October 29, 2014
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).