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Affordable Housing Revisited: U.S. Bank v. Hough
In 1975, the New Jersey Supreme Court determined that a “developing municipality” may not, through a system of exclusionary zoning, avoid its obligation to provide its “fair share” of low and moderate income housing. So. Burlington Cty NAACP v. Twp. of Mt. Laurel, 67 N.J. 15 (1975) (“Mt Laurel I”). In response, the Legislature eventually enacted the Fair Housing Act [“FHA”], N.J.S.A. 52:27D-301 et seq., which created the Council on Affordable Housing [“COAH”] within the Department of Community Affairs [“DCA”]. See Handbook of N.J. Title Practice, §10414 (3d Ed); Title Talk No. 76 (Fall 2010).
Pursuant to regulations promulgated by COAH and DCA, a certain number of housing units in certain residential developments are designated as so-called “Mt. Laurel” or affordable housing units. These properties are typically encumbered by restrictive covenants, known as affordable housing restrictions [“AHRs”], which (a) restrict their use to qualifying purchasers (i.e., low or moderate income fam-ilies); and (b) seek to recapture a portion of the profit upon re-sale, if the sale price exceeds a certain sum. Additionally, the restrictions may limit the amounts of mortgages placed upon such properties. In an opinion construing N.J.A.C.5:80-26.18, the Appellate Division held that the entire debt secured by a mortgage which exceeded the allowable sum was unenforceable by foreclosure (and not just the excess amount), but its decision was reversed by the Supreme Court. US Bank, N.A. v. Hough, 210 N.J. 187 (2012), rev’g 416 N.J. Super 286 (App. Div. 2010).
In US Bank, the mortgagor (Hough) purchased a “Mt. Laurel” condominium unit in 2004 for $68,000; the transaction was financed with a $61,000 purchase-money mortgage. However, in 2005, she replaced the existing loan with a refinance mortgage of $108,000. Hough subsequently defaulted, and in 2007 the lender commenced foreclosure proceedings. The borrower moved to vacate the foreclosure judgment and dismiss the complaint on the grounds that the mortgage exceeded the amount permitted under N.J.A.C. 5:80- 26.18(b). The Appellate Division held that N.J.A.C.5:80-26.18(e) supported the relief sought by the mort - gagor. Nevertheless, the underlying debt was not void (although the mortgage lien was unenforceable by foreclosure), and thus the lender could enforce the same by obtaining a judgment at law for the amount due. The Supreme Court, however, construed the regulation to mean that only the excess portion of the loan required avoidance, and thus the remaining amount was enforceable:
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 the 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.
210 N.J. at 191.The decision nevertheless demon- strates the importance of ascertaining whether the property to be mortgaged is subject to AHRs.
If a first purchase-money mortgagee acquires title to an affordable housing unit through foreclosure, is the unit released from the AHRs? Although this was originally the case, it seems that -- as the result of amendments to COAH regulations -- the AHRs will survive foreclosure. Furthermore, it seems that this change is effective retroactively. Wells Fargo Bank v. Kelly, __ N.J. Super. __ (Ch. Div. 2005) (not officially reported), construing N.J.A.C. 5:80-26.5(e). Thus, one may not rely upon a recital in the recorded AHRs governing a particular “Mt. Laurel” unit to the effect that foreclosure will release the unit from the burden of the restrictions.
From the title insurer’s standpoint, AHRs are similar to other restrictive covenants. But because they are based on COAH regulations, which are extremely complex, they must nevertheless be approached with more than the usual degree of caution. AHRs are typically excepted as such in Schedule B of the commitment and policy, e.g.: Affordable housing restrictions in Deed Book ___, page ____. In sum, AHRs present a potential pitfall for the unwary and should be approached with caution.
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