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December 11, 1974

UNITED STATES of America, Plaintiff,
Thomas J. CAPRICE, Defendant

The opinion of the court was delivered by: BIUNNO

 In this mortgage foreclosure case, the mortgage debtor raises two points, the application of which depends on whether New Jersey law governs.

 One is N.J. Court Rule 4:27-2, which by the exception referring to N.J.S. 2A:50-2, forbids joinder in one action of the remedy of foreclosure of the mortgage and the remedy of a deficiency money judgment on the bond if the proceeds of sale do not satisfy the debt. (The exception probably should refer to N.J.S. 2A:50-1, or to both sections).

 The second is whether the mortgage debtor is entitled here to have the deficiency judgment reduced by the difference between the "fair value" of the property and the amount realized at the sale.

 The decisions hold that where the United States is the holder of the mortgage, whether by assignment or otherwise, the proceeding is governed by federal law and not by the law of the State where the property is located, since the issue involves federal rights and liabilities stemming from a federal program. See U.S. v. Wells, 403 F.2d 596, at 598 (CA5th, 1968); Clearfield Trust Co. v. U.S., 318 U.S. 363, 63 S. Ct. 573, 87 L. Ed. 838 (1943); U.S. v. Shimer, 367 U.S. 374, 81 S. Ct. 1554, 6 L. Ed. 2d 908 (1961); U.S. v. McIntyre, etc., 343 F. Supp. 1095 (M.D.La.1972). As noted in Wells, the application of federal law "is particularly needed to assure the uniform administration of the nationwide Veterans Administration loan program."

 F.R.Civ.P. 18(b), which corresponds to N.J. Court Rule 4:27-2, expresses no exception for foreclosures on bond and mortgage, and the two remedies may be joined in one action. The end result, however, is the same, because when these remedies are joined, the practice is to handle the case in two stages. The first is the foreclosure, which involves establishment of the total debt due, foreclosure of the right of redemption as well as the rights of subordinate interests, and a sale of the property. The second step is to determine the deficiency, if any, and enter a money judgment accordingly. That sequence was used in this case. The late Judge Robert Shaw entered the judgment of foreclosure, and the matter now has come on for trial before the court without a jury, to establish the deficiency.

 Since New Jersey law does not apply, there seems to be no reason why the United States could not, if it so chose, simply sue the debtor on the bond for a money judgment without foreclosing the mortgage at all. If this were done, of course, satisfaction of the money judgment would entitle the mortgage debtor to a warrant for satisfaction of the judgment and to a discharge or release of the mortgage lien, leaving him with whatever interest he may have in the property mortgaged as security.

 This course can be followed under New Jersey law when the obligation of the debt is evidenced by a note (a "promise" to pay money, usually not under seal, for which the statute of limitations is 6 years), rather than a bond (an "obligation" to pay a penalty if a specified condition is not met, usually under seal, for which the statute of limitations is 16 years). See 79-83 Thirteenth Ave., Ltd., v. De Marco, 44 N.J. 525, 210 A.2d 401 (1965). *fn1"

 The provisions of N.J.S. 2A:50-2 have been indicated as designed to provide the mortgage debtor with a personal privilege, rather than to express some concept of public policy. See Guarantee Trust v. Hoffman, 16 N.J.Misc. 340, at 342, 199 A. 781 (Cir. 1938), and the precedents there cited.

 As a matter of public policy, the experience of the great depression suggests that foreclosure might well be the remedy of last resort, instead of the required first step. Lenders make mortgage loans in the expectation that they will be paid according to their terms. The providing of security is a factor that helps justify making the loan, and commands a lower interest rate than unsecured loans. Borrowers who are conscious of the cost of money will offer the lender additional security, such as a collateral assignment of in force life insurance, or of sound securities already owned, in order to bargain better loan terms.

 And the lender has no desire to foreclose. Foreclosure involves unwanted risks of loss not only of interest but of principal as well, and allowances for losses must be made up in the level of interest rates charged to borrowers generally. *fn2"

 Before the great depression, mortgage loans were made customarily in a form that called for the payment of interest only until the debt was due. The terms often ran for 3 or 5 years, and the loan was periodically extended with an adjustment in interest rates to reflect then current levels, much as is customary today with short term paper (e.g., U.S. Treasury bills, certificates of deposit issued by banks, and commercial paper). In a period of economic depression, many borrowers are wholly unable to satisfy the entire principal at one time, and a rule like New Jersey's results in wholesale foreclosures and the attempted sale of large numbers of parcels at one time. The laws of supply and demand force values down and the end result is that everyone loses badly.

 During the 1930's the direct amortization mortgage, with level monthly payments toward interest and principal, became the rule rather than the exception. Even where the loan is a high percentage of the purchase price, and even when the loan term is extended, including arrangements under which a "balloon" of principal remains when the debt falls due, this system constantly reduces the balance of principal and increases the equity interest of the owner, thus placing both borrower and lender in a better position to recast the mortgage balance in difficult economic periods when the owner cannot manage to meet the monthly payments. This factor has the influence of reducing the incidence of foreclosures, reducing the number of parcels on the market for sale at any one time, and thereby helps to sustain real estate values generally to the benefit of both borrower and lender.

 Most regulated lending institutions are required to take steps to protect their loans in cases of defaults continuing for specified periods. Procedures that would allow the lender to sue for the defaulted installments, instead of accelerating all the remaining balance and foreclosing (which is what N.J.S. 2A:50-2 forces them to do) would put the loan back in good standing and avoid ...

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