On certification to the Superior Court, Appellate Division, whose opinion is reported at 219 N.J. Super. 263 (1987).
For affirmance in part and reversal in part -- Justices Clifford, Handler, Pollock, Garibaldi and Stein. Opposed -- None. The opinion of the Court was delivered by Stein, J. O'Hern, J., concurring in part, dissenting in part.
[114 NJ Page 228] In 1984, the New Jersey Housing Mortgage and Finance Agency (HMFA) adopted a new rule, N.J.A.C. 5:80-5, regulating the transfer of ownership interests in housing projects financed by the Agency and its predecessors, the Housing Finance Agency (HFA) and the Mortgage Finance Agency (MFA). (15 N.J. Reg. 2090-95). We consider in this case challenges to the validity of three regulations adopted as part of the Rule. N.J.A.C. 5:80-5.10 prohibits prepayment of mortgage loans without prior approval by HMFA; N.J.A.C. 5:80-5.8 provides that if an agency-financed project is sold and the underlying mortgage prepaid, profits in excess of an eight-percent return on the seller's equity must be paid to HMFA as an
additional fee for approval of the sale; and N.J.A.C. 5:80-5.9 imposes various processing fees on sellers in connection with the sale of agency-financed housing projects.
In a direct appeal to the Appellate Division pursuant to Rule 2:2-3(a)(2), plaintiffs, Lower Main Street Associates (Lower Main) and Union Plaza Associates (Union), contended that the regulations were contrary to the terms of their financing agreements with HFA, and inconsistent with HMFA's enabling legislation. They also claimed that the regulations violated the contracts clauses of the federal and state constitutions, U.S. Const. art. I, § 10, and N.J. Const. of 1947 art. IV, § 7, para. 3, as well as the "takings" clause of the federal constitution. U.S. Const. amends. V and XIV.*fn1 The Appellate Division upheld the validity of two of the three regulations, those limiting the right of prepayment and the return on equity in the event of sale of an agency-financed project, but struck down the imposition of closing fees as "patently excessive and thus invalid * * *." Lower Main Assocs. v. New Jersey Hous. & Mortgage Fin. Agency, 219 N.J. Super. 263, 278 (1987).
We affirm the judgment of the Appellate Division invalidating the regulation that imposes closing fees, N.J.A.C. 5:80-5.9. With respect to the restriction on prepayment of agency-financed mortgages, we are in accord with the Appellate Division's conclusion that plaintiffs' mortgages cannot be construed to confer on the mortgagors the right to prepay at any time after the agency's underlying bonds are redeemable. Thus, the regulation restricting prepayment is not in conflict with the underlying agreements between plaintiffs and HMFA. Nevertheless, we hold the regulation to be invalid because it provides no standards whatsoever to guide HMFA's exercise of discretion in determining whether to approve requests for prepayment of an agency-financed mortgage loan. We also conclude
that the regulation restricting return on equity, after sale of an agency-financed project and prepayment of the underlying mortgage, cannot in its present form be reconciled with the underlying statutory authorization; moreover, this regulation appears to have been adopted, at least in part, for a purpose different from that advanced by HMFA. Accordingly, we invalidate N.J.A.C. 5:80-5.8. We thus affirm in part and reverse in part the judgment of the Appellate Division.
HMFA, established by the New Jersey Housing and Mortgage Finance Agency Act of 1983 (HMFA Act), L. 1983, c. 530, is a consolidation of two prior agencies, the New Jersey Housing Finance Agency (HFA), and the New Jersey Mortgage Finance Agency (MFA). Prior to the establishment of the HMFA, the HFA financed construction of moderate-income housing through the issuance of tax-exempt bonds. N.J.S.A. 55:14J-34(f) (repealed by HMFA Act, codified at N.J.S.A. 55:14K-1 to -44). Under the HMFA Act, the HMFA assumed the obligations of the HFA bonds, N.J.S.A. 55:14K-4d, and was authorized to issue its own tax-exempt bonds in order to finance low- and moderate-income housing. See N.J.S.A. 55:14K-2e(2); 55:14K-20.
Lower Main and Union are limited partnerships, organized in 1969 and 1970 respectively, under the Limited-Dividend Housing Corporations Law, N.J.S.A. 55:16-1 to -22. Union borrowed $5,835,000 from HFA in 1969 to construct a 240-unit housing project in Union City. Lower Main borrowed $7,665,000 from HFA in 1971 to finance construction of a 288-unit housing project in Rahway. Both loans were for ninety percent of the cost of the respective projects, and had fifty-year maturities. The HFA issued short-term bond anticipation notes in 1971 to generate the funds required for the loans.
Concurrently with the closing of the loans, and in compliance with HFA's enabling legislation, N.J.S.A. 55:14J-9 (repealed by HMFA Act, codified at N.J.S.A. 55:14K-1 to -44), Lower Main and Union entered into regulatory agreements with HFA that were to remain in effect until the loans were repaid. The agreements imposed limitations on rents, management, and tenant eligibility, and also limited the amount of annual distributions to Lower Main and Union to eight percent of their respective equity investment in the housing projects.
In 1972, HFA issued its 1972 Series A General Housing Loan Bond and used the proceeds to retire the short-term bond anticipation notes and to provide permanent mortgage financing to Lower Main and Union. The Series A Bonds matured on November 1 of each year in principal amounts set forth in the bond resolution. Bonds maturing prior to November 1983 were not redeemable by HFA; bonds maturing on and after November 1, 1983, were redeemable after November 1, 1982, at the agency's option. Concurrently with the issuance of the Series A bonds, Lower Main and Union executed so-called "conforming" mortgages to insure consistency between the mortgages and the provisions of the bond resolution.
Rule 5:80-5 was proposed by HMFA in May 1984. 16 N.J. Reg. 951. It was adopted by the Agency in the form proposed in June 1984, and became effective August 6, 1984. 16 N.J. Reg. 2091. In July 1985, plaintiffs instituted this proceeding pursuant to Rule 2:2-3(a)(2), challenging three of the regulations included in N.J.A.C. 5:80-5.*fn2 As noted above, the Appellate
Division upheld N.J.A.C. 5:80-5.10, which prohibits prepayment of mortgage loans without HMFA approval, and also sustained N.J.A.C. 5:80-5.8, which restricts the amount of profit a sponsor of an agency-financed project may retain if the project is sold and the agency's mortgage prepaid. The Appellate Division invalidated N.J.A.C. 5:80-5.9, which imposes various processing fees in conjunction with the sale of agency-financed projects. We granted plaintiffs' petition for certification and also granted HMFA's cross-petition addressed to N.J.A.C. 5:80-5.9. 109 N.J. 47 (1988).
HMFA's prepayment regulation, N.J.A.C. 5:80-5.10, provides that "[p]repayment of the mortgage loan made by the Agency is prohibited without the prior written approval of the agency." Although plaintiffs incidentally challenge this regulation as unauthorized by the HMFA Act, their principal contention is that the regulation conflicts with the right of prepayment expressly conferred by the mortgages executed by plaintiffs and HMFA to secure the project loans. Plaintiffs argue that HMFA cannot adopt a regulation that contradicts an express prior agreement by the Agency that recognizes plaintiffs' right to prepay their mortgages.
Plaintiffs rely specifically on the following excerpt from paragraph 6 of the conforming mortgages:
That the Mortgagor shall not make any advance principal payment prior to the date on which all of the Bonds issued by the Mortgagee for the purpose of obtaining funds with which to make this Mortgage Loan are redeemable. With respect to any advance principal payment so permitted thereafter, the Mortgagor shall pay an amount equal to the aggregate of (i) the principal amount of the Mortgagor's Mortgage Loan Obligations (as determined pursuant
to the Bond Resolution) remaining unpaid, (ii) the Mortgagor's Housing Finance Fund Obligations (as determined pursuant to the Bond Resolution) remaining unpaid, (iii) the interest to accrue on all Bonds of the Mortgagee to be redeemed by the Mortgagee upon the making of such advance principal payment to the next call date thereof not previously paid by Mortgagor, (iv) the call premium, if any, on the Bonds so to be redeemed, and (v) the cost and expenses of the Mortgagee in effecting the redemption of the Bonds so to be redeemed, less the amount of monies available under the provisions of the Bond Resolution for application to the redemption of the Bonds so to be redeemed, as determined by the Mortgagee * * *. (Emphasis added.)
Lower Main and Union contend that paragraph six of their respective mortgages bars prepayment by the mortgagors only until the underlying bonds are redeemable by HMFA. Relying on the phrase, "[w]ith respect to any advance principal payment so permitted thereafter," plaintiffs assert that the mortgagors are unconditionally "permitted" to make prepayments at any time after the bonds are subject to redemption. Because the bond resolution authorizes redemption after November 1, 1982, of all bonds ...