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US Bank, N.A. v. Hough

416 N.J. Super. 286, 3 A.2d 1251 (App. Div. 2010)

AFFORDABLE HOUSING; MORTGAGES — A mortgage covering an affordable housing unit can only be for up to 95% of the defined maximum resale value and if it exceeds that amount, the mortgage will be voided, but not the obligation itself.

A borrower purchased a residential condominium unit. The unit was sold to satisfy a municipality’s affordable housing obligation under the Mount Laurel decisions. Therefore, it was subject to the Uniform Housing Affordability Controls adopted by the New Jersey Housing and Mortgage Finance Agency (HMFA). The deed had a restriction that made the unit subject to the municipality’s ordinance governing the purchase or rental of affordable housing.

One year after purchasing the unit, the owner refinanced her mortgage by borrowing $108,000. At the time, however, the resale value for her unit was capped by the affordable housing regulations at $69,000 and the regulations only permitted mortgages of up to 95% of the maximum resale value. The borrower defaulted on her loan and the lender filed a foreclosure action. A default was entered and the lender served a notice of entry. The borrower moved to void the judgment and to dismiss the complaint, arguing that since the mortgage loan exceeded the maximum resale value for the property under the affordable housing regulations, it was void under public policy. The lower court denied the motion and the borrower appealed.

On appeal, the borrower argued not only that the affordable housing regulations, as a mater of public policy, required the court to void the mortgage, but also required the court to void the entire indebtedness. The Appellate Division invited the New Jersey Attorney General, on behalf of HFMA, to address whether the housing controls required voiding of the indebtedness in addition to voiding the mortgage. The Attorney General argued that only the mortgage offended the regulation and it therefore was void under public policy, but that the underlying indebtedness should not be voided.

The Appellate Division agreed with the Attorney General. The Court found that a lender who makes a mortgage loan secured by an affordable housing unit for more than the amount permissible under the affordable housing regulations is prohibited from foreclosing because the mortgage is void as against public policy. The Court agreed that the focus of the regulations is to prevent the use of affordable housing units as collateral for excessive loans. It noted that if lenders were permitted to make loans secured by mortgages for more than 95% of the resale value of affordable housing units, then, upon a foreclosure, the property would be lost as an affordable housing unit. In the Court’s view, the potential loss of affordable housing units due to excessive loans was contrary to the public policy of ensuring the availability of affordable housing units. It held, however, that only the mortgage itself offended the regulations and had to be voided. The debt itself remained valid. This leaves a lender with an unsecured debt. According to the Court, voiding an entire indebtedness is improper because the borrower would receive a windfall. The Court noted that borrower was aware, at the time she borrowed the money, that it exceeded the maximum resale value under the regulations. Therefore, it would be inequitable for her to have used the money and not be subject to a collection suit by the lender to recoup the borrowed money.

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