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Senator Proposes Legislation to Help Underwater Borrowers Avoid Foreclosure

SenateU.S. Senator Bob Menendez (D-New Jersey) has proposed legislation that will help underwater homeowners avoid foreclosure and remain in their homes, according to an announcement on Menendez's website.

The Preserving American Homeownership Act is intended to help the estimated 5.1 million Americans who are underwater, or owe more on their mortgage than their home is worth. That number accounts for about 10 percent of homes with a mortgage in the United States, according to data recently released by CoreLogic. About 40 percent of those 5.1 million underwater borrowers (approximately two million) owe at least 25 percent more than their home is worth.

Menendez's home state of New Jersey was one of the areas hardest hit by the foreclosure crisis and has routinely ranked near the top among states for foreclosure rate. In April, 5.1 percent of all residential homes in New Jersey were in some state of foreclosure, the highest rate among states, according to CoreLogic. The national average for the month was 1.4 percent. New Jersey also had the nation's highest serious delinquency rate (8.5 percent) during April.

Compounding the problem is the high number of "zombie" foreclosures, or owner-vacated homes that are in the process of foreclosure but the process is not yet complete. Reports have indicated that New Jersey has the highest rate of zombie foreclosures in the nation. Many of the zombie foreclosure properties will end up sold in short sales or foreclosure auctions.

"Far too many New Jerseyans are underwater on their mortgages and are all too familiar with the burden this brings," Menendez said. "My bill aims to give homeowners the break they need by working with banks to find acceptable solutions for everyone. Not only can we help families stay in their homes, we can mitigate the impact zombie foreclosures have on our communities and our economy."

The national decline in home values since 2007 has caused many homeowners to be underwater on their mortgage. Those homeowners, who may be at risk of foreclosure and unable to sell their home because of the negative equity situation, are often forced to walk away from their mortgage. On the other hand, lenders and banks, fearing a loss of income, are reluctant to reduce the amount of principal owed on those mortgages.

Menendez's bill seeks to help both homeowners and lenders. In exchange for reducing the amount of principal owed, banks would be entitled to a portion of any future increase in value the home might experience. This gives the underwater homeowners relief on their mortgages while banks take a short-term reduction in exchange for a long-term gain pending the housing market recovery. Menendez said in his announcement that 80 percent of homeowners offered the chance to participate in a similar program offered by a private servicer agreed to do so and subsequently re-defaulted at a rate of just 2.6 percent.

"The sad fact is that millions of homeowners still have underwater FHA and FHFA mortgages and many are facing foreclosure," said Phyllis Salowe Kaye, Executive Director of New Jersey Citizen Action. "Principal reduction is the most effective way to keep people in their homes, to prevent foreclosures and to stabilize neighborhoods that have been decimated by vacant and abandoned properties. Senator Menendez's bill offers real solutions. It should be supported and passed quickly by Congress."

Click here to view the bill's full text.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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