October 29, 2014
Can A Condominium Association Foreclosure Extinguish a Mortgage Lien?
On October 16, 2014, I asked in a blog post, “What Rights Do Lenders and Owners Have Against Property Association Foreclosure?” In that installment, I discussed a Nevada foreclosure case that was not between the borrower and the lender. It reflected a litigation trend between the lender, homeowners association and the federal government. Today’s article continues exploration of this legal development emerging in some states. Some courts are finding that homeowners associations have the right to foreclosure on private property for failure to pay fines, dues and special assessments. Several recent court rulings found that HOA foreclosures can extinguish the lien of the bank who financed the purchase of the property. Owners, banks and federal housing agencies find this trend an alarming sea change in the home mortgage markets.
Evaluating Competing Foreclosure Rights:
Today’s blog post focuses on where all of these legal developments put lenders when an Association attempts to enforce a lien for nonpayment of fines, assessments and dues. In a mortgage, the borrower agrees to put the property up as collateral to finance the purchase. The loan documents received at closing outline the payment obligations and the rights of foreclosure. Association obligations, on the other hand, are determined by the governing body of the Association according to the Bylaws. In many states, statutes provide for Associations to record liens in land records for unpaid assessments. Some statutes also allow Associations to conduct foreclosure sales to satisfy unpaid assessments by following certain procedures. Where state law allows, the Association’s authority to foreclose isn’t based on the owner’s agreement to make the property collateral. The statutes and recorded covenants put the buyer on notice of these Association rights.
Journalist Megan McArdle discusses on BloombergView how in about 20 states, HOAs can put homes up for auction (without the permission of the lender) and sell them to satisfy little more than outstanding dues (perhaps a four figure amount) to an investor, and the bank’s mortgage lien (six or seven figures, likely) is extinguished from the real estate. Ms. McArdle remarks that this doesn’t make a huge amount of sense, and I tend to agree with her. Some adjustment must come to the regulatory landscape in order to preserve both property rights and market liquidity.
Personal Experience with Northern Virginia Condominium Ownership:
Before I got married, I owned and lived in a condominium in Northern Virginia for over nine years. I remember hearing discussions, whether at the annual meeting or in the elevators, that some owners in the building fell on hard times and had kept on paying their taxes and mortgages but had stopped paying their condo association dues. Those distressed homeowners felt confident that while the association might consider other collection activity, it would not be able to sell their unit in foreclosure, to the prejudice of both the mortgage lender and the owner. At that time, the right to occupy the unit had a unique value to them.
This made sense to me, because the mortgage lender usually has more “skin” in the game in terms of the dollars invested. Can this strategy continue to hold up in light of new national trends in HOA foreclosure? Changes have already reached the opposite shores of the Potomac in an August 28, 2014 District of Columbia Court of Appeals decision.
Bank and Association Battle in D.C. Courts Over Priority of Liens on Condo Unit:
Two months ago, the Court of Appeals published an opinion that will likely change the lending environment for D.C. condominiums. In July 2005, Brian York financed $280,000.00 to purchase a unit in the Chase Plaza Condominium in Washington, D.C.. Unfortunately, he became unable to continue making payments on his mortgage and Association dues after the mortgage crisis began in 2008. In April 2009, the Association recorded a lien of $9,415 in land records. The Association foreclosed, selling the entire home to an investor for only $10,000.00. The Association deducted its share and then forwarded the $478.00 balance to the lender. The bank and Association found themselves in Court over whether the Association had the right to wipe off the bank’s six figure mortgage lien in the five-figure sale to the investor.
The Court of Appeals found that under the D.C. condominium association foreclosure statute, the lender gets paid from the left-over proceeds, and to the extent the lien is not fully satisfied, it no longer attaches to the real estate. (It then becomes an unsecured debt against Mr. York, who went into bankruptcy).
J.P. Morgan, the successor in interest to the original lender, pointed out that such a conclusion, “will leave mortgage lenders unable to protect their interests, which in turn will cripple mortgage lending in the District of Columbia.” The Association and investor responded that the alternative leaves HOAs often unable to enforce their liens or find buyers in foreclosure sales. The Court suggested that lenders can protect their own liens by escrowing the HOA dues, like property taxes.
The decisions of Nevada, the District of Columbia and other jurisdictions do not control the Supreme Court of Virginia or the General Assembly. However, the same economic and human forces exert pressure on lending and home ownership in Virginia as they do in the District of Columbia. What is the current law in Virginia? How are owners and lenders to react to these changes here? The answer will come in the next installment in this series on Community Association Foreclosure.
If you are the beneficiary or servicer of a loan on distressed real estate subject to a lien of a community association, contact qualified legal counsel to protect your interest in the collateral.
Case opinion discussed: Chase Plaza Condominium Ass’n, Inc., et al. v. J.P. Morgan Chase Bank, 98 A.3d 166 (2014).
Photo credit: To my knowledge, the featured photo does not depict any of the property specifically discussed in this blog post. The credit is here: email@example.com via photopin cc
October 16, 2014
What Rights Do Lenders and Owners Have Against Property Association Foreclosure?
How are Virginia homeowners to evaluate competing threats from their mortgage bank and property association foreclosure? For many years, owners unable to pay their bills associated with their homes have focused on the threat of foreclosure from their mortgage lender.
Homeowners’ Varying Obligations to Lenders and Property Associations:
The conventional wisdom, in Virginia at least, is that homeowners should focus on keeping bills paid in the following priority: (1) local property taxes (have priority as liens, and are non-dischargable in bankruptcy), (2) mortgage lenders (monthly payments largest) (3) the monthly dues and special assessments of the homeowners association or condominium unit owners association. These notions are reinforced by mortgage lenders who escrow property taxes but not association assessments. Should owners continue to follow this in making decisions in the face of risk of payment default? Tax liens will certainly continue to enjoy a super-priority. However, a unit owner’s rights and responsibilities to their community association are of a different nature than bank mortgages. The rights of Associations to fix dues, special assessments and fines change. The General Assembly can amend the statutes. Courts make new legal interpretations. The owners can vote to change the Association Bylaws. Although the Association has significant influence over a unit owner’s rights, its lien is often overlooked to the detriment of many owners. What foreclosure, rights, if any, may an Association use to enforce its assessments? Florida and Nevada tend to be bellwethers of national trends in property associations because of their extraordinary number of condominiums and other associations. One recent case illustrates the chaos that may arise from these competing claims.
Las Vegas Foreclosure Contest Between HOA, Bank and U.S. Government:
On September 25, 2014, Judge Gloria Navarro of the U.S. District Court for Nevada issued an opinion providing clues to how Virginia homeowners may one day find themselves caught up in legal crossfires between banks and HOA’s. Emiliano & Martha Renteria owned a single-family home in Las Vegas that was a part of the Washington & Sandhill Homeowners Association (“HOA”). This is not a condominium but the issues are analogous. In September 2009, they defaulted on their Bank of America mortgage. Like Virginia, Nevada allows non-judicial foreclosure proceedings wherein title is transferred transactionally. The Court becomes involved if there is a dispute. In July 2012, the Bank-appointed Trustee foreclosed on the property. Five months later they rescinded that foreclosure. In May 2013, the Bank completed a foreclosure (in a do-over), claiming title to the property. On May 17, 2013 the Bank conveyed the home to the U.S. Department of Housing & Urban Development in a claim under the Single Family Mortgage Insurance Program.
To make matters more confusing, the HOA pursued its own foreclosure proceedings on the property at the same time to enforce its lien for the Renteria’s failure to pay their assessments. Most of the procedural aspects of Nevada condominium foreclosures are substantially different from Virginia. The HOA purchased the Renteria property at its own foreclosure sale in May 23, 2012, before the Bank’s first foreclosure sale. In July 2012, the HOA filed a release of its lien. A couple of months later, the HOA resumed its foreclosure, asserting an unpaid assessment lien of $4,983.00, this time against the Bank as owner. In October 2012, the HOA reacted to the Bank’s conveyance of the property to HUD, asserting a lien of $1,250.00 against the government. Note that this association foreclosed on a single-family home in an urban area to satisfy only $1,000-$5,000. When those demands went unpaid, the HOA abandoned this position. On October 9, 2013, the Association filed a federal lawsuit claiming ownership pursuant to the May 23, 2012 sale. In the lawsuit, the HOA disputed the Bank and HUD’s claims of title.
On September 18, 2014, the Supreme Court of Nevada ruled in a similar case that a HOA foreclosure extinguishes a mortgage lien such as that held by the Bank. Local readers may be interested that on August 28, 2014, the D.C. Court of Appeals reached a similar decision. In Nevada, Judge Navarro discussed how it is illogical for the HOA to simultaneously claim to be the rightful owner of a property and also assert an assessment claim against another party as owner. She found that under Nevada law, the Association was not permitted to waive its right to extinguish the Bank’s prior lien through foreclosure. The Court decided that the HOA’s subsequent release of the lien against the Renterias and new liens against the Bank and HUD were not valid because it had no right to change course. Had an individual investor purchased the property from the Bank’s foreclosure following the HOA’s release, he would have found himself caught up in this mess. The Court did not discuss whether these latter actions also created unwaivable rights. Judge Navarro ultimately decided that the HOA claim of title violated the U.S. Constitution. She dismissed of the Association’s lawsuit on the grounds that the HUD enjoyed an interest in the property under the Single Family Mortgage Insurance Program that could only be released under federal law. The Property Clause of the Constitution states that, only “Congress has the Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States.” Since the Bank’s mortgage was HUD-insured, a HOA cannot violate the government’s rights as insurer. This case is currently on appeal.
All of this caught my attention because it illustrates how HOA’s and Banks may use nonjudicial foreclosure procedures to duel over residual rights in distressed real estate. This case illustrates, if nothing else, why title examination and insurance are valuable investments to individual investors who may find themselves caught up in such a case. Well-advised home buyers must study the association bylaws and other disclosures carefully before waiving the contingency. If legal developments like this continue, associations will likely require a substantial legal reform. Otherwise, property values, especially condominiums will be in jeopardy, banks may restrict financing in fear of HOA lien priority, and investors may lose interest.
Will a Reordering of Rights of Banks and HOA’s Come to Virginia?
The competing rights of HOA’s and Banks is a critical aspect of the foreclosure crisis. On October 2, 2014, Nevada real estate attorney Bob Massi was interviewed on cable news about trends in HOA foreclosures. He predicted that lenders will start requiring borrowers to make their HOA payments into a bank escrow so that the lender’s foreclosure rights are not prejudiced by unpaid assessments.If this becomes a reality, mortgage servicers will become collection agents for associations. What remedies will owners have with respect to the escrow if they have disputes with the association over a fine? Will lenders change their underwriting guidelines to make loans more difficult for property subject to association covenants?
I expect that the issue of HOA lien priority will soon return to the Virginia Supreme Court and General Assembly. What responses to these trends can homeowners expect in Virginia? In a later installation in this new blog series about Association Foreclosure, I will discuss how a 2003 Supreme Court of Virginia decision presently limits a Condominium Association’s remedies for unpaid assessments. This Virginia opinion limits the rights of Virginia’s community association to disturb a lender’s rights under a purchase money mortgage. Given these new developments in Nevada and D.C., this 11-year-old opinion is important to every owner, association and lender with an interest in Virginia condominiums.
If you are a lender and have questions whether an association’s lien has priority over your own mortgage, contact qualified legal counsel. If you are an owner and have questions whether an attempt by your association to enforce a lien on your property runs afoul of the law or your condominium instruments, contact a real estate attorney to protect your rights.
Case citation: Washington & Sandhill Homeowners Association v. Bank of America, et al., No. 2:13-cv-01845-GMN-GWF (D.Nev. Sept. 25, 2014)(Navarro, J.).
Thanks to Shu Bartholomew, host of the weekly property rights radio show “On the Commons,” for letting me know about the Bob Massi interview.
Photo credit (photo does not depict the property discussed in this post): JoeInSouthernCA via photopin cc
October 1, 2014
We Built this City: Homeowner Associations and Traffic Stops
The classic image of a homeowners association is a neighborhood with stately homes or attractive townhouses. Owners occupy their own properties. Neighbors socialize with one another, perhaps around a park, golf course, tennis court or swimming pool. The common areas make the development an attractive place to live. Common values of commitment and neighborly respect inform stewardship of common areas and management of the association’s business. Desire to achieve this ideal motivates many land development and home buying decisions. According to Virginia Lawyers Weekly, there are 5,645 registered community associations in Virginia, and several thousand more unregistered ones. That’s a lot of roads and other common areas that are neither individually owned nor maintained by local governments. If someone recklessly drives their car on those association-owned roads, who has the authority to pull them over?
On August 13, 2014, Mark R. Herring, Attorney General of Virginia released an official advisory opinion addressing the question of homeowner associations and traffic stops. State Senator Bryce Reeves asked Mr. Herring whether a HOA may enforce violations of state or local traffic laws on its private streets and whether and how a HOA may adopt and enforce its own rules regulating traffic (Sen. Reeves’ district includes Fredericksburg, Orange County, and some surrounding areas). The Attorney General’s opinion is about the intersection between HOA law and traffic law. Mr. Herring outlines two options for associations: (1) ask the city or county in which their community is located to police the streets, or (2) they may use private security qualified as Special Conservators of the Peace.
Why is this issue coming up in 2014? The economic collapse beginning in 2008 affected homeowners associations in several ways:
- Many homeowners stopped paying their association dues along with their mortgage. This hit HOA’s in the wallet.
- Foreclosures negatively affected the property values, slowing down sales of neighboring properties.
- Renting became a way of life for many people struggling to save for 20% on a down payment for a home. For Associations, this means that many residents are tenants, who take a different perspective from owner-occupants regarding common areas and their neighbors.
What better words to describe such a dystopia than lyrics from one of the worst pop songs of the 1980’s:
Say you don’t know me or recognize my face
Say you don’t care who goes to that kind of place
Knee deep in the hoopla, sinking in your fight
Too many runaways eating up the night.
– Starship, “We Built this City” (1985)
Developers sought to create oases where children could safely play and parents could develop long relationships with neighbors. Now in some HOA’s, security patrols are chasing residents, tenants and guests for traffic violations.
The Attorney General Opinion describes an unnamed association (within Sen. Reeves’ district) that directed its safety patrol to stop moving vehicles and issue citations for traffic infractions such as speeding, reckless driving and failure to obey highway signs. The safety patrol even uses vehicles with flashing lights to pull over drivers over. Through the safety patrol, the association holds property owners responsible for their infractions and those of their guests. This association has its own “court” in the form of a Violations Review Panel where homeowners may appear to contest citations.
Do associations have the authority to enforce traffic rules in this way? How much do HOA’s resemble local governments? In commenting on this opinion, community associations lawyer Lucia Anna “Pia” Trigiani of Alexandria told Virginia Lawyers Weekly that, “community associations exist in some respects to relieve demands for local government services such as traffic enforcement and road maintenance.” No doubt these developments ease cities and counties burdens to provide key infrastructure in many residential neighborhoods. Attorney General Herring’s opinion appears to disagree with Ms. Trigiani in a critical aspect. He observes that the Virginia Property Owners Association Act does not grant associations the authority to enforce violations of state or local traffic laws that occur on community property. Private persons may only enforce traffic laws if they have been appointed as a Special Conservator of the Peace (“SCOP”). To qualify as an SCOP, one must undergo substantial training. Otherwise, attempts to pull over or stop drivers could be deemed an “unlawful detention” by misrepresentation of authority to conduct police-like activities. Associations may ask the city or county in which their community is located to police the streets, or they may use private security qualified as SCOP’s. Virginia Lawyers Weekly‘s Peter Veith notes that extensive use of SCOPs may produce its own controversies, since the extent of an SCOP’s authority may be misunderstood by the security guard or the drivers on association roads. If someone produces a SCOP credential, what does that mean to an individual driver?
Attorney General Herring makes an important point about the statutory authority of HOA’s to enforce their rules and regulations over their common areas. “Rules and regulations may be enforced by any method normally available to the owner of private property in Virginia.” Real estate legal remedies are not tailored to enforcing traffic laws. Private property owners do not have the authority to conduct arrests or stops of vehicles for violation of traffic rules. That authority is reserved to law enforcement and SCOP’s. This limitation may also apply to other quasi-governmental activities undertaken by HOA’s.
In the Lake of the Woods Association in Orange County, the reaction to this Attorney General Opinion was swift. The Free Lance-Star reports that this large community went to the County Board of Supervisors which adopted an ordinance designating the LOWA roads as highways for law enforcement purposes. This will allow LOWA SCOPs to issue traffic citations and broaden the authority of local law enforcement in the community. I expect that similar decisions will be made in HOA’s around the state that have extensive systems of community roads.
If you or your Association seek to navigate safely through the regulatory landscape now coming into focus regarding the enforcement of traffic laws in community associations, contact qualified attorneys having experience in both real estate and traffic law matters to review your association’s legal instruments. Communities with extensive networks of roads should take precautions to get ahead of avoidable situations where HOA roads become hazardous or private security unlawfully detains drivers.
photo credit: Phil’s 1stPix via photopin cc (apparently one of the toy cars is a W. Va. police vehicle)