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July 2012 - Recent Supreme Court Decision Addresses Mortgage Limits for Affordable Housing

In a Decision reached last week in the matter, U.S. Bank, N.A. v. Hough, the New Jersey Supreme Court determined when a lender issues a loan that exceeds the maximum permissible loan amount for an affordable housing unit the excess portion of the loan is void and not collectible by the lender.  The balance of the loan is valid and remains secured by the mortgage against the affordable housing unit.

 The homeowner Hough purchased an affordable housing unit under Piscataway’s Affordable Housing Program. A year later she refinanced with a loan secured by the affordable housing unit which exceeded 95% of the unit’s allowable resale price under the Housing and Mortgage Finance Agency’s (“HMFA”) Uniform Housing Affordability Controls (“UHAC”). Hough paid off her original mortgage, property taxes and received approximately $20,000 from the refinance.  Hough did not report the refinancing to the municipality’s administrative agent as required by UHAC. When Hough defaulted the lender filed a foreclosure action.  Piscataway filed an answer in the foreclosure asserting that the foreclosure was subject to its affordable housing restrictions.

 In the litigation Hough claimed that both the mortgage and underlying indebtedness are void.  The HMFA took the position that the mortgage was void, and the lender contended that it should have an equitable mortgage for the maximum allowable resale price of the unit and that it should have an unsecured claim for the balance of the debt.  The Court determined that the portion of the loan that exceeded 95% of the unit’s allowable resale price is void and not collectible by the lender.  The balance of the loan remained and the mortgage securing the loan balance was enforceable as a lien against the property.

The Court’s decision serves as a reminder that Lenders have to be diligent when making loans for affordable housing units, the deed and mortgage restrictions for the affordable unit in question were in the unit’s chain of title and a basic title search should have revealed the restrictions.  Also, the case highlights the difficulty a municipality’s affordable housing administrative agent faces when a homeowner fails to advise the administrative agent that they are seeking to refinance their mortgage.