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BROWN v. LYNN

October 11, 1974

JOHNNIE D. BROWN AND LOUIS AND LEEANA BROOKS, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS UNDER COUNTS I AND II, AND CALVIN AND MIRIAM MOORE ET AL., PLAINTIFFS UNDER COUNTS III AND IV,
v.
JAMES T. LYNN, INDIVIDUALLY AND AS THE SECRETARY OF THE UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, ET AL., DEFENDANTS, AND L. E. LAY & COMPANY, INC., AN ARKANSAS CORPORATION AND SIMMONS FIRST NATIONAL BANK OF PINE BLUFF, ARKANSAS, A NATIONAL BANKING CORPORATION, DEFENDANTS UNDER COUNTS I AND II, AND FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF GARY, AN INDIANA ASSOCIATION, ET AL., DEFENDANTS UNDER COUNTS III AND IV.



The opinion of the court was delivered by: Will, District Judge.

  OPINION

The plaintiffs bring this action individually and on behalf of all other persons who either own or will own homes under section 203, 12 U.S.C. § 1709, or section 235, 12 U.S.C. § 1715z of the National Housing Act. The plaintiffs, all of whom possess mortgages under these programs, allege that the named mortgagees, by instituting foreclosure proceedings against the plaintiffs without adequate prior notice or an opportunity for a preliminary hearing, have violated both their due process rights as protected by the Fifth Amendment as well as certain contractual rights which the plaintiffs claim are the product of the federally regulated contractual relationship between the mortgagees and the Department of Housing and Urban Development (hereinafter HUD). The plaintiffs further allege that defendants Lynn and Waner, as representatives of HUD, by permitting these foreclosure proceedings, have violated their statutory obligation as defined in the applicable statutory provisions. Basing jurisdiction upon 28 U.S.C. § 1331, 1332 and 1361 and 5 U.S.C. § 701 et seq., the plaintiffs are seeking monetary damages in addition to declaratory and injunctive relief. The defendants have responded by moving to dismiss for lack of jurisdiction and for failure to state a claim. For the reasons set forth hereinafter, the mortgagees' motions will be granted while the federal defendants' will be denied.

BACKGROUND AND FACTUAL ALLEGATIONS

The two housing programs in question were instituted in furtherance of the congressional mandate to realize as soon as feasible the goal of a decent home and a suitable living environment for every American family. 42 U.S.C. § 1441. Section 203 was originally passed in 1934 and subsequently amended many times in response to a perceived housing shortage for low income families. The program is designed to make homes more accessible to low income families by means of extensive mortgage insurance which will permit mortgagees to accept limited down payments (12 U.S.C. § 1709(b)(9)), reduced interest rates (12 U.S.C. § 1709(b)(5)), and longer maturities (12 U.S.C. § 1709(b)(3)) than are otherwise available in the market. Section 235 is designed to assist lower income families in procuring homes by reducing the absolute amount due from the mortgagor through supplemental mortgage assistance payments made by the federal government directly to the mortgagee. Section 235 also provides for mortgage insurance designed to protect the mortgagee's investment against possible defaults. (12 U.S.C. § 1715z(i)).

The plaintiffs, all of whom have had their mortgages foreclosed, contend that these foreclosures have been violative of both the spirit and the letter of the National Housing Act as well as rights secured under the Constitution. As they acknowledge in their complaint, each of the plaintiffs has at some time been unable to make timely mortgage payments to the mortgagees. They indicate that in each case they notified the respective mortgagee, explaining what they considered to be legitimate reasons for their delinquent status, and expressing a willingness to make late payments as they could until they were once again current. Thereafter, all of the mortgagors tendered either late or partial payments during the ensuing months until almost every named plaintiff became current.

It is alleged that the mortgagees made no attempt during the delinquency period to ascertain the cause or status of the plaintiffs' financial plight, but after some months of arrearages, regardless of the plaintiffs' interim efforts and payments, they referred the matter to their attorneys for collection. These attorneys would then return all interim payments along with notice that unless thay receive total payment of all delinquent installments plus rather substantial attorneys' fees ostensibly representing collection services, they would institute foreclosure proceedings. After approximately two weeks, even if the plaintiffs tendered the requested mortgage payments in full, unless the attorneys' fees were also included, the mortgagees' attorneys would proceed with foreclosure. This action would impose further costs and fees upon the mortgagors.

The institution of foreclosure proceedings automatically suspends the supplemental mortgage assistance payments made by the federal government on behalf of the mortgagors under the 235 programs, 24 C.F.R.420.7(b)(3). These payments can be reinstated retroactively only if the foreclosure action is subsequently dismissed. However, as the plaintiffs point out, the only way a mortgagor can affect a dismissal, is by tendering all payments in default, plus attorneys' fees associated with the collection attempts, plus additional costs incurred because of the foreclosure. Chap. 95, Ill.Rev.Stat., § 57. The plaintiffs maintain that, because of their already strained economic condition, they cannot meet these increased demands, and thus the institution of foreclosure proceedings is tantamount to the loss of their homes.

The plaintiffs, however, do not challenge the state foreclosure proceedings which have already withstood constitutional attack. Rather, their complaint is directed against the mortgagees, who, by allegedly arbitrarily and unilaterally instituting the foreclosure proceedings, and the federal defendants, by permitting them to do so, have violated the plaintiffs' rights. Counts I and III charge violations of the plaintiffs' Fifth Amendment right to due process. They argue that foreclosures should not be permitted before affording the plaintiffs notice and a hearing at which they could explain the reasons for any delinquencies, rebut the presentations of the mortgagees, and discuss alternatives to foreclosure. They further claim that they are being unconstitutionally deprived of their property interest in the 235 mortgage assistance payments because of the federal defendants' policy of automatically terminating with the inception of a foreclosure. Plaintiffs are seeking both declaratory and injunctive relief under these counts.

In addition to the Fifth Amendment claims, the plaintiffs also charge in Counts II and IV that they are third party beneficiaries of the contractual relationship between the mortgagees and HUD. As such, they claim to have standing to enforce the regulatory scheme which they maintain requires the mortgagees to attempt to alleviate any conditions which may jeopardize home ownership under either the 203 or 235 programs. In support of this proposition, the plaintiffs point to 24 C.F.R. § 203.9 which requires mortgagees to adopt

  "Acceptable mortgage practices of prudent lending
  institutions."

They argue that a prudent lending institution would pursue activities such as those delineated in the HUD Guidebook, Administration of Insured Mortgages, FHA G 4015.9 (HUD Guidebook) before choosing foreclosure as a last resort. The plaintiffs contend that this guidebook contains "regulations" which have the force of law, and accordingly, requires the following measures be taken by mortgagees when faced with a default:

  (a) Voluntary Withholding of Foreclosure by the
  Mortgagee: "The mortgagee may wait as long as one
  year from the date of default before starting
  action to acquire the property. During this period,
  the mortgagee can help the mortgagor by accepting
  reduced payments or by carrying the account in a
  default status." Mortgagees Guide 4015.9 at p. 16.
  (b) Special Forbearance Relief: "The Commissioner
  may approve special forbearance relief if he finds
  that the default was due to circumstances beyond
  the mortgagor's control." Mortgagees Guide 4015.9
  at p. 17; 24 C.F.R. § 203.340.
  (c) Recasting of Mortgage: "In addition to the
  Special Forbearance Relief afforded in
24 C.F.R. § 203.340, if the commissioner makes the finding
  required in paragraph (a) of that section, he may
  approve a modification of the terms of the mortgage
  for the purpose of changing the authorization
  provisions by recasting the total unpaid amount due
  over the remaining term of the mortgage or over
  such longer period as he may approve." Mortgagees
  Guide 4015.9 at 18; 24 C.F.R. § 203.342.
  (d) Assignment of Mortgage to FHA: "Since approved
  mortgagees are required to service their insured
  mortgage accounts in accordance with the accepted
  practices of prudent lending institutions, there
  should be few instances in which the lender is
  unable to grant the needed relief to a deserving
  mortgagor when it is reasonable to believe that
  forbearance, recasting, or patient servicing will
  enable the mortgagor to receive debt-free home
  ownership. FHA directors are, however, authorized
  to accept assignment to the Secretary of mortgages
  in default. . . ." Mortgagees Guide 4015.9 at p.
  19; 24 C.F.R. § 203.350.
  The plaintiffs claim that the mortgagees' failure to comply with these prescribed alternatives, and HUD's failure to enforce them, deprived the plaintiffs of their rights as third party beneficiaries of the Mortgage Insurance and Mortgage Assistance Payment contracts entered into with respect to their property. Plaintiffs accordingly seek injunctive relief compelling enforcement of these "regulations" and monetary damages for any violations.

THE COURT'S JURISDICTION

I

The federal defendants' principal jurisdictional objection rests on their assumption that the federal government may not be sued without its specific consent. They cite numerous cases in support of the concept of sovereign immunity which have little or nothing to do with the National Housing Act. A plain reading of that Act, however, reveals that the United States Government, acting through the Department of Housing and Urban Development, has statutorily consented to be sued in cases arising under this law. As set forth in 12 U.S.C. § 1702:

  The Secretary shall, in carrying out the
  provisions of . . . subchapter II [mortgage
  insurance] . . . be authorized in his official
  capacity, to sue and be sued in any court of
  competent jurisdiction, State or Federal.

This section is an effective waiver of sovereign immunity, and, as numerous decisions have concluded, the federal courts have the power to enforce the provisions of this Act against the Federal Government. Federal Housing Administration v. Bern, 309 U.S. 242, 60 S.Ct. 488, 84 L.Ed. 724 (1940); Northwest Residents Ass'n v. HUD, 325 F. Supp. 65 (E.D.Wis. 1971); Powelton Civic Homeowners Ass'n v. HUD, 284 F. ...


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