those of their statewide partners. We recommend the following steps to address these issues:

7.1: Establish a series of formal training and knowledge-sharing mechanisms:

Increase Statewide Trainings Led by NeighborWorks. HMFA currently hosts one to two training sessions per year. Increasing the number of annual training sessions and targeting established as well as new counselors could help facilitate information exchange, encourage trouble-shooting, and allow for the transfer of technical advice that may be lost when distributed as bulletins. Each session should be administered in conjunction with the NeighborWorks Center for Homeownership Education and Counseling (NCHEC), which has expertise in building the skill set of counselors at all proficiency levels.

Require Counseling Agencies to Meet Industry Standards. HMFA should adopt National Industry Standards for Homeownership Education and Counseling as part of counseling agency-partner contract agreements. These standards, issued by the NCHEC, provide a set of training and performance benchmarks to encourage consistent, high quality counseling services.

Formalize Mentorship. To address varying output levels among counseling partners, HMFA could pair high-performing counselors with low-performing or inexperienced counterparts to encourage the sharing of formal and informal counseling techniques. Philadelphia recently recommended hiring a Counselor Supervisor to formalize such mentoring relationships, recognizing that counselors in smaller agencies have fewer opportunities to seek advice from peers. This would be an effort to go beyond individual abilities and promote exchange around operating systems. Expectations around collaboration should clearly indicate that this partnership should not come at the expense of efficiency on the part of the mentor agency.

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7.2: Contract, on a pilot basis, with high-output and high-capacity housing counseling organizations to provide “roaming counselors” to high-need areas of the state.

Foreclosure has affected families and communities across New Jersey at different rates. High-need

areas are not guaranteed to proximately possess adequate capacity from local housing agencies. As a tool to better allocate housing resources across the state, particularly in high-need locations, HMFA has at times adjusted the electronic allocation of HomeKeeper applicants to housing counseling agencies so that additional agencies can provide assistance (even if an agency is not located in a high-need area).

Both HMFA and homeowners will benefit by contracting with housing counseling organizations that

have demonstrated the logistical know-how of managing a large and more geographically diverse operation. With counselors deployed to high-need areas, additional families will benefit from foreclosure intervention expertise without delay. Additionally, by officially expanding the geographic purview of organizations on a pilot basis, HMFA will be able to assess the relative merits of this policy change without being contractually obligated to continue this method of resource allocation if it does not prove to be successful.

7.3: Develop a tiered reimbursement system that rewards counseling agencies for acquiring and maintaining counselors with appropriate skills.

HMFA has identified certain skills and qualifications that have proven especially useful in assisting struggling homeowners. For example, State-certified debt-adjusters are the only individuals allowed to engage in the business of acting or offering to act for consideration as an intermediary between a homeowner and his/her creditors for the purposes of settling, compounding, or otherwise altering the terms of payment of debts of the debtor.

Moving forward, HMFA should provide higher levels of reimbursement to agencies when a certified debt-adjuster is involved in settling claims between debtors and creditors, which would compensate agencies for the higher costs of labor due to this enhanced skill set and its associated bi-annual licensing cost. This has been proposed and is in the early implementation stages in Pennsylvania.49

7.4: Seek an appropriation for housing counseling and mediation services by recommending that Governor Christie commit additional resources in his State of the State message and/or budget message.

Given the challenges that the foreclosure crisis will continue to pose for New Jersey, and amid

declines in funding for related counseling and legal services, the Governor should allocate additional resources in support of the State’s foreclosure support system. HMFA, as the state’s key housing partner “on the ground” and the agency closest to the foreclosure crisis, could offer a well thought out and powerful recommendation to the Governor to signal the need for increased support. Additionally, it would signal to counseling agency partners that HMFA understands their challenges and is actively working to make professional counseling and legal services available to struggling homeowners statewide.

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Conclusion The magnitude and pace of the foreclosure crisis in New Jersey requires nimble responses by

government. The New Jersey Housing and Mortgage Finance Agency recognized the need for action, launching foreclosure prevention programs as early as 2007. As delinquencies continued to mount, HMFA endeavored to address each stage of the problem, from financial literacy to mortgage payment assistance to court-sponsored mediation.

With the recent allocation of $300 million from Treasury’s Hardest Hit Fund, now is the time to re-examine current efforts and develop a comprehensive strategy for the future. We recommend diversifying the HHF allocation across multiple programs. The underlying causes of distress vary across the state, and our research has confirmed that no one program can adequately address each type of homeowner or neighborhood. We also considered the need to be innovative, as existing programs are not stemming the flow of new delinquencies and foreclosures.

The actions identified in this report strike an important balance between impact, equity, and feasibility. In some cases, we had to determine the point at which increasing the number of beneficiaries would dilute impact by spreading resources too thinly across recipients and regions. In other cases, we had to make decisions regarding what type of homeowner is “deserving” of government assistance. We also considered benefits accrued not only to direct recipients of aid, but also to residents of the surrounding communities whose home values and quality of life have deteriorated as a result of the foreclosure crisis. Finally, we took into account the relevant logistical and political obstacles before recommending a particular action.

We are confident that the recommended actions will allow HMFA to help thousands more New Jersey homeowners, through temporary mortgage payment assistance, permanent loan modification, assistance moving out of unaffordable housing, and foreclosure prevention counseling. For the first time, HMFA would actively combat negative equity, making aid available to underwater homeowners by revising current program guidelines and launching new initiatives.

Above and beyond their initial impact, the recommended actions have the potential to help a far larger number of New Jersey residents. The Mortgage Resolution Fund, if successful, would recoup its initial outlay and help additional rounds of homeowners in future years. More broadly, by tailoring program offerings to address specific needs, HMFA can be a leading force in stabilizing home prices and bringing local housing markets back to health. We therefore urge HMFA to adopt this package of recommendations.

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Summary of Recommendations:

1. Expand eligibility criteria for New Jersey HomeKeeper, allowing more homeowners to receive mortgage payment assistance.

2. Allocate $50 million in HHF funds to create the New Jersey Mortgage Resolution Fund as proposed by New Jersey Community Capital, Mercy Housing, and partners. The Mortgage Resolution Fund will purchase distressed mortgage notes and responsibly move borrowers to a modification or relocation.

3. Allocate $25 million to a principal reduction and equity sharing program in which lenders match state funds on a one-to-one basis, thus relieving the borrower’s negative equity position.

4. Allocate $2 million for Transition Assistance for delinquent borrowers who face dislocation as an outcome of the NJ MRF program or whose mortgages are in HMFA’s portfolio.

5. Designate $73 million from the initial HHF allocation to create a Reserve Fund that is used to expand the most successful program(s) by 2015.

6. Establish a Foreclosure Data Intermediary in conjunction with local academic and philanthropic partners.

7. Strengthen the role of counseling in the foreclosure support system to improve applicant intake and outcomes for HMFA programs.

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Appendices

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Appendix A: Use of Hardest Hit Fund Resources Across States Under Treasury’s Hardest Hit Fund, a total of $7.6 billion has been allocated to eighteen states and the District of Columbia. The chart below summarizes the main ways that states are using HHF resources to assist borrowers at risk of foreclosure, as of December 2011.50

Type of Hardest Hit Fund Program States Implementing the Strategy

Unemployment Mortgage Payment & Reinstatement Assistance: Pays some portion of the borrower’s mortgage, or some portion of arrearages to reinstate the loan, for borrowers at-risk of foreclosure owing to involuntary unemployment or underemployment.

AL, AZ, CA, DC, FL, GA, IL, IN, KY, MI, MS, NV, NJ, NC, OH, OR, RI, SC, TN All HHF states offer temporary mortgage payment assistance to unemployed homeowners. Most extend assistance to the underemployed and to pay arrearages.

Hardship Mortgage Assistance: Pays some portion of delinquent mortgage obligations for households who had an involuntary hardship such as income loss, divorce, death or disability, or illness.

MI, OH, RI (Provides for reinstatement or temporary mortgage payment assistance.)

Principal Reduction: Provides funds to write-down a portion of unpaid principal balance for homeowners with negative equity, on the condition that the lender match HHF resources (e.g., 1-to-1 match).

AZ, CA, MI, NV, OH, RI

Mortgage Modification: Provides assistance to enable affordable loan modifications; may include principal reduction with no lender match.

NC, OH, OR, RI, SC

Second Lien Relief: Pays incentives to lenders to extinguish or modify second lien loans to enable workouts.

AZ, NV, NC, OH (Lien Elimination program extinguishes first and second mortgage liens on low-value properties).

Short Sale Assistance: Pays incentives to lenders to facilitate short sales; may offer relocation assistance for homeowners.

AZ, NV, CA (In Sacramento, HHF payment enables short sale to Neighbor-works and lease back to homeowner.)

Transition Assistance: Provides homeowners who need to relocate with aid for moving expenses, security deposit, etc.

CA, OH, OR, RI, SC

Note Purchase: Facility buys delinquent mortgages at a discount and then pursues affordable loan modifications or short sale/deed-in-lieu arrangements.

IL, OR

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Innovative Marketing Strategies: Rhode Island

Rhode Island Housing has promoted participation in their HHF programs through a variety of creative targeting vehicles, including:

• Holding over 50 outreach meetings statewide the first year of programming;

• Regularly visiting churches and other community forums to make announcements;

• Having a Spanish-speaking outreach specialist on staff and holding HHF intake days afterhours and on weekends;

• Auto-dialing residents with telephone messages recorded by local mayors;

• Engaging local newspapers;

• Developing and placing PSAs for television, radio (including ethnic radio stations), the web, and potentially in theaters;

• Inserting “buck slips” into water bills and Department of Labor mailings. (However these inserts have had limited impact to date. Now the Department of Labor will mail stand-alone letters about the HHF program, an approach used in North Carolina).

Innovative Hiring Models

Other HHF States have instituted creative hiring methods that could serve as a model for HMFA as they ramp up program staff:

• Recruiting out-of-work mortgage industry professionals: When the Michigan State Housing Development Authority chose to run their application processing operation in-house, they hired 45 staffers who were formerly unemployed mortgage industry professionals. Not only could they tout their operation as a job creator, but their hires brought significant technical knowledge of the industry.

• Hiring temporary workers: The Ohio Housing Finance Agency hired temporary workers to answer phones and assist with intake when their HHF programs took off. This allowed OHFA to keep up with initial high volume was high without investing in long-term staffing during hiring freezes.

• Foreclosure Corps: The Community Economic Development Association of Michigan (CEDAM) partnered with the Corporation for National and Community Service to place 20 AmeriCorps members in counseling agencies across the state. These individuals provide foreclosure prevention services and enhance capacity at these organizations at limited cost to the state.

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APPENDIX B: Case Study – Home Values in Newark and South Orange, 2001-2010 Median home sale prices from 2001-2010 were collected for three neighborhoods in the City of

Newark and two neighborhoods in the adjacent Township of South Orange; Figure 12 shows the location of these neighborhoods.51 The neighborhoods of the Ironbound and Vailsburg in Newark have dense urban characteristics, with a combination of detached and attached homes and single-family and multi-family homes. Forest Hill, also in Newark, is slightly wealthier, with predominantly single-family detached homes. The Seton Hall neighborhood in South Orange, which directly abuts Newark’s Vailsburg, is characterized by detached single-family homes and close proximity to Seton Hall University. The Mountain Station neighborhood is also characterized by detached single-family homes, as well as easy access to New Jersey Transit’s Midtown Direct service to Manhattan.52 Median home values for each neighborhood from 2001-2010 are displayed in Figure 13.

Three key differences between Newark and South Orange neighborhoods stand out. First, property values have stabilized in South Orange, with sale prices remaining relatively constant over the past few years. In contrast, sale prices exhibit an “upside-down U” shape in Newark, with home prices continuing to trend downward in Forest Hill and the Ironbound.

Second, Newark properties have appreciated only modestly or lost value over the last ten years, with median sale prices in the Ironbound rising only 13 percent since 2001 and prices in Vailsburg dropping by 32 percent during the same period. (Forest Hill properties are performing better). In contrast, median prices in South Orange have increased by 46-65 percent since 2001. In other words, real estate in South Orange has been a relatively good long-term investment, despite recent market volatility. Homeowners in Newark have not gotten the same returns on their real estate investments.

Finally, property values in Newark have fallen precipitously since peaking, with a 33 percent drop in Forest Hill to a 65 percent drop in Vailsburg. In contrast, property values in South Orange have fallen only 17-27 percent off of their peak. As a result, homeowners who bought properties in Newark during the middle of the last decade are far more likely to have negative equity in their property.

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Figure 12: Case Study – Newark and South Orange Neighborhood Map

Source: Google

Figure 13: Case Study – Newark and South Orange Home Sale Prices, 2001-2010

Data Source: New Jersey Association of County Tax Boards

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APPENDIX C: Calculation of the Expected Impact of Expanding HomeKeeper Eligibility New Jersey homeowners who will receive HomeKeeper eligibility due to the three proposed

expansions in eligibility criteria fall into seven groups: (1) those who were excluded solely because of their LTV; (2) those who were excluded solely because their hardship does not qualify; (3) those who were excluded solely because they live in three- or four-family homes; (4) those who were excluded because of both LTV and hardship; (5) those who were excluded because of both LTV and their residence in three- or four-family homes; (6) those who were excluded because of both hardship and their residence in three- or four-family homes; and (7) those who were excluded because of LTV, hardship, and their residence in three- or four-family homes.

To calculate the number of homeowners in each group, data on the total number of New Jersey

homeowners with mortgages (roughly 1,900,000), the combined unemployment and underemployment rate in the state (roughly 16.1 percent), and the percentage of homeowners who maintain negative equity (roughly 16.3 percent) are used. It is assumed that an additional 5 percent of borrowers face hardship in the form of medical emergency, divorce, or death in the family that brought about imminent danger of foreclosure, and that 5 percent of borrowers live in three- or four-family homes. Furthermore, it is assumed that 20 percent of borrowers within each of the above groups meet the remaining eligibility criteria for HomeKeeper. Finally, it is assumed that the percentage of borrowers within any given group is constant regardless of other characteristics; for example, 16.3 percent of total borrowers are underwater, and therefore 16.3 percent of borrowers facing hardship are underwater, 16.3 percent of borrowers in three- and four-family homes are underwater, etc. See below for the estimated totals for each group:

Group 1: 1,900,000 * .163 * .161 * .950 * .200 = ~ 9,500 Group 2: 1,900,000 * .050 * .837 * .950 * .200 = ~ 15,100 Group 3: 1,900,000 * .050 * .161 * .837 * .200 = ~ 2,600 Group 4: 1,900,000 * .050 * .163 * .950 * .200 = ~ 2,900 Group 5: 1,900,000 * .050 * .163 * .950 * .200 = ~ 2,900 Group 6: 1,900,000 * .050 * .837 * .050 * .200 = ~ 800 Group 7: 1,900,000 * .050 * .163 * .050 * .200 = ~ 150 Total: ~ 33,950

The three expansions of HomeKeeper eligibility proposed above are therefore estimated to increase

the pool of eligible homeowners in New Jersey by roughly 34,000, or about 1.8 percent of the total number of New Jersey homeowners with mortgages. The State’s HHF resources are not sufficient to provide adequate foreclosure aid to 34,000 homeowners, though, so the expected impact of this recommendation must be tempered by the availability of funds.

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APPENDIX D: Glossary of Key Terms Adjustable-Rate Mortgage (ARM): A mortgage where the interest rate is not fixed, but resets during the life of the loan in line with movements in an index rate. Conventional or Conforming Loan: A mortgage that has a principal balance no larger than conforming-loan limits set by the Federal Housing Finance Agency and that also meets other underwriting criteria set by Fannie Mae and Freddie Mac. In 2010, the base conforming-loan limit for single-family homes in the continental United States was $417,000. Limits may be higher (generally up to $729,750) in metropolitan areas with high housing costs. Debt-to-Income Ratio (DTI): Percentage of a borrower's monthly gross income that goes toward paying debts. To be precise, DTIs often cover more than just debts; they can include certain taxes, fees, and insurance premiums as well. Default: Failure to make mortgage payments as agreed to in a commitment based on the terms and at the designated time set forth in the mortgage or deed of trust. Generally, thirty days after the due date if payment is not received, the mortgage is in default. Equity: The value of a homeowner's unencumbered interest in real estate. Equity is computed by subtracting from the property's fair market value the total of the unpaid mortgage balance and any outstanding liens or other debts against the property. Escrow: Funds paid by one party to another to hold until the occurrence of a specified event, after which the funds are released to a designated individual. Fannie Mae and Freddie Mac: Government-sponsored enterprises (GSEs) that purchase and securitize conforming mortgages. “Fannie” and “Freddie” guarantee the timely payment of principal and interest to investors in agency-issued mortgage-backed securities. On September 7, 2008, Fannie and Freddie were placed in conservatorship by their regulator, the Federal Housing Finance Agency (FHFA). As conservator, the FHFA was given full powers to control the assets and operations of both GSEs. Foreclosure: A legal term applied to any of the various methods of enforcing payment of the debt secured by a mortgage, or deed of trust, by taking and selling the mortgaged property, and depriving the mortgagor of possession. HUD: U.S. Department of Housing and Urban Development. Office of Housing/Federal Housing Administration within HUD insures home mortgage loans made by lenders and sets minimum standards for such homes. Lien: A claim by one person on the property of another as security for money owed. Such claims may include obligations not met or satisfied, judgments, unpaid taxes, materials, or labor. Loan-to-Value Ratio (LTV): The relationship between the amount of the mortgage loan and the value of the real property expressed as a percentage. For purchase loans the value of the property is the appraised value or the purchase price, whichever is less. For refinance loans the value is the appraised value. Mortgage: A lien or claim against real property given by the buyer to the lender as security for money borrowed. Under government-insured or loan-guarantee provisions, the payments may include escrow amounts covering taxes, hazard insurance, water charges, and special assessments.

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Mortgage Backed Security (MBS): A fixed-income security whose cash flows derive from a pool of underlying mortgages, residential or commercial. Residential MBS can be divided into agency, government, and non-agency securities. Agency MBS, which are sponsored by Fannie Mae and Freddie Mac, carry a credit guarantee, ensuring that investors do not incur losses in the event of borrower defaults. Government MBS are backed by mortgages with explicit government credit insurance in case of borrower default, through programs from the Federal Housing Administration, the U.S. Department of Veterans Affairs, and others. Non-agency MBS are securitized by private financial institutions and do not carry guarantees against credit losses. Mortgage Note: A written agreement to repay a loan. The agreement is secured by a mortgage, serves as proof of indebtedness, and states the manner in which it shall be paid. The note states the actual amount of the debt that the mortgage secures and renders the mortgagor personally responsible for repayment. Non-prime Mortgage (subprime/Alt-A): A loan to a borrower who fails to qualify for a prime loan. Compared with prime borrowers, nonprime borrowers have lower credit scores, lower incomes, or other characteristics that suggest a higher probability of default. Nonprime loans include subprime and Alt-A loans. Alt-A mortgages are generally made to more creditworthy borrowers than subprime loans, although they are more likely to include nonstandard features such as negative amortization. Prime Mortgage: A mortgage loan to a borrower with low credit risk, such as someone with a high credit score, a high down payment, and/or a high-income level relative to the scheduled mortgage payments. The term is often used as a synonym for loans that meet underwriting standards set by Fannie Mae and Freddie Mac.

Underwater/upside-down/negative equity: Used to describe homeowners or loans associated with properties with negative equity. That is, the LTV of the home is greater than 100 percent; they owe their lender more money than the current market value of the house. Underwriting: A process of deciding whether to make a loan based on the borrower’s credit reputation, income, debt, appraised value of the house, and other factors.

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Notes                                                                                                                          1 Mallach, Alan. 2008. How to Spend $3.92 Billion: Stabilizing Neighborhoods by Addressing Foreclosed and Abandoned Properties. Federal Reserve Bank of Philadelphia Discussion Papers, Community Affairs Department. 2 Currie, Janet and Erdal Tekin. 2011. Is the Foreclosure Crisis Making us Sick? NBER Working Paper 17310. Available at: http://www.nber.org/papers/w17310.pdf 3 Neumark, David and Kenneth Troske. 2011. Addressing the Employment Situation in the Aftermath of the Great Recession. Journal of Policy Analysis and Management. Available at: http://onlinelibrary.wiley.com/doi/10.1002/pam.20622/pdf. 4 Immergluck, Dan. 2009. The Economic and Social Costs of High-Risk Mortgage Lending, in Foreclosed: High-Risk Lending, Deregulation, and the Undermining of America’s Mortgage Market. Ithaca: Cornell University Press. 5 Bocian, Debbie Gruenstein, Wei Li, Carolina Reid, Roberto G. Quercia. 2011. Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures. Center for Responsible Lending. Available at: http://www.responsiblelending.org/mortgage-lending/research-analysis/Lost-Ground-exec-summary.pdf. 6 Avery, Robert B. and Kenneth P. Brevoort. The Subprime Crisis: Is Government Housing Policy to Blame? Federal Reserve Board of Governors: Finance & Economics Discussion Series. Available at: http://www.federalreserve.gov/pubs/feds/2011/201136/201136pap.pdf. 7 U.S Department of Housing and Urban Development and U.S. Department of the Treasury. November 2011. National Scorecard: The Obama Administration’s Efforts To Stabilize The Housing Market and Help American Homeowners. Available at http://portal.hud.gov/hudportal/documents/huddoc?id=NovNat2011_Scorecard.pdf. 8 Kingsley, Darius. 2011. Testimony before the House Committee on Financial Services, Subcommittee on Insurance, Housing and Community Opportunity. Hearing: The Administration’s Response to the Housing Finance Crisis. October 6. Available at: http://financialservices.house.gov/UploadedFiles/100611kingsley.pdf. 9 U.S Department of Housing and Urban Development and U.S. Department of the Treasury. November 2011. National Scorecard: The Obama Administration’s Efforts To Stabilize The Housing Market and Help American Homeowners. Available at: http://portal.hud.gov/hudportal/documents/huddoc?id=NovNat2011_Scorecard.pdf. 10 U.S. Census Bureau, New Jersey QuickFacts. 2010 data on population and housing units. Available at: http://quickfacts.census.gov/qfd/states/34000.html. 11 U.S. Census Bureau, American Community Survey. 2005-2009 ACS Five-Year Estimates. Available at: http://www.census.gov/acs/www/data_documentation/2009_release. 12 Federal Reserve Bank of New York. 2010. U.S. Credit Conditions. Web. Available at: http://data.newyorkfed.org/creditconditionsmap/. 13 Bureau of Labor Statistics. November 2011. Regional and State Employment and Unemployment Summary. Available at: http://www.bls.gov/news.release/laus.nr0.htm. 14 Bureau of Labor Statistics, Local Area Unemployment Statistics. 2010. County-level Unemployment and Median Household Income for New Jersey. Compiled by the U.S. Department of Agriculture, Economic Research Service. Available at: http://www.ers.usda.gov/data/unemployment/RDList2.asp?ST=NJ. 15 Trends noted by the Otteau Valuation Group. 16 CoreLogic. 2011. Negative Equity Report, Q3 2011 Negative Equity by State. Available at: http://www.corelogic.com/about-us/researchtrends/negative-equity-report.aspx#. 17 For up-to-date data see Federal Reserve Bank of New York. 2011. Regional Mortgage Briefs: Northern New Jersey. Available at: http://www.newyorkfed.org/regionalmortgages/northern-new-jersey.html. 18 Center for Responsible Lending. August 2010. The Cost of Bad Lending in New Jersey. Available at: http://www.responsiblelending.org/mortgage-lending/tools-resources/factsheets/new-jersey.html 19 RealtyTrac. 2011. Third Quarter 2011 Top State Foreclosure Timelines. October 24. Available at: http://www.realtytrac.com/content/news-and-opinion/third-quarter-2011-top-state-foreclosure-timelines-6892 20 U.S. Department of Housing and Urban Development. HUD’s Methodology for Allocating the Funds for Neighborhood Stabilization Program 3 (NSP3). Available at: http://www.huduser.org/nsp/docs/NSP3%20Methodology.pdf. 21 Kingsley, G. Thomas, Leah Hendey and David Price. 2011. Setting Priorities for Neighborhood Stabilization. The Urban Institute. Available at: http://www.foreclosure-response.org/maps_and_data/data_for_strategic_targeting.html.

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                                                                                                                                                                                                                                                                                                                                                                                                       22 New Jersey Housing and Mortgage Finance Agency. 2009. Mortgage Assistance Pilot (MAP) Program Guidelines. Available at: http://www.state.nj.us/dca/hmfa/consu/owners/map/program_guidlines.pdf. 23 U.S. Department of Housing and Urban Development. FY 2012 Income Limits Documentation System: FY 2012 Income Limits Summary. Available at: http://www.huduser.org/portal/datasets/il/il2012/2012summary.odn?inputname=STTLT*3499999999%2BNew+Jersey&selection_type=county&stname=New+Jersey&statefp=34.0&year=2012. 24 New Jersey Office of the Attorney General, Department of Law & Public Safety. 2009. Statewide Mortgage Foreclosure Mediation Program Launched. January 9. Available at: http://www.nj.gov/oag/newsreleases09/pr20090109a.html. 25 Resolution Systems Institute, compiled by Kulp, Heather Scheiwe. 2011. Foreclosure Mediation and Mitigation Program Models. Available at: http://courtadr.org/files/ForeclosureMediationProgramModels_May2011.pdf. 26 Walsh, Geoff. 2011. Recent Developments in Foreclosure Mediation. National Consumer Law Center. Available at: http://www.nclc.org/images/pdf/foreclosure_mortgage/mediation/rpt-mediation-2011.pdf. 27 Estimate based upon discussion with representatives from the Office of Dispute Settlement, which administers the state’s Judiciary Foreclosure Mediation Program. 28 Underemployment is defined as a 25 percent annual decrease in household income. 29 CoreLogic. 2011. Negative Equity Report, Q3 2011 Negative Equity by State. Available at: http://www.corelogic.com/about-us/researchtrends/negative-equity-report.aspx#. 30 This study covered a sample of borrowers from Arizona, California, Florida, and Nevada. It could be argued that the LTV threshold for strategic default is inflated by this sample, as homeowners in these states may be “desensitized” to housing declines, and would therefore wait until higher levels of negative equity before defaulting. Even if one were to accept this argument, though, it is difficult to justify claims that the negative equity threshold in other states with relatively large housing declines (like New Jersey) is so far below that of the states in this sample that the analysis is irrelevant. 31 Bhutta, Neil, Jane Dokko, and Hui Shan. 2010. The Depth of Negative Equity and Mortgage Default Decisions. Federal Reserve Board of Governors: Finance & Economics Discussion Series. Available at: http://www.federalreserve.gov/pubs/feds/2010/201035/201035pap.pdf. 32 One may counter that homeowners who are underwater are more likely to have paid very little in terms of down payments on their homes, thereby making it more likely that they would slip into negative equity with even slight downturns in the housing market. Given that homeowners who are eligible for HomeKeeper must be unemployed or underemployed, though, it seems that this would constitute the greater source of distress than negative equity that is relatively small (in LTV terms). 33 Bhutta, Neil, Jane Dokko, and Hui Shan. 2010. The Depth of Negative Equity and Mortgage Default Decisions. Federal Reserve Board of Governors: Finance & Economics Discussion Series. Available at: http://www.federalreserve.gov/pubs/feds/2010/201035/201035pap.pdf. 34 Illinois Housing Development Authority, U.S. Department of the Treasury. August 2011. Fourth Amendment to the Commitment to Purchase Financial Instrument and HFA Participation Agreement. Schedule B-2. Available at: http://www.treasury.gov/initiatives/financial-stability/programs/housing-programs/hhf. 35 Mallach, Alan. 2008. How to Spend $3.92 Billion: Stabilizing Neighborhoods by Addressing Foreclosed and Abandoned Properties. Federal Reserve Bank of Philadelphia Discussion Papers, Community Affairs Department. 36 Tingerthal, Mary. 2009. Community Development Financial Expertise Put in the Service of Neighborhood Stabilization. Community Development Investment Review 5(1): 53-64. 37 Mallach, Alan. 2008. How to Spend $3.92 Billion: Stabilizing Neighborhoods by Addressing Foreclosed and Abandoned Properties. Federal Reserve Bank of Philadelphia Discussion Papers, Community Affairs Department. 38 The Illinois MRF applies these criteria for selecting eligible census tracts. The NSP-2 index of estimated need was developed by HUD, using factors including the rate of subprime loans originated, the increase in the unemployment rate, and the fall in home values from peak to trough. 39 A case study of lease-to-purchase programs in the Chicago area finds that scattered single-family lease-to-purchase requires 150+ units to pay for the back office infrastructure, staffing, programming, and risk management. See: Goldsmith, Bill and Cindy Holler. 2010. Lessons from Ten Years of Lease to Purchase. Available at: https://www.mercyhousing.org/document.doc?id=105. 40 Mortgage Resolution Fund, LLC. 2011. MRF Program Data Matrix Summary and Economic Model for New Jersey. 41 CoreLogic. 2011. Negative Equity Report, Q3 2011 Negative Equity by State. Available at: http://www.corelogic.com/about-us/researchtrends/negative-equity-report.aspx#.

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                                                                                                                                                                                                                                                                                                                                                                                                       42 Approximately 65 percent in New Jersey. 43 Viswanatha, Aruna and Rick Rothacker. 2011. Five Major Banks May Be Required To Commit $15 Billion To Reduce Principal Balances. Huffington Post, October 28. Available at: http://www.huffingtonpost.com/2011/10/28/mortgage-crisis-five-major-banks-15-billion-mortgage-debt_n_1064573.html. 44 For example, see: Newman, Kathe. 2010. Go Public! Journal of the American Planning Association 76(2): 160-171. Available at: http://www.tandfonline.com/doi/full/10.1080/01944360903586738#preview. 45 As communicated by Professor Newman via e-mail, December 10, 2011. 46 As communicated by Jenny Kershner via telephone on October 28, 2011. 47 NFMC was launched in December 2007 with funds appropriated by Congress to address the nationwide foreclosure crisis by dramatically increasing the availability of housing counseling for families at risk of foreclosure. 48 NeighborWorks America. 2011. National Foreclosure Mitigation Counseling Program: Congressional Update. Available at: http://www.nw.org/network/nfmcp/documents/2011CongressionalReport.pdf. 49 Regional Housing Legal Services. 2011. No Place Like Home: Philadelphia’s Approach to Foreclosure Prevention. Available at: http://rhls.org/wp-content/uploads/NoPlaceLikeHome_RHLS.pdf. 50 Information on Hardest Hit Fund programs for each state was taken from the most recent agreement between the State HFA and the U.S. Department of the Treasury, documented in the latest “Amendment to the Commitment to Purchase Financial Instrument and HFA Participation Agreement.” Available at: http://www.treasury.gov/initiatives/financial-stability/programs/housing-programs/hhf. 51 New Jersey Association of County Tax Boards. Available at: http://njactb.org. 52 The neighborhoods profiled in the Case Study are defined as follows: Forest Hill: Bounded by 2nd Ave., Clifton Ave., Grafton Ave., Degraw Ave., Elwood Ave., and Lake St. (Blocks 580-583, 605-608, 630-633, 669-672, 684-687, 712-715, 738-742, 756-760). Ironbound: Bounded by Elm St., Adams St., E. Kinney St., Jefferson St., Oliver St., and Pacific St. (Blocks 941-946, 958-962). Vailsburg: Bounded by Varsity Rd., Underwood St., Stuyvesant Ave., Abinger Pl., Sanford Ave., Cliff St., and Montrose St. (Blocks 4100-4111, 4121-4125.02, 4160-4162, 4171, 4174-4177). Seton Hall: Bounded by South Orange Ave., Montrose St., Woodbine Ave., and Centre St. South (Blocks 801-811 and the eastern portion of Block 901). Mountain Station: Bounded by N. Ridgewood Rd., Meadowbrook Pl., NJ Transit tracks, Ralston Ave., Scotland Road, and the northern municipal boundary of South Orange (Blocks 401-416, 1001, 1101, 1201-1207). Photo credits: Title page (top to bottom): (1) corydalus on Flickr. 2010. Bayonne, NJ. Available: http://www.flickr.com/photos/corydalus/4895936326/. (2) cafemama on Flickr. 2010. Portland, OR. Available: http://www.flickr.com/photos/cafemama/4477847376. (3) Berg, PJ. 2011. Camden, NJ. (4) Hersh, Matthew Brian. 2009. Irvington, NJ. In Operation Neighborhood Recovery. Shelterforce, June 3, 2009. Available: http://www.shelterforce.org/article/print/1587/. (5) ksnyder on Flickr. 2006. Near Edison, NJ. Available: http://www.flickr.com/photos/99145154@N00/3449783005/. Appendices page (left to right): (1) Indexpost. 2011. Absecon, NJ. Available: http://www.indexpost.com/property-for-sale/new-jersey-absecon-08205-327-orange-tree-ave/.(2) morisius cosmonaut on Flickr. 2009. Available: http://www.flickr.com/photos/mo_cosmo/3347896463/. (3) Weichert Realtors Bank Owned Homes. 2011. East Orange, NJ. Available: http://reohomestour.com/property-list/.

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