US Bank, N.A. v. Hough

• Decision Date: 22 May 2012
• Citation: 210 N.J. 187,42 A.3d 870
• Parties: US BANK, N.A., Plaintiff–Appellant and Cross–Respondent, v. Nikia HOUGH, Defendant–Respondent and Cross–Appellant, and Mr. Hough, Husband of Nikia Hough; New Jersey Department of Community Affairs; Council on Affordable Housing; Township of Piscataway; New Jersey Housing and Mortgage Finance Agency; State of New Jersey; and the Commons at Piscataway, Inc., Defendants.
• Court: New Jersey Supreme Court

210 N.J. 187

42 A.3d 870

US BANK, N.A., Plaintiff–Appellant and Cross–Respondent,

v.Nikia HOUGH, Defendant–Respondent and Cross–Appellant,andMr. Hough, Husband of Nikia Hough; New Jersey Department of Community Affairs; Council on Affordable Housing; Township of Piscataway; New Jersey Housing and Mortgage Finance Agency; State of New Jersey; and the Commons at Piscataway, Inc., Defendants.

Supreme Court of New Jersey.

Argued Nov. 7, 2011.

Decided May 22, 2012.

Diane Bettino argued the cause for appellant and cross-respondent (Reed Smith, attorneys; Ms. Bettino and Paul Bond, Princeton, on the briefs).

Henry A. Loeb, Manville, argued the cause for respondent and cross-appellant (Blumberg & Rosenberg, attorneys).

Geraldine Callahan, Deputy Attorney General, argued the cause for amicus curiae New Jersey Housing and Mortgage Finance Agency (Paula T. Dow, Attorney General of New Jersey, attorney).

Michael J. Fasano submitted a brief on behalf of amicus curiae New Jersey Land Title Association (Lomurro, Davison, Eastman & Munoz, attorneys; Edward C. Eastman, Jr., Freehold, of counsel; Mr. Fasano and Mr. Eastman, on the brief).

Justice ALBIN delivered the opinion of the Court.

The Fair Housing Act, N.J.S.A. 52:27D–301 to –329.19, is a statutory scheme intended to ensure that municipalities fulfill their constitutional obligation to provide affordable housing to New Jersey's low-and moderate-income residents. Under the Act, the Housing and Mortgage Finance Agency (HMFA) is charged with the responsibility of establishing programs to assist municipalities in meeting their obligation to provide affordable low-and moderate-income housing. N.J.S.A. 52:27D–321.

In carrying out its statutory charge, HMFA promulgated regulations controlling the use and sale of affordable housing units. See N.J.A.C. 5:80–26.1 to –26.26. One such regulation prohibits a lending institution from issuing a loan—secured by an affordable housing unit—that “exceed[s] 95 percent of the maximum allowable resale price of that unit.” N.J.A.C. 5:80–26.8(b). To enforce this policy, HMFA declared that “[a]ny loan issued in violation of [these regulatory provisions] shall be void as against public policy.” N.J.A.C. 5:80–26.18(e).

The bank in this case issued a loan to the owner of an affordable housing unit—secured by a mortgage—in excess of 95% of the allowable resale price of the unit. Notice of the resale-price restriction was set forth in the deed. The unit owner later defaulted on the loan. The Chancery Division declined to void the mortgage or the loan, finding that to do so would result in a windfall to the unit owner.

Giving deference to HMFA's interpretation of its own regulations, the Appellate Division held that the lender's violation of the regulatory scheme required the voiding of the mortgage securing the affordable housing unit, but not the loan or even the amount of the loan in excess of the lawful permissible limits.

We now reverse. Although we accord great deference to a state agency's interpretation of a regulation within the sphere of its expertise, we cannot ignore the clear, straightforward language of N.J.A.C. 5:80–26.18(e), which states that the loan violating the maximum permissible limit, not the mortgage, “shall be void as against public policy.” HMFA's interpretation of its regulation only permits the voiding of the mortgage, not the unlawful excess portion of the loan. That interpretation is plainly unreasonable because it permits a lending institution to collect the unlawful part of a loan that the regulation declares to be void. Read in a commonsense manner in accordance with its plain language, N.J.A.C. 5:80–26.18(e) strips the lending institution of any profit from the unlawful portion of a loan it issues, ensuring both that low- and moderate-income housing unit owners will not be saddled with debts they cannot afford and that lenders will not engage in predatory lending practices.

I.

A.

Defendant Nikia Hough met the limited income requirements for a qualified purchaser of a condominium unit under Piscataway Township's Affordable Housing Program.¹ In January 2004, Hough bought an affordable housing condominium unit for $68,142.86, financing the purchase through a $61,329.00 loan issued by Wells Fargo Home Mortgage, Inc.² The Uniform Housing Affordability Controls (UHAC) promulgated by HMFA, N.J.A.C. 5:80–26.1 to – 26.26, and the Township's ordinances controlled the sale and resale price of Hough's condominium unit. The Affordability Controls also prohibit a lending institution from issuing a loan, secured by an affordable housing unit, exceeding 95% of the unit's allowable resale price as set by the Township. N.J.A.C. 5:80–26.8(b).

A year later, in March 2005, Hough refinanced her home, which, at the time, by the Township's calculation, had a resale value of approximately $68,735. Mortgage Lenders Network USA, Inc. (Mortgage Lenders) issued a thirty-year loan to Hough in the amount of $108,000.00, with a fluctuating interest rate between 7.8% and 13.8%. In turn, Hough gave Mortgage Lenders a mortgage on the property securing the entire amount of the loan.³ Both the deed and mortgage referenced the restrictions set forth in Piscataway's affordable housing ordinances. The proceeds from the loan satisfied Hough's pre-existing debts, including monies owed on the Wells Fargo loan and unpaid property taxes, and netted Hough a disbursement of $20,080.45.

Hough did not report, as required by N.J.A.C. 5:80–26.8(a), the refinancing to the administrative agent of the Township who ensures compliance with the appropriate laws governing affordable housing. The loan issued by Mortgage Lenders far exceeded the allowable resale price of the condominium unit and violated N.J.A.C. 5:80–26.8(b)'s bar against loans that exceed 95% of the maximum allowable resale price of the unit.

By February 2007, Hough defaulted on the loan by failing to make the required monthly payment. The loan and mortgage were assigned to US Bank, which, in June 2007, filed an action to foreclose on the property.⁴ In July 2008, US Bank filed an amended foreclosure complaint, naming a number of defendants, including Hough, Piscataway Township, and the New Jersey Housing and Mortgage Finance Agency (HMFA).⁵ The complaint sought the sale of the mortgaged property and a declaration that US Bank's mortgage had priority over any other legal interests attached to the property.

In September 2008, US Bank moved for the entry of default against all defendants. Thereafter, Piscataway Township filed an answer basically asserting that the foreclosure action was subject to the Township's affordable housing restrictions in the deed. Through a consent order, US Bank agreed to be bound by those restrictions. In essence, US Bank stipulated that it would not seek a resale price higher than the one allowed by the applicable affordable housing regulations and ordinances and that the unit would be sold only to a qualified buyer.

In January 2009, US Bank filed a notice for entry of final judgment. In March 2009, wrongly believing that a final judgment had already been entered, Hough moved to vacate the non-existent judgment and to dismiss US Bank's complaint on the ground that the loan violated the cap permissible under N.J.A.C. 5:80–26.8(b). The Chancery Division did not catch Hough's mistakeand denied the motion to vacate. The court reasoned that to void the mortgage or the loan would give Hough an unwarranted windfall.⁶

Hough filed a notice of appeal in July 2009.

B.

The Appellate Division reversed. US Bank, N.A. v. Hough, 416 N.J.Super. 286, 289, 3 A.3d 1251 (App.Div.2010).⁷ The panel rejected Hough's argument that, under N.J.A.C. 5:80–26.18(e), US Bank is prohibited from foreclosing on the mortgage or collecting on the unpaid portions of the loan. Id. at 297, 3 A.3d 1251. The panel also rejected US Bank's proposal that it affirm the Chancery Division's order denying Hough's motion to dismiss the foreclosure complaint. Id. at 294–96, 3 A.3d 1251.

The panel invited the Attorney General, on behalf of HMFA, to address the issue of the proper interpretation of N.J.A.C. 5:80–26.18(e). Id. at 292, 3 A.3d 1251. HMFA took the position that when a lending institution issues an excessive loan secured by an affordable housing unit, N.J.A.C. 5:80–26.18(e) voids only the mortgage, not the underlying indebtedness. Id. at 295–97, 3 A.3d 1251. Applying principles of agency deference, the panel accepted HMFA's interpretation of its own regulation, finding that it was not “plainly unreasonable.” Id. at 295, 3 A.3d 1251. The panel, however, permitted US Bank to file a separate action to collect on the unsecured debt. Id. at 297, 3 A.3d 1251. Thus, US Bank lost its status as a secured creditor but was allowed to pursue a judgment for the full repayment of the loan. Id. at 296, 3 A.3d 1251.

C.

We granted US Bank's petition for certification and Hough's cross-petition for certification. US Bank, N.A. v. Hough, 205 N.J. 184, 13 A.3d 1290 (2011). We also granted the motions of the New Jersey Land Title Association and HMFA to participate as amici curiae.

II.

US Bank concedes that pursuant to N.J.A.C. 5:80–26.18(e), the “legal mortgage between [it] and Hough is void.” Nevertheless, it submits that the Chancery Division properly exercised its discretion by allowing for an equitable mortgage—as agreed to by US Bank and Piscataway Township—in which the foreclosure on Hough's condominium unit would be subject to the applicable affordable housing restrictions. That is, the property could be sold only to an income qualified buyer and only at a price not higher than the unit's maximum resale price as set by the UHAC regulations. US Bank argues that to read N.J.A.C. 5:80–26.18(e) as stripping it of its security interest in the property would constitute not only a “plainly unreasonable” interpretation, but also a violation of the judiciary's constitutional authority to exercise its equitable powers. Under US...