This is an action to foreclose a mortgage insured by the Federal Housing Administration (FHA) and administered under the rules and regulations of the Department of Housing and Urban Development (HUD). Defendant contends that plaintiff failed to follow regulations and procedures as promulgated by HUD pertaining to foreclosure proceedings; she maintains that as a result she lost an opportunity to recast the mortgage, to obtain special forbearance relief and to have the mortgage assigned to the FHA.
On June 30, 1980 William E. Buehler and Elizabeth Buehler, his wife, and Patricia H. Ruh executed an FHA-insured bond and mortgage to Jefferson Mortgage Company (Jefferson) in the sum of $51,850, with interest at the rate of 11 1/2% payable in monthly installments, together with monthly payments towards mortgage insurance premiums, taxes and insurance. The total monthly payments amounted to $679. The mortgage covered property located at 1517 Haddonfield-Berlin Road, Cherry Hill, New Jersey, which had been owned by the Buehlers for about ten years. It was conveyed by the Buehlers to themselves and defendant, who moved into the property in July 1980. Within a few weeks the Buehlers conveyed the property to defendant for the total consideration of $52,900 and then moved to Somerdale, New Jersey. Defendant continued to occupy the premises and made monthly payments on August 1, September 1 and October 1, 1980. No payment has been made since October 1, 1980.
The mortgage was executed to Jefferson but assigned to plaintiff bank on the same date and serviced by Jefferson for plaintiff. On July 1980 Jefferson addressed a letter to the Buehlers and defendant concerning the account number of the mortgage, monthly payments to principal and interest and the escrow account, the due date and late charges, with directions to make payments to Jefferson. The letter had defendant's name underneath the Buehlers' name and was not delivered to 1517 Haddonfield-Berlin Road but was forwarded by the Cherry Hill Postoffice to the Buehlers at 804 W. Somerdale Road, Somerdale. The Buehlers hand-delivered the letter to defendant. On January 19, 1981 a delinquency notice was addressed in the same manner and was again forwarded by the postoffice to the Buehlers, who again hand-delivered it to defendant.
On February 18, 1981 defendant met with James Smedley, president of Jefferson, whom she knew personally through her business as a real estate broker. Arrangements were made to pay $1,000 a month until the delinquency was brought current. On the same date she received a letter advising that the account had been approved for foreclosure. She contacted Smedley concerning the letter, who advised that he would stop the action but that she would be required to pay the $1,000 by the end of March. She apparently had another conversation with Smedley because she received another letter, dated February 26, 1981, advising that the total delinquency, including the payment due for March 1, amounted to $3,503.54. She made a notation on this: "$1,000 due a month start April 1." When defendant failed to make the first $1,000 due-a-month installment she again contacted Smedley for extra time, but was told that the mortgage was being transferred to plaintiff, who would contact her.
In the meantime, Jefferson went into bankruptcy and all of its files were taken over by mortgagees for whom it had been servicing the accounts. Plaintiff took over about 1,000 mortgage accounts for direct servicing and received defendant's file from Jefferson on March 19, 1981. In the second or third week
of April defendant called plaintiff. She did not know with whom she spoke but advised that she had no coupon book or account number. She was told that plaintiff was in the process of transferring the accounts and that they would contact her at a later date. Since the mortgage was four months in arrears when plaintiff took over servicing the account, the file was not sent to plaintiff's mortgage department nor programmed into a mortgage computer but rather was sent directly to plaintiff's foreclosure department.
In July 1981 plaintiff forwarded a tax bill for the second quarter of 1981 to defendant. The accompanying letter stated it could not identify the tax bill with her loan number and requested that if she had an active mortgage with plaintiff, to indicate the loan number and return it to plaintiff. She wrote to plaintiff on her real estate stationery and advised that she never received an account number. In July 1982 the tax bill for the second quarter of 1982 was forwarded to defendant by plaintiff, with the same inquiry as to her loan number. It is obvious that plaintiff's mortgage department was not communicating with its foreclosure department.
Foreclosure proceedings were instituted on November 9, 1981. Defendant was served on January 25, 1982. She filed a pro se answer and asserted as defenses, among other matters, that she had not been offered any reinstatement of the mortgage; plaintiff never sent payment books, invoices for payments, or cards for payments or notice of any type; plaintiff never directed her to make payments to it at any location; she received no information that plaintiff is the mortgagee and that plaintiff never attempted to contact her by telephone or by mail.
In February 1982 she went to plaintiff's office and spoke to Vincent Campellone, who is in charge of the mortgage department. She seemed indignant because Campellone refused to permit her to go through plaintiff's file. She did see 8 to 12 envelopes in the file with yellow tickets on them, which indicated to her envelopes returned from the postoffice. Campellone
informed her of the amount of arrearages and advised that the mortgage would be reinstated if plaintiff paid all arrearages within two weeks. Defendant called him two or three times after that but was unable to speak with him. She went to plaintiff's office but Campellone would not see her.
Toward the end of February or the beginning of March 1982 defendant then made an appointment with Robert J. O'Shaugnessy, the foreclosure administrator, concerning the account. She was again informed that plaintiff required full payment to reinstate the mortgage. A meeting was then arranged among defendant, O'Shaugnessy and a representative of HUD. They explained to her that when the account was assigned to plaintiff it was already four months in arrears and therefore did not go to the mortgage department but went directly to the foreclosure department. On this occasion she again glanced at plaintiff's open file and this time noted that there were only two or three letters with the yellow stickers on them indicating nondelivery. At another meeting between O'Shaugnessy and the HUD representative she was informed by HUD that it rejected an assignment of the mortgage, based on copies of notices addressed to her in the original Jefferson file but which she never received. She was given a HUD Handbook and tried to pursue her HUD rights, but was refused based upon HUD's review of the information in the Jefferson file.
At trial defendant admitted that if given an opportunity, she was unable to bring the account current. Defendant's only source of income is her real estate business. Defendant said that she could have made payments of $1,000 a month from April 1 to September 1, 1981, but admitted that her total income for that year was only about $13,000. Obviously, defendant at no time since default has been financially able to cure the delinquency and reinstate the mortgage. Defendant could not make any payments in 1982.
Defendant contends that plaintiff failed to follow the regulations promulgated by HUD, 24 CFR 203,600 et seq., as authorized
by 12 U.S.C.A. § 1715b, and further, that plaintiff failed to follow the procedures outlined in the HUD Handbook, 4330.1 (formerly 4191.02), on Administration of Insured Home Mortgages. As previously noted, defendant originally contended she lost an opportunity to recast the mortgage, to obtain special forbearance relief, and to have the mortgage assigned to FHA. She has abandoned this position. She now maintains that the failure to follow the regulations and procedures in itself precludes plaintiff from foreclosing the mortgage, or alternatively, plaintiff's conduct in this respect is so unconscionable and inequitable as to preclude it from relief in equity. She relies upon Associated East Mortgage Co. v. Young, 163 N.J. Super. 315 (Ch.Div.1978); Federal Nat'l Mortgage Ass'n v. Ricks, 83 Misc. 2d 814, 372 N.Y.S. 2d 485 (Sup.Ct.1975), and Cross v. Federal National Mortgage Ass'n, 359 So. 2d 464 (Fla.D.C.1978).
Plaintiff contends that HUD regulations and procedures outlined in the Handbook are discretionary, not mandatory, and are not a legal prerequisite to foreclosure, which is controlled by state law. It relies upon Brown v. Lynn, 385 F. Supp. 986 (N.D.Ill.E.D.1974) (Brown 1); Roberts v. Cameron-Brown, 556 F.2d 356 (5 Cir.1977); Hernandez v. Prudential Mtgs. Co., 553 F.2d 241 (1 Cir.1977), and Northrip v. Federal Nat' Mtge. Co., 527 F.2d 23 (6 Cir.1975). It denies that under state law it is guilty of any inequitable conduct precluding it from foreclosing the mortgage.
Initially, it is necessary to review the HUD regulations pertaining to foreclosure of FHA mortgages. The most succinct summary of these regulations is in 29 N.J.Practice (Cunningham and Tischler, Law of Mortgages), § 176 at 60 et seq. (Supp.1981), which states:
When mortgages are FHA-insured, the current HUD Regulations require the mortgagee "to take prompt action to collect amounts due from mortgagors to minimize the number of accounts in a delinquent or default status," (24 CFR § 203,600) but the mortgagee "shall not commence foreclosure for a monetary
default unless at least three full monthly payments due on the mortgage are unpaid," except where "the mortgagee ascertains that (1) the mortgaged property is vacant or has been abandoned, (2) the mortgagor, after being clearly advised of the options available for relief, has clearly stated in writing that he has no intention of honoring his mortgage obligation, or (3) a tenant is paying rentals on the property but such rentals are not being applied to the mortgage payments." (24 CFR § 203.606). The mortgagee is directed to "give notice to each mortgagor in default on a form supplied . . . or approved by the Secretary [of HUD], no later than the end of the second month of any delinquency in payments" (24 CFR § 203,602), and to initiate certain "contacts" with delinquent mortgagors before beginning foreclosure proceedings."*fn1
The HUD Regulations also provide that "[t]he mortgagee shall permit reinstatement of a mortgage, even after the institution of foreclosure proceedings, if the mortgagor tenders in a lump sum all amounts required to bring the account current, including foreclosure costs and reasonable attorney's fees and expenses properly associated with the foreclosure action, unless (a) the mortgagee has accepted reinstatement after the institution of foreclosure proceedings within two years immediately preceding the commencement of the current foreclosure action, (b) reinstatement will preclude foreclosure following a subsequent default, or (c) reinstatement will adversely affect the priority of the mortgage lien." 24 CFR § 203.608 In addition, the HUD Regulations authorize "special forbearance relief" and "recasting" of the mortgage in certain cases.*fn2
"Special forbearance relief" may be granted to a delinquent mortgagor without obtaining the approval of the Secretary of HUD if the mortgagor establishes to the satisfaction of the mortgagee (whose finding is conclusive) that the mortgagor
owns no other property subject to a HUD-insured mortgage and the written forbearance agreement (1) is limited to a period of 18 months, (2) provides for resumption of regular mortgage payments after expiration of the forbearance period, and (3) provides for repayment of the total unpaid indebtedness accruing prior to and during the forbearance period on or before a date extending the original maturity for a period no greater than the forbearance period. 24 CFR § 203.614(b). In other cases the mortgagee must obtain the approval of the Secretary, who may approve only if he finds that the default was due to circumstances beyond the mortgagor's control and the forbearance agreement provides for payment of the total unpaid indebtedness accruing prior to and during the forbearance period on or before the original maturity date or some date subsequent to the original maturity which is approved by the Secretary. 24 CFR § 203.614(a) Since the language as to "special forbearance relief" is permissive, it is clear that the mortgagee need not enter into such an agreement with the delinquent mortgagor, whether or not the Secretary's approval would be required in a particular case.*fn3 (Emphasis supplied).
The HUD Regulations also authorize the Secretary of HUD to approve the "recasting" of the mortgage so as to make "the total unpaid amount" payable "over the remaining term of the mortgage or over such longer period of time as the Secretary may approve," provided the Secretary finds that the default was due to circumstances beyond the mortgagor's control. 24 CFR § 203.616(a). The mortgagee is authorized to "recast" the mortgage without obtaining the Secretary's approval if the mortgagee finds that the mortgagor does not own any other property subject to a mortgage insured by HUD and the "recast" agreement requires payment of the ...