New Jersey Appeals Court Voids Mortgage Made In Violation Of Affordable Housing Deed Restriction, Leaving Lender With Unsecured Loan

The following facts have been adapted from a recent ruling of the Superior Court of New Jersey, Appellate Division (New Jersey's intermediate appeals court):

• On January 14, 2004, one, Hough, purchased a condominium unit for $68,142.86. To fund part of the purchase price, Hough borrowed $61,329 from Wells Fargo Home Mortgage, Inc., and secured the loan by executing a mortgage in favor of Wells Fargo.

• Because the condominium formed a part of the Township's affordable housing obligation under New Jersey state law, the deed contained a restriction limiting the use, sale and resale of this property, which, among other things, limited the amount of a loan that could be secured by the property.

• On March 25, 2005, Hough refinanced the condominium unit by borrowing $108,000 from Mortgage Lenders Network, USA, Inc.

• At the time of the mortgage transaction, the maximum allowable resale price of the condominium unit, pursuant to N.J.A.C. 5:80-26.6, was approximately $68,735.41. The loan, therefore, was limited to 95% of the units' maximum allowable resale price.

• Hough used the mortgage proceeds to satisfy the Wells Fargo purchase money mortgage then in the amount of $62,795.10, and for other personal unsecured debts, and real property tax liens. Hough netted $20,080.45 from the mortgage refinance.

• On February 1, 2007, Hough defaulted on the mortgage. The lender subsequently sued for foreclosure, afterwhich Hough challenged the legality of the mortgage, which the lower court overruled, and which gave rise to an appeal.

• In reversing the lower court, the New Jersey appeals court noted that the deed restriction limiting the use, sale and resale of the property placed lenders on constructive notice that the condominium unit was part of the Township's Mount Laurel affordable housing obligation subject to the applicable state regulations.

• Because the amount of the refinanced loan exceeded the maximum amount allowable under the Township's affordable housing obligation, the court found the mortgage to be void, but left the amount of debt itself, now unsecured, to remain in tact, and noted that lender may file a separate action seeking to collect upon the unsecured underlying debt.

For the ruling, see U.S. Bank, N.A. v. Hough, Docket No. A-5623-08T3 (N.J. Super. App Div. September 14, 2010) (when link expires, TRY HERE).