Wells Fargo Home Mortgage, Inc. v. Neal (Ct. of Appeals)

Filed: March 13, 2007. Opinion by Judge Glenn T. Harrell, Jr.

The question on appeal was whether a term in a deed of trust generically alluding to HUD regulations limiting the circumstances in which a mortgagee may accelerate and foreclose on an FHA-insured mortgage may be invoked by the mortgagor to enjoin foreclosure.

The Court held that because foreclosure is an equitable remedy, a mortgagee seeking foreclosure is subject to being enjoined from foreclosing by a mortgagor alleging violations of the HUD regulations governing foreclosure. A mortgagor bears the burden of proving that a mortgagee failed to comply with applicable HUD regulations such that he or she is entitled to an injunction.

The case began when the mortgagee initiated foreclosure proceedings. The foreclosure was stayed when the mortgagor filed a separate complaint alleging that the mortgagee had not pursued processes mandated by HUD regulations and designed to prevent foreclosure and mitigate losses. The trial court disposed of the mortgagor's claim on summary judgment, ruling that the HUD regulations were intended for the benefit of HUD enforcement of the FHA mortgage insurance program and did not grant a private cause of action for borrowers.

The mortgagor appealed to the Court of Special Appeals, which vacated the summary judgment and remanded the matter for further proceedings. That opinion is available in PDF format. Although the CSA agreed that the HUD regulations did not afford a private right of action, it opined that private parties may be bound by laws specifically incorporated into contracts executed between them. Therefore, the CSA remanded the case for determination whether the parties had bargained for the provision alluding to the HUD regulations.

The Court of Appeals reversed, concluding that the parties could not have bargained for the term at issue. The substantive provisions of the form deed were not negotiated by either party. Authority presented by the mortgagor even suggested that HUD did not contemplate its regulations to support affirmative state law claims by aggrieved mortgagors.

On the other hand, the Court held, "ample authority" suggests that alleged violations of the regulations may be asserted defensively to halt a foreclosure action. The Court held that because foreclosure is an equitable remedy, a mortgagee seeking foreclosure coming to the court with “unclean hands” is subject to being enjoined from foreclosing by a mortgagor alleging violations of the HUD regulations governing foreclosure. The mortgagor bears the burden of proving that a mortgagee failed to comply with applicable HUD regulations such that he or she is entitled to an injunction.

The opinion is available in PDF format.