This is a foreclosure action involving a residential mortgage insured by the Department of Housing and Urban Development (HUD) under a program designed to aid low-income families in purchasing their own homes. National Housing Act § 221(d)(2), as amended 12 U.S.C.A. § 1715 l (d)(2) (1969) (HUD program). Plaintiff Associated East Mortgage Co. (Associated) is a New Jersey corporation engaged in the mortgage lending business. Defendants William G. and Dianne M. Young (Youngs) are the mortgagors, and defendant Meadowlands National Bank (Meadowlands) is the holder of a second mortgage on the Youngs' property. A voluntary dismissal was entered as to defendants Paul Auerbach and Mrs. Paul Auerbach, the tenants who occupied an apartment in the mortgaged premises. The State of New Jersey was also named a defendant as the possible holder of a judgment lien against defendant William Young resulting from an action brought by the Office of the Public Defender for legal services. A default was entered against the State.
Plaintiff seeks a judgment of foreclosure of the mortgage contract. Associated regards this mortgage as no different from those which are not insured by HUD and claims it has followed the standard banking procedures for handling defaults. Although HUD has published an extensive and detailed handbook, Associated contends it is not legally bound to follow these recommended procedures because they are merely guidelines for private mortgagees. The Youngs filed a counterclaim seeking a declaratory judgment determining that plaintiff is legally bound to provide them with forbearance relief. Youngs also seek an injunction compelling not only forbearance but also a recasting of their mortgage. They assert that while Associated is reaping the benefits of a mortgage totally guaranteed by HUD, it is disregarding those features which distinguish it from a traditional mortgage. The Youngs argue that plaintiff has failed to fulfill its obligations under the HUD program and thus enters the court with unclean hands. The duties
and obligations of a private mortgagee in servicing mortgages insured under the HUD program must be determined in deciding this controversy.
After considering the evidence presented, the court finds the following facts. On June 1, 1972 the Youngs gave a mortgage to Associated for $17,200 to purchase a home in Jersey City. The mortgage provided for monthly payments of $236 and was approved pursuant to the HUD program. Mr. Young, a 37-year-old bus driver with a wife and four children, had a gross annual income of approximately $14,500. In March 1976 a strike forced his unemployment and his income was reduced to $50 a week in union strike benefits. Despite this obvious financial setback, the Youngs continued to pay their mortgage with funds from their savings account from March to August 1976, when the account was depleted. An apartment in the Youngs' home had been rented for $185 a month until it became vacant in June 1976. Subsequent efforts to relet the apartment were unsuccessful.
The Youngs contacted Associated as soon as the strike occurred to request a reduction in the monthly payments. Associated denied this request and in July 1976 sent a form letter to the Youngs as a reminder of overdue payments for June and July. This letter warned that foreclosure was imminent if these payments were not made. During the four years prior to June 1976 the Youngs had regularly paid the monthly mortgage installments.
These form letters continued from July through October 1976, during which time the Youngs executed and delivered a promissory note to Meadowlands for $6,791.40 at 7% annual interest with monthly payments of $80.85, and also gave a second mortgage as security for the note. They have been making irregular partial payments of $20 to Meadowlands on account of this indebtedness and these payments have been accepted although the note is in default.
During the period of her husband's unemployment Mrs. Young frequently telephoned plaintiff to request a reduction in the mortgage payments and to explain her family's financial circumstances, but these requests received little attention. At the Youngs' urging, Associated finally consented to a forbearance agreement which called for monthly payments of $315 (regular payments of $236 plus $79 in arrears) to be effective from October 1, 1976 to June 1, 1977, at which time the mortgage would be current. Although they never signed this agreement, the Youngs attempted to meet its payment schedule and offered one payment of $315 which was accepted. However, they were unable to make additional payments of this increased amount. Thereafter, the Youngs did not hear from Associated regarding the possibility of reduced or suspended payments pending Mr. Young's return to work.
Associated instituted this foreclosure action on April 6, 1977. In May 1977 the strike ended and Young returned to work. He was then able to resume paying his regular monthly mortgage installments of $236, which have been placed in escrow pending the outcome of this action.
The American dream of every family owning its own home was aided by congressional mandate in the Housing Act of 1949, § 2, as amended 42 U.S.C.A. § 1441 (1978), to provide everyone with a decent home and a suitable living environment as soon as feasible. The program under which the Youngs secured their mortgage was conceived with this objective in mind. According to the provisions of the Housing Act of 1949, a mortgagee who is approved by the Secretary of HUD (Secretary) as qualified to service the mortgage properly, could foreclose in case of default, take possession of the property and receive the insurance benefits to which it is entitled. 12 U.S.C.A. §§ 1709(b)(1), 1710(a)(1). The mortgagee's obligation to pay the insurance premium charges would be released after conveying title to the Secretary and assigning to him all its claims against the mortgagor or others arising out of the mortgage
agreement or foreclosure proceedings. The Secretary would then issue debentures to the mortgagee with a total face value equal to the amount of the mortgage and a certificate of claim subject to a cash adjustment as provided in the statute. 12 U.S.C.A. § 1709(a)(1). Thus, the mortgagee has an incentive to participate in the HUD program since the mortgages are risk-free and totally guaranteed by the Federal Government.
Pursuant to the authorization in 12 U.S.C.A. § 1715b, HUD promulgated a series of regulations to govern the proper servicing of these mortgages. The regulations were codified in the Code of Federal Regulations (C.F.R.). See 24 C.F.R. §§ 203.600 et seq. (1977). Therefore, the regulations have the effect of law and are to be used as authority by the agency which issued them. 44 U.S.C.A. § 1510(a) (1969). Accord, Sheridan-Wyoming Coal Co. v. Krug , 84 U.S. App. D.C. 288, 293, 172 F.2d 282, 287 (D.C. Cir. 1949), rev'd on other grounds 338 U.S. 621, 70 S. Ct. 392, 94 L. Ed. 393 (1950); Northern States Power Co. v. Rural Electrification Administration , 248 F. Supp. 616, 622 (D. Minn. 1965); U.S. v. Springfield Fire & Marine Ins. Co. , 107 F. Supp. 753, 756 (W.D. Mo. 1952), aff'd 207 F.2d 935 (8 Cir. 1953).
The documents codified in the C.F.R. are prima facie evidence of the original text of the regulations and are required to be judicially noticed. 44 U.S.C.A. §§ 1507, 1510(e); Wei v. Robinson , 246 F.2d 739, 743 (7 Cir. 1957), cert. den. 355 U.S. 879, 78 S. Ct. 144, 2 L. Ed. 2d 109 (1957); U.S. v. Millsap , 208 F. Supp. 511, 516 (D. Wyo. 1962); Sims v. So. Bell Tel. & Tel. Co. , 111 Ga. App. 363, 141 S.E. 2d 788, 789 (App. Ct. 1965). Federal laws and regulations are binding on state courts and are subject to their judicial notice. Lange v. Nelson-Ryan Flight Serv., Inc. , 259 Minn. 460, 465, 108 N.W. 2d 428, 432 (Sup. Ct. 1961); Ralston v. Hawes , 334 Mass. 51, 53, 133 N.E. 2d 589, 591 (Sup. Jud. Ct. 1956). [163 NJSuper Page 321] In order to fully appreciate the issues here a thorough review of the pertinent regulations in the C.F.R. is necessary. These regulations require a HUD-approved mortgagee to employ or contract for the employment of trained personnel who are competent in all aspects of mortgage-lending activities, including servicing and field-collection activities. They also mandate that these mortgagees employ adequate staff and facilities to originate and service mortgages in accordance with the C.F.R. 24 C.F.R. § 203.9. The collection techniques for mortgages which are in default must be adapted to the mortgagor in each case. A mortgagor's individual circumstances must be considered, although mortgagees are urged to take prompt action to collect the amounts due on the mortgages. 24 C.F.R. § 203.600. A prerequisite to foreclosure is the mortgagee's obligation to arrange a face-to-face interview with the mortgagor or at least to make a reasonable attempt to schedule such a meeting. This must occur "before three full monthly installments due on the mortgage are unpaid." 24 C.F.R. § 203.604(b). In case of default on a repayment plan not arranged at a personal interview, the mortgagee must schedule a face-to-face meeting within 30 days of the default before initiating a foreclosure action. Id. A reasonable attempt by the mortgagee to arrange such a meeting is considered to consist of at least one letter sent by certified mail to the mortgagor in addition to at least one trip to visit him at the ...