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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2016

Super-Lien Laws Are Trumping Lenders’ Collateral Position

Laws in many states now favor homeowners associations over first-mortgage holders in debt-recovery battles

Super-Lien Laws Are Trumping Lenders’ Collateral Position

In recent years, one trend in the mortgage industry that has caused lenders some heartburn is the emergence of so-called “super liens.”

Numerous states now give assessment liens filed by homeowners associations (HOAs) priority over lenders’ mortgage liens. These super liens raise the possibility that, in cases of a property foreclosure, a mortgage lender’s lien, or claim, might be extinguished in favor of a claim for unpaid monthly HOA fees and special assessments — and the lender may lose its collateral.

Prime among the concerns mortgage professionals have with super liens is the possibility that the increased risk they create for financial institutions could affect mortgage prices and availability. Managing the new environment for mortgages under super-lien laws is not easy. It requires lenders to change their loan-enforcement strategies, and modify underwriting requirements and loan-document escrow provisions. Super liens also could prompt new lender requirements that HOA documents include waivers, notices or opportunities for a lender to cure any outstanding HOA liens.

Shadow of unfairness

Absent major reforms in super-lien status, loan servicers must find ways to proactively resolve HOA fee and assessment delinquencies by monitoring homeowner payments to HOAs as well as their own loans that may be delinquent or in default. This is complicated by the fact that lenders and servicers may be unaware that an HOA has a potential interest in the loans under their care.

If a lender does find that the property is subject to an HOA agreement, communication may be difficult. Many HOAs do not even have current registered-agent information on file with state regulators, and only a small percentage of HOAs are managed by professional companies.

There also is a shadow of unfairness cast over HOA super-lien foreclosures. A mortgage lender can see a property for which it holds a mortgage sold to investors through an HOA super-lien foreclosure for a fraction of what that mortgage is worth — just to cover the outstanding HOA fees. Investors can then turn around and resell the property, free of the original mortgage, for a huge profit. The losses suffered affect more than just the lender because most mortgages are pooled into securities and are owned or handled by multiple parties.

Case law

This seemingly upside-down justice is what played out in Nevada when that state’s Supreme Court issued an opinion holding that an HOA lien is a true super-priority lien that extinguishes a lender’s first deed of trust in a foreclosure action. In the case, the original mortgage was for $885,000. The original HOA lien totaled $1,225.19 — $1,149.24 of which was collection and attorney’s fees — and it subsequently ballooned to $4,542.06 by the time the case landed in the courts. The property was ultimately foreclosed on and purchased by real estate investors for $6,000. The state’s top court in 2014 ruled that the HOA super lien had priority over the lender’s first deed of trust on the property, pointing out that the lender could have avoided that outcome by paying off the HOA lien prior to the foreclosure-forced sale.

Policymakers need to take a closer look at 
super-lien laws and make some modifications.

Similarly, in the District of Columbia, a court initially determined that a condominium association’s super lien for unpaid fees took priority in position and payment over the lender’s mortgage lien. Subsequently, in 2014, the Court of Appeals, the highest court in the District of Columbia, held that the foreclosure of the association’s assessment lien extinguished the lender’s mortgage lien.

The court reached this conclusion even though District of Columbia laws do not require that the lender be notified of the foreclosure action. This means that lenders can be wiped out by an association’s assessment-lien foreclosure without any notice or opportunity to cure the claim — by paying the outstanding fees. The court, however, said mortgage lenders could address the problem by “requiring payment of assessments into an escrow account.” It also pointed out that if condo- association super liens were not afforded a priority position, the ability to assure timely payment of fees and special assessments — described as an association’s “financial life-blood” — would be put at risk.

HOA foreclosures involving assessment liens have been relatively rare to date, but the outcome of these two court cases, combined with the continuing echoes of the housing crisis, could well accelerate the number of HOA foreclosures in the future. HOAs may see foreclosing on a super lien as a fast way to recoup overdue fees to refill their coffers in the short term. But in the long run, such an extreme approach may only serve to damage their relationship with lenders and impair the availability of credit in the community.

•  •  •

The risk with laws and court rulings that advance the superiority of HOA liens at the expense of mortgage collateral is that potential buyers may eventually discover they are unable to find a lender willing to extend a loan for property subject to an HOA agreement. Lenders may start viewing such properties as potentially too high-risk and too high-maintenance. This is not an outcome that bodes well for the housing industry and homebuyers.

Policymakers need to take a closer look at super-lien laws and make some modifications. That message seems to have been heard to some degree in Nevada, where the governor last year signed into law a measure that provides added protections to first-lien holders. The new law, for example, requires that lenders be given advanced notice by super-lien holders of default and sale-notice filings and allows a lender to preserve its first-lien status if it pays off the HOA super-lien claim at least five days prior to a foreclosure sale. Changes are needed elsewhere in the country to assure that the negative impacts of super-lien laws do not spread further. 


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