April 4, 2016
In the contemporary dystopia, property ownership provides ordinary people with space in which to live, work and play in peace, safety, and freedom. Americans also see real estate as an investment. My high school friend Tom was one of my first classmates to purchase a home. Years ago, he explained that the great thing about a home is that it is an investment and you also get to live in it. Unfortunately, there are many predators in the marketplace seeking to capitalize on consumers’ commitment to home ownership. Some loan servicers, debt collectors, and contractors see owners as opportunities. Their trade groups lobby state capitals. Owners have to stick up for themselves in Court and with their elected representatives to protect themselves from becoming someone else’s cash drawer. Sometimes unscrupulous people get what they want by conceptually framing a crisis to shape the perceptions of decision-makers. Fear is one of the easiest emotions to manipulate. Owners should be skeptical of how the housing industry describes the Zombie Foreclosure Apocalypse.
In a recession, financial struggles can render owners unable to make payment obligations to mortgage lenders and HOA’s. In many cases, these personal crises are temporary. Job loss or illness of the owner or a family member can cause a temporary but acute financial crunch. The problems may be fixable by a new job or resuming work after addressing a family member’s needs. Unfortunately, lenders and HOA’s tend to treat all defaults in payment obligations the same. In the past few years, HOA’s have waited for assessment income when banks delayed foreclosing on homeowners. In these so-called “zombie foreclosures,” banks delay completing foreclosures for years because there is little economic incentive to adding the distressed property to their own real estate inventory. If they buy the property, they become responsible for it as the new owner. Usually the owners stop paying their HOA dues around the time they can’t pay their mortgage. The HOA industry sees themselves suffering financial losses at the hands of loan servicers who fail to timely foreclose and put a new owner in the property with the willingness or ability to pay the HOA assessments.
On March 25, 2016, Dawn Bauman posted an article on the Community Associations Institute’s (“CAI”) blog titled, “Clean Up Foreclosures in Your Community.” Ms. Bauman argues that because the banks delay foreclosure, other owners must pick up the tab of the struggling neighbor to support an HOA’s budget. This blog post calls upon neighbors to file citizen complaints with the Consumer Financial Protection Bureau (“CFPB”) when banks delay foreclosing on neighboring homes. The blog post contains links and instructions for submitting complaints. I understand Ms. Bauman’s point that Boards might have to make budget changes if there is a spike in “zombie” foreclosures. These budget decisions might include increasing dues for other owners, slashing budgets or even raiding reserves to pay for major repairs. However, I’m not convinced that a campaign to expedite foreclosures would really advance the interests of other owners. As films and books such as “The Big Short” illustrate, the foreclosure crisis is a complex phenomenon. When a borrower falls into default, wouldn’t the community’s interests be better advanced by helping them get back on track with their existing lender and HOA? There is no guarantee that the CFPB would have the resources, authority and/or will to take regulatory action upon receipt of a complaint submitted through web forms on the internet. This CAI blog post seems to perpetuate the stereotype of debt collection as the common denominator of a HOA community. Yes, communities require accountability, but that should go both ways.
What is happening here? Imagine that a prospective buyer met with a realtor or property manager to discuss a home in an HOA. What if the real estate professional candidly told the prospective buyer that in this community, if you default on your mortgage, your neighbors and HOA will contact regulatory authorities to make sure the bank expedites your eviction. The prospective buyers are expected to also do the same against to their neighbors. The home shoppers innocently ask, “Why is this?” The manager candidly explains that the local government has outsourced its functions to the HOA. That HOA has a big budget. The locality and the HOA have an interest in keeping property assessments high. If the homebuyers are rational, they will walk out of that meeting and never come back to that development. Home owners want neighbors who support each other, or at least leave each other alone. No one wants to live in a community where neighbors are expected to tattle. If that’s necessary, then there is something wrong with the community association model. To sustain themselves, the community associations should seek to advance the interests of their members and not the other way around. The task of creating communities traditionally belonged to local governments, developers and the owners themselves. However, real estate is also a national policy concern because of the roles of Fannie Mae, Freddie Mac, the CFPB and a host of other federal agencies. At a March 29, 2016 town hall meeting, Republican presidential candidate Donald Trump identified “housing, providing great neighborhoods” was one of the top three responsibilities of the federal government. Such statements are easily dismissed as political pandering. However, Mr. Trump, however controversial, seems to have a knack at getting into the minds of many voters.
When an owner falls into a persisting default, usually the lender, HOA, and local government want to start over with a new owner. In fact, the HOA industry and local governments want to work together to eliminate these “zombie foreclosures.” Fairfax County holds an annual “Community and Neighborhood Leaders Conference” to provide face-time between HOA board members and county agencies with authority to enforce laws and ordinances. This alliance puts the elderly and disabled at a particular disadvantage when it comes to complying with local ordinances about how property should be maintained. Owners may find their lenders, HOA’s, and local governments taking action against their property interests.
If owners find themselves in default of their loan and assessment payment obligations, what can they do to protect their financial interests and property rights? Fortunately, there are some strategies that work.
- Avoid Falling into Default in the First Place. If the owner isn’t in default, then the lender or HOA doesn’t have a basis to institute foreclosure or debt collection proceedings. For many owners, the financial crunch of making the payments is less costly than digging themselves out of a persistent default.
- Know Your Rights. Many owners rely upon what bank representatives or HOA board members say in order to determine their rights. However, in court a judge can be expected to apply what the mortgage or HOA documents say to resolve any dispute. Owners should organize and understand the applicable legal documents and not rely on hearsay.
- Have a Plan. The bank representative or property manager is not going to take the lead on how to resolve the payment default. Debt collectors are looking to get paid as much as possible and/or to push the owner out. The owner must determine whether they want to keep or relinquish the property. The circumstances of each case are unique and which strategies to employ is outside of the scope of this post.
- Present Well. If a property appears to be abandoned, then the local government, HOA, and lender will treat it as such and move aggressively. If an owner keeps the property up, they are less likely to be bullied. Likewise, in negotiating with a lender’s or HOA’s representatives, an owner should consider how their actions and works are likely to be interpreted. If the owner has unrealistic expectations or appears to show signs of weakness, then the industry professionals are less likely to take them seriously.
- Have a Team. Board members, property managers, and collection attorneys are working together to maximize the accounts receivable of the HOA and minimize their own hassle. The lenders have account representatives and lawyers to service the loan. Owners should have a team of their own. Allies in a community can look out for each other and guard against bullies. Many state legislators want to take up the cause of property ownership. Lenders and HOA’s have experts and attorneys of their own on call to advance their interests. Out of experience they are able to think two or three steps ahead of consumers. If a lender or HOA behaves in a mysterious manner, it may be that they contemplate future legal action. Many times owners need legal assistance of their own.
An owner who struggles with financial difficulties is not a “zombie.” What is really “undead” is the complex web of loan documents, HOA rules, and public policies putting an owner’s property rights and financial condition at unnecessary risk. Financial challenges do not have to result in intractable crises. When told about the pending Zombie Foreclosure Apocalypse, owners need to understand what is really “undead.” The industry should educate and advocate for owners in these situations in order to keep the HOA model from turning into an unsustainable dead end. Until then, owners must work together and with qualified professionals to protect their rights.
UPDATE: Check out my April 23, 2016 “On the Commons” podcast with HOA attorney Jeremy Moss and Host Shu Bartholomew. We discuss the Zombie Foreclosure phenomenon and what it means for HOAs and owners.
November 4, 2014
Today’s blog post is the third installment in a series on the emerging trend of foreclosure of condominium association liens on private property owners. In a previous article, I discussed a new appellate court decision, Chase Plaza Condominium v. Wachovia Bank, recognizing the right of an association under the D.C. Code to sell a condo unit in foreclosure to satisfy unpaid assessments, thereby extinguishing the much larger bank mortgage. This installment examines how future, similar attempts may be viewed under the Virginia Condominium Act.
Presently, Lenders Have Priority over Association Liens in Virginia:
In 2003, the Supreme Court of Virginia heard a case involving similar facts as in the Chase Plaza case under the corresponding portion of the Virginia Condominium Act. Va. Code Sect. 55-79.84 provides that a properly recorded Condo assessment lien has priority over other encumbrances except for:
- Real Estate Tax Liens;
- Liens Recorded Before the Condominium Declaration;
- First Mortgages or First Deeds of Trusts Recorded Before the Assessment Lien.
That same code section provides for the distribution of the proceeds of the association foreclosure sale, differing materially from the aforesaid lien priorities:
- Reasonable Expenses of the Sale & Attorney’s Fees;
- Lien for Unit Owner’s Assessments;
- Any Remaining Inferior Claims of Record;
- The Unit Owners Themselves.
Since the statute provides for differing priorities for liens and distribution, I’m not surprised that this issue was litigated. At the Virginia Supreme Court, Colchester Towne Condominium Council argued that these provisions permitted foreclosure of a unit for its owner’s failure to pay assessments. This Association asserted that before the bank received anything, the proceeds would first be paid for expenses, taxes or the assessments.
Wachovia Bank argued that it had a priority over the Condominium Association for both the lien and payment. In a narrow 4-3 decision, the majority agreed with the bank. Justice Lawrence Koontz found that the General Assembly intended for the first mortgage to get paid before the association assessment liens. The Court observed that purchase money mortgages are the “primary fuel that drives the development engine in a condominium complex.” Justice Koontz remarked that a contrary result (the D.C. and Nevada cases come to mind as examples) would not adequately protect the lender’s interests.
Justice Elizabeth Lacy wrote for the three justice minority, which included now-incumbent Chief Justice Cynthia Kinser and Chief Justice-elect Donald Lemons. They favored permitting the association to conduct the foreclosure sale and give the unpaid assessments priority over the mortgage. However, they would permit the lender’s lien to survive the foreclosure process, burdening the property purchased at the auction. None of the justices on the Supreme Court at that time published an opinion that would give an Association powers like those found in the Chase Plaza case.
As of the date of this article, the conventional wisdom followed by many owners of distressed condominium properties in Virginia has a legal basis on this 4-3 decision from 11 years ago. I predict that in a matter of months or years, this same issue will resurface in the General Assembly or the Supreme Court. I don’t know to what extent the national sea change will have a ripple effect in Virginia. It is not possible to predict to what extent, if any, associations may acquire greater rights against banks and homeowners. However, local governments rely on associations to pay to maintain certain common areas and services. Cities and counties continue to seek ways to avoid budget shortfalls. New land development brings the prospect of additional tax dollars. These associations have a financial crisis of their own for the reasons I spoke of in my prior post. The financial crisis is greater today than 11 years ago, and so are the challenges to private property rights.
Where Does All This Leave Property Owners and Their Advisors?
For a homeowner, keeping one’s home and paying bills is a more immediate human concern than ending the larger rescission. What do these storm clouds mean to Virginia condominium owners? A few thoughts:
- Escrow Accounts. Courts and pundits suggest bank escrow of HOA dues may be the answer. Writer Megan McArdle points out, a “vast regulatory thicket surrounds mortgage lending.” Throwing association governance and budget issues into that thicket does not seem like an attractive option to owners, who don’t always find themselves aligned with their association’s decisions. Making banks party to disputes between Associations and owners would complicate matters further.
- Banks Shy From Financing Condos. The Wall Street Journal Reports that David Stevens, president of the Mortgage Bankers Association, expects mortgage rates to rise in Nevada. The Mortgage Bankers Association also reports that sometimes HOAs won’t accept payments from them or even tell them the amount due. I expect banks to strengthen due diligence of a condominium association’s governing documents, policies and financials before agreeing to lend on a property subject to its covenants.
- Home Buyer’s Focus on Contingency. In purchasing a condominium or another type of property in an association, a buyer has a window of time to review the association disclosures and either get out of the deal or move forward. If the banks start escrowing association fines, etc., this may become a greater focus in the home-buying process.
- Cash Only Trend Prevails in Condominium Sales. In many condominiums, unit sales are conducted in all cash. The cash only option certainly cuts out the problem of the purchase money-lender. This also cuts most owner-occupants out of the house hunt, and decreases the number of owner-occupants in the association, making the place less attractive to lenders. This does not seem to be a solution.
One option that I haven’t seem discussed elsewhere is this: What if, when unit owners default on their obligations, the property is put up for foreclosure, and the lender, association (or any other investor), could submit competing bids to a trustee? The HOA would get paid, and the lender could get the collateral property. I doubt this would work under the existing statutory framework, but perhaps it would work better than an escrow.
If you own a property that is subject to the covenants of a condominium or homeowners association, and the association has threatened to enforce its lien against your property, contact a qualified real estate attorney to protect your rights. In order to protect your rights, you may need to prepare for a sea change in the balance of powers in home ownership.
If you are considering an opportunity to purchase a property at an association assessment lien foreclosure sale, retain qualified counsel to advise you regarding related risks, and carefully consider purchase of title insurance.
Case opinions discussed: Colchester Towne Condominium Council v. Wachovia Bank, 266 Va. 46, 581 S.E.2d 201 (2003)
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).