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Foreclosure and Affordable Housing
What Municipalities
Don't Know Can Hurt Them
Thomas J. Trautner Jr.
By Thomas J. Trautner Jr.
Wolff & Samson PC

Preserving affordable housing units after they have been built is a subject that, unfortunately, is often overlooked. Perhaps the biggest problem with maintaining affordable units concerns what happens when an affordable unit is subject to foreclosure. This is because affordable units that were built between 1987 and 1999 often contain deed restrictions that are extinguished in the event of a foreclosure. As a result, untold numbers of affordable housing units have been lost over the years through foreclosures—often with little or no notice to the municipalities that struggled to see them built. Equally frustrating was the fact that the New Jersey Council on Affordable Housing (“COAH”) offered virtually no guidance to municipalities as to how to save these units from foreclosure—short of simply paying-off the delinquent mortgage and the accompanying late fees, attorneys fees, etc.

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Untold numbers of affordable housing units have been lost over the years through foreclosures—often with little or no notice to the municipalities that struggled to see them built.

Recognizing the problem, on October 1, 2001, the New Jersey Housing and Mortgage Finance Agency (“HMFA”) attempted to fill this void by adopting the Uniform Housing Affordability Controls (“UHAC Rules”) that were designed to prevent the extinguishing of deed restrictions on affordable units in the event of a foreclosure. The UHAC Rules required the use of a revised form of deed restriction for new affordable housing units. The UHAC Rules also stated that they apply to all affordable units — regardless of the date on which the units were created. This, of course, suggests that the UHAC Rules were meant to be applied retroactively in order to prevent units that were deed restricted between 1987 and 1999 from being lost through foreclosure. Problem solved—right? Think again.

There are at least four court decisions which discuss the retroactive application of the UHAC Rules, and the decisions are anything but unanimous. Moreover, COAH and HMFA’s handbook entitled “Understanding UHAC” actually takes the position that the UHAC Rules do not retroactively apply to units built between 1987 and 1999. Without getting too technical with respect to analyzing the UHAC Rules, under the current state of a law, whether or not a deed restriction is extinguished after a Sheriff’s Sale appears to depend upon: (i) when the unit was built; and (ii) when the deed restriction was executed. In light of this uncertainty, municipalities cannot simply ignore the subject of foreclosures and trust that the UHAC Rules will save them from having to replace lost affordable units.

So what should municipalities do to preserve affordable units? Like many problems, the only answer is vigilance. Municipalities should attempt to have their affordable housing administrator work with mortgage lenders to actively monitor affordable units for delinquencies in mortgage payments. Not surprisingly, heading off a problem early-on can allow a municipality to explore a variety of cost-effective options to save the affordable unit.

By way of example, if a foreclosure is imminent, the municipality can use money from its affordable housing trust fund to purchase the mortgage to:(1) halt the foreclosure; (2)stop the bank from imposing late fees and attorneys fees that must be repaid; and (3) take control of the situation to move at its own pace.

Once in control, the municipality can chose to work with the owner and maintain the mortgage, purchase the unit from the owner and resell it to a qualified buyer, commence litigation to compel the owner to sell the property to the municipality, or begin foreclosure action and restrict the Sheriff’s Sale to qualified buyers (bearing in mind that lien holders may need to be made whole).

Obviously, municipalities will not always have the luxury of intervening in matters before a bank obtains a judgment of foreclosure. If, however, a municipality learns of a foreclosure action prior to a Sheriff’s Sale, the municipality should still consider purchasing the unit from the owner and paying off the mortgage. Alternatively, the municipality might consider purchasing the mortgage from the bank and substituting as the plaintiff in the foreclosure action. The municipality can then ask the Court to either compel the owner to sell the affordable unit back to the township (and if the owner cannot be located, ask the Court to simply transfer title of the unit to the municipality); or arrange for a Sheriff’s Sale to qualified buyers.

It is important to understand, however, that while a municipality can spend whatever funds are needed from its affordable housing trust fund to preserve an affordable unit, the municipality can only resell an affordable unit for a fixed amount that is determined by HMFA. Accordingly, it will not always make sense to simply payoff the mortgage at issue—particularly if there are liens on the unit. In such a case, the municipality may consider intervening as a party in the foreclosure action to prevent the Sheriff’s Sale from being open to the general public.

The municipality should, however, proceed with caution if the affordable unit does not have a recorded deed restriction in the revised form provided under the UHAC Rules. If there is any question about whether the UHAC Rules apply to the affordable unit at issue, the bank and other lien holders may attempt to litigate:

(1) whether or not the deed restriction will be extinguished at Sheriff’s Sale;

(2) if the Sheriff’s Sale must be limited to qualified buyers (knowing that an open Sheriff’s Sale will fetch a greater sale price and a greater probability of the bank and lien holders being made whole); and

(3) if lien holders must be made whole by the municipality prior to a restricted Sheriff’s Sale.

Because it is difficult to avoid affordable units being subject to foreclosure, municipalities should consider taking steps to improve their odds of success in the event of litigation. First, municipalities should take an inventory of their affordable housing stock to make sure each affordable unit has a properly executed and recorded deed restriction. Not surprisingly, builders have sometimes been less then careful to ensure that deed restrictions for affordable units were properly executed and recorded. Municipalities should also be proactive to compel owners to satisfy any liens as soon as they attach to affordable units. Finally, for affordable units that do not have the revised form of deed restriction provided under the UHAC Rules, municipalities should consider asking each owner to execute the revised form of deed restriction and have the same recorded. Although this type of action is not expressly provided for by the UHAC Rules, it is difficult to envision a Court refusing to honor the terms of the revised deed restriction in the event of a foreclosure.

While none of these suggestions are by any means fool-proof, the moral of the story is that because COAH and HMFA are likely never going to be able to draft regulations to completely address the subject of affordable units and foreclosures, municipalities must remain vigilant to preserve their affordable units. And, while it is both time consuming and expensive to implement these measures, the time and expense will be less severe than facing litigation or having to replace a lost affordable unit.






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