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GMAC Mortgage, LLC v. Fraser

A-4301-08T1 (N.J. Super. App. Div. 2010) (Unpublished)

MORTGAGES — The failure of a mortgagee to comply with statutory licensing requirements does not affect the validity or enforceability of any of its mortgage loans.

Borrowers purchased a residence by taking a first and second mortgage. They defaulted on both, and the property went into foreclosure. The borrowers then obtained lender financing to pay off both mortgages. To do so, they executed a note secured by a mortgage on the premises. The lender was not a licensed financial entity in New Jersey. For the first five years, the borrowers were obligated to make interest only payments.

The mortgage was assigned to an entity that also was not licensed in New Jersey. The borrowers believed the original lender had charged excess interest in the form of “points” and contacted the State Department of Banking and Insurance. It issued a refund directive to the lender. The borrowers were advised by their attorney to stop payment because the original lender was unlicensed and because they were owed money for the six excess points charged at closing. The mortgage then was reassigned to a licensed New Jersey lender.

This licensed lender sued to collect the debt. A separate mortgage foreclosure action was filed. In the suit to collect the debt, the lower court ordered the borrowers to make payments, into a trust account, of interest only during the pendency of the action. The borrowers failed to comply. They were then ordered to pay the past due amount into the account or the lender could ask the court to strike the borrowers’ defenses and affirmative claims without notice to them. The court granted such relief after the borrowers failed to make required payments.

On the merits, the lower court declared the mortgage and note enforceable, and held the borrowers were in default. Their defenses and claims were dismissed with prejudice.

On appeal, the Appellate Division affirmed the lower court’s finding that the mortgage and note remained enforceable and held the lender was unlicensed in New Jersey. New Jersey’s statutes expressly provide that failure to comply with the statutory licensing requirements does not affect the validity or enforceability of any mortgage loan. The Court, however, reversed and remanded the balance of the lower court’s order concerning the amount due on the mortgage and note and the dismissal of the borrowers’ defenses and claims. It found unclear whether the order was intended to constitute a money judgment subject to docketing and enforcement or whether it merely represented a statement of the obligations of the borrowers. It also was unclear whether the companion mortgage proceedings had been concluded by the time the order was entered. According to the Court, before collection proceedings could begin on the mortgage debt, the mortgage must first be foreclosed and the property sold.

Additionally, the Court held the lower court erred in striking the borrowers’ answer and claims just because they had not made the court-ordered interest payments. Again, the debt can not be collected on a residential mortgage until the foreclosure has taken place.

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