holding that “a mortgagor of an FHA-insured mortgage may raise as an equitable defense to foreclosure, the mortgagee’s deviation from compliance with the forbearance provisions of the HUD Handbook and regulations.”
How later courts described this case
- holding that “a mortgagor of an FHA-insured mortgage may raise as an equitable defense to foreclosure, the mortgagee’s deviation from compliance with the forbearance provisions of the HUD Handbook and regulations.”
- recognizing that a mortgage foreclosure judgment is purely an in rem judgment for the purpose of effecting the judicial sale of the mortgaged property
- linking its holding to the National Housing Act’s legislative purpose of “assist[ing] in providing a decent home and a suitable living environment for every American family . . . . by making available to low-income families, mortgages which they could not otherwise afford”
- permitting the assertion of failure to follow HUD guidelines as defense to mortgage foreclosure, but rejecting the assertion of a violation of the Truth in Lending Act as a defense to mortgage foreclosure
Written by the judges who cited it.
The opinion
CAVANAUGH, Judge,
dissenting:
I respectfully dissent.
I disagree with the majority’s holding that a mortgagee’s deviation from compliance with the forebearance provisions of the HUD Handbook and regulations may constitute an equitable defense to a foreclosure action. I believe this improperly expands the intended scope of the HUD regula *128 tions. I believe that the court’s intervention in this area is improper, absent clear mandates from the legislature, and in the long run could result in diminished sources of mortgage funds.
In and of themselves, the HUD regulations are neutral as to whether non-compliance is a legal defense to foreclosure actions. See, e.g., 24 C.F.R. 203.500. However, the regulations do say that “a pattern of refusal or failure to comply will be the cause for withdrawal of a mortgagee’s approval” as an FHA-insured mortgage lender. 24 C.F.R. 203.500. Thus, non-compliance with the HUD regulations may result in a sanction. However, that sanction is limited in two respects: 1) the sanction only concerns HUD’s relationship with the mortgagee and in no way addresses the mortgagee’s relationship or obligations with the mortgagors; and, (2) HUD may only raise the sanction where there is evidence of a pattern of refusal or outright failure to comply with its regulations. In other words, the sanction will not arise for a mere technical violation of some regulation.
I believe the majority errs in holding, without legislative or administrative mandate to do so, that these regulations are binding, with the force and effect of law, on the mortgagee vis a vis the mortgagor. This allows the individual mortgagor to rely on regulations which heretofore only HUD had the authority to apply. Further, the majority allows an equitable defense to arise where only a “deviation from compliance with the forebearance provisions of the HUD Handbook and regulations” is demonstrated. This goes far beyond Brown v. Lynn, 392 F.Supp. 559 (N.D.Ill. 1975), relied upon extensively by the majority, which limited use of the equitable defense to situations where “... mortgagees have flagrantly disregarded the forebearance provisions of the HUD Handbook.” Id., 392 F.Supp. at 562 . Further, the majority’s reference to decisions from sister states is not entirely persuasive. While the Florida decision provides some authority, the New York case, Federal National Mortgage Association v. Ricks, 83 Misc.2d 814 , 372 N.Y.S.2d 485 (1975), is not an appellate decision. The *129 majority cites two New Jersey decisions. However, the latter New Jersey decision, Heritage Bank N.A. v. Ruh, 191 N.J. Super. 53 , 465 A.2d 547 (1983), limited the earlier New Jersey decision, Associated East Mortgage Company v. Young, 163 N.J.Super. 315 , 394 A.2d 899 (1978), to its facts which involved “[an] imprudent and callous lender” who approached the court with unclean hands given his “unconscionable” conduct in failing to follow the specific directions of the HUD Handbook. Id. at 333 , 394 A.2d at 899 . The court in Heritage, to the contrary, held that a mortgagor could not raise an equitable defense of a mortgagee’s failure to follow the HUD regulations and procedures unless the mortgagee’s conduct was “monstrously harsh” or “shocking to the conscience.” Heritage Bank N.A. v. Ruh, 191 N.J.Super. at 71, 72 , 465 A.2d 547, 557 (1983). The Heritage court, in denying the defendant-mortgagor’s claim, stated:
Further, defendant materially contributed to her predicament by failing to make any overtures in the beginning to plaintiff concerning her four months delinquency; failing to contact plaintiff about the default for nearly a year, and failing to show any good faith effort to make any payment into an escrow account until prompted by the court. Defendant’s flagrantly acquiescent conduct does not induce the court to extend equitable relief to one to whom such culpable negligence can be attributed. The doctrine of clean hands has its logical justification only in consideration of good conscience and natural justice. There are cases in which a court of equity, fulfilling the reasons and objects for its existence may, in furtherance of a natural justice, aid one who is comparatively more innocent. (Citations omitted.)
Id. at 71-73 , 465 A.2d at 557-558 .
It is clear that the majority’s decision, which would require a trial where defendant could demonstrate a mere violation of the HUD regulations, goes well beyond the cases it cites as authority for its position.
*130 I respectfully dissent and would affirm the lower court’s decision.