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Novastar Mortgage, Inc. v. Koerner

F-5058-07 (N.J. Super. Ch. Div. 2008) (Unpublished)

MORTGAGES; AFFORDABLE HOUSING — Where a deed contains affordable housing restrictions limiting the resale price of the subject property, a lender who takes a mortgage more than 95% of such maximum selling price may find that its mortgage is void, even with respect to the loan amount that is less than 95% of the maximum selling price.

In 1989, a prospective homeowner qualified as a participant in an affordable housing program offered by her municipality. Two months later she purchased a house under the auspices of the program. Affordable housing deed restrictions were incorporated into the deed. The deed restrictions provided that the property could not be sold for more than a certain price. Despite such restrictions, during the course of a seven year period, the homeowner took out six mortgages secured by a note in the sum of $192,000. The mortgage amounts represented an amount well above the maximum allowable sales price for the property. In 2007, the lender filed a foreclosure complaint against the homeowner alleging a default on the mortgage. The lender did not name the municipality in its complaint as it did not know that the property was subject to the affordable housing deed restrictions. After a default judgment was entered against the homeowner, the municipality moved to intervene and vacate the judgment.

The Chancery Division granted the municipality’s motion, vacated the foreclosure judgment, and permitted the municipality to intervene as a defendant. The Court held that the deed restrictions survived foreclosure. The maximum price at the time of the foreclosure proceedings was $77,000. Therefore, the Court held that the property could not be sold for a price higher than that amount at a sheriff’s sale.

The lender conceded that: (i) the restrictions were valid, (ii) the deed limited the price that the property could be sold; and (iii) its mortgage was restricted to 95% of the maximum selling price, as prescribed by the most recent Council on Affordable Housing (COAH) regulations. The COAH regulations also stated that mortgages issued in violation of the deed restrictions were void. The lender argued that the regulations were intended to invalidate only the portion of the mortgage exceeding 95% of the maximum selling price. It asserted that the mortgage should be reformed to the maximum amount set in the regulation. The Court agreed with the municipality that the entire amount of any loan issued in violation of the regulation was “void as against public policy.” It held that the regulations were unambiguous and pointed out that the lender was not claiming that the regulation violated the State or Federal Constitution, or legislative policies. The Court did not see the COAH’s findings underlying the adoption of the regulation to be the “product of clear agency error.” The Chancery Division also rejected the lender’s argument that the Court’s interpretation of the regulation would have a chilling effect on the availability of mortgages. The Court held that such a determination should be left to the legislature and COAH. It chose not to exercise its equitable powers to reform the contract because the mistake of law was found to be unilateral and not mutual. The Court did note that the lender was not “left entirely without redress.” It mentioned that the title company would make a “worthwhile target for an action at law” by the lender. It also stated that the lender could proceed with a restitution claim against the homeowner for the amount of principal advanced to her as part of the transaction which created the mortgage. Because the homeowner may have “misled the lender into the mistake,” the ruling nullifying the mortgage was stayed until the municipality concluded its foreclosure of the property to ensure that the homeowner did not benefit from the cancellation of the mortgage. The homeowner was also barred from otherwise encumbering the property.

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