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LaSalle National Bank v. Johnson

2006 WL 551563 (N.J. Super. Ch. Div. 2006) (Unpublished)

MORTGAGES; FORECLOSURE — Generally, a mortgagee has the right to foreclose upon a showing of execution, recording, and non-payment of its mortgage, but when its mortgagor’s default is occasioned by the mortgagee, such a default does not form the basis for a foreclosure action.

Homeowners executed a mortgage in favor of their mortgage lender. Following a foreclosure, the Department of Housing and Urban Development (HUD) purchased the property at a sheriff’s sale. Subsequently, the property was deeded back to the homeowners. The homeowners again defaulted on the mortgage and their mortgage lender filed another foreclosure complaint. The lender claimed the deed from HUD to the homeowners was subject to the original mortgage, and any default entitled the lender to foreclosure. Claiming a right to foreclose, the lender argued that, in a foreclosure action, a court should focus on only three factual inquiries: (1) the validity of the mortgage; (2) the amount of indebtedness; and (3) the right of the mortgagee to resort to the mortgaged property. FHA mortgages, such as the one in question, are subject to HUD regulations, and the homeowners claimed that the lender failed to follow HUD regulations prior to commencing the foreclosure action. Specifically, they claimed their lender failed to afford them a face-to-face meeting. The homeowners also raised the factual issue of whether the mortgage was cancelled by the first foreclosure action or whether it was revived by reference within the deed from HUD. The lender moved to strike the homeowners’ answer and accordingly to deem the matter uncontested. It moved for summary judgment.

Generally, a mortgagee has a right to foreclose upon a showing of execution, recording, and non-payment of the mortgage. But when a mortgagor’s default is occasioned by conduct of the mortgagee, such a default does not form the basis for a foreclosure action. Here, the Court found that lender did not produce any evidence that it complied with the HUD regulations in either affording the homeowners a face-to-face meeting or by considering alternative loss mitigation techniques short of foreclosure. The rationale behind the HUD regulations is to prevent foreclosure of HUD mortgages. The objective of providing the opportunity of home ownership to low-income people who would otherwise not be eligible for mortgage loans would be frustrated if HUD’s involvement ended with the receipt of a mortgage loan. Adherence to HUD guidelines is essential to promote the purposes of the HUD program. Although a mortgagee’s failure to adhere to the HUD guidelines does not create an affirmative cause of action in favor of the mortgagor, the mortgagee’s actions could justify withholding the equitable remedy of foreclosure. Here, the Court found that the lender simply did not address the homeowners’ allegations. As such, the Court could not determine if the lender had unclean hands warranting denial of the equitable remedy of foreclosure. Whether a lender has unclean hands must be determined in a plenary hearing at which the full conduct of the lender is balanced against the actions of the defaulting mortgagor. Thus, the lender’s motions to strike the homeowners’ answer and for summary judgment was denied. The lender was ordered to provide an accounting of all monies paid by its mortgagor and the parties were ordered to explore alternatives to foreclosure.


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