By: Clark, Campbell, Lancaster & Munson, P.A.
Q: Can a homeowner’s association foreclose on me even when I have a mortgage?
A: Yes. One issue that I address in any community association law seminar or consultation with an association is assessment delinquency. Most associations have at least a few owners who are delinquent, and some owners remain in default for years without any consequence other than a few demand letters. The reason is usually financial. The association might think it is simply not worth fronting the attorney fees for an enforcement action. The legal cost and effort is of particularly questionable value when the property still has a mortgage, often in default, because the lender may have the superior right to come in and foreclose on the property at any time. If the lender does not foreclose, the mortgage may stay in place and make the property unmarketable even if the association obtains the property by its own foreclosure.
Even so, associations should consider foreclosures under the right circumstances. First, an association’s failure to enforce its own covenants, or its selective enforcement of the rules, opens the door in future lawsuits as to the validity of those rules. (My colleague Kyle Jensen covered the concept of selective enforcement in the December 17, 2015 edition of this column.) Second, while the association waits around for the lender to foreclose, the only loser is the association. The owner enjoys the delay, often resulting in free housing, but the association continues to rack up delinquent assessments. Under many circumstances, the bank will eventually take title, and the association will recover from the bank only a year of assessments, even if there are several years of delinquency.
If the association proceeds to foreclose on the property, one of three things will typically happen. The bank might be motivated to foreclose, thereby curing the delay. The association might get lucky and get a third party to buy the property at the foreclosure sale, thereby ensuring that the association gets paid for its claim. Or the association might take title to the property subject to the mortgage. The benefit here is that the association can begin to rent out the property and start to recover some of its losses from those rents while it awaits the lender’s foreclosure. In certain circumstances, the association might even find it worthwhile to negotiate with the lender as to the proper resolution of the mortgage and debt. For example, an association might be in a better (or more motivated) position to negotiate a short sale of the property to eliminate the mortgage and get the property into the hands of owners who will pay their bills.
Whether the association sells the property or the property goes to a new owner via the mortgage foreclosure sale process, the next owner is typically liable to the association for the assessments that accrued while the association held title in the property. In reality, however, these amounts are not often recovered, because the association will usually feel forced to waive those past assessments so that a paying owner will get into the property and “stop the bleeding.”
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