Article Courtesy of The Market
By Daniel Goldstein
January 15, 2015
If you’ve fallen behind on your condo or homeowner association (HOA) fees, this might be a shocker for you: Your HOA or condo association might have the right to foreclose on your property.
And even for the vast majority of homeowners who never face foreclosure, the ripple effects of this little-noticed legal development could eventually be costly — in the form of higher interest rates and fees on your mortgage.
The number of Americans who live under the rules of a homeowners’ association has been steadily growing; by one estimate, nearly 80% of new construction is now governed by an HOA or condo association, and as many as 65 million Americans live in such properties. HOA fees, which can amount to $300 or $400 a month, typically pay for services that developments provide, such as landscaping, grass cutting and snow removal, as well as other capital improvements. And during tough economic times, it’s fairly common for squeezed homeowners to fall behind on those fees.
The new wrinkle: A legal process called a “super lien,” which got its beginnings in the 1980s and is now allowed in more than two dozen states, and under consideration by nearly a dozen more.
Super liens give homeowners associations the right to begin foreclosure proceedings against a property if the owner is seriously delinquent on HOA fees. And while mortgage lenders have traditionally had priority when it comes to getting their money back through foreclosure auctions or court judgments, super liens give HOAs the right to jump ahead of the lenders, and in some cases, even wipe out the lenders’ rights completely.
In August 2014, the District of Columbia Court of Appeals, the district’s equivalent of a state Supreme Court, ruled that not only was a condo association correct in foreclosing on a delinquent owner, but that under super lien rules the bank that holds the mortgage loses its right to the property entirely. A Nevada Supreme Court decision a month later came to the same conclusion. While those rulings only impact foreclosures in D.C. and Nevada, other state courts could follow their precedent, said Roger Winston, a real estate attorney and partner in the Bethesda, Md., office of law firm Ballard Spahr LLP.
“The court’s decisions have caught everybody off guard,” said Winston, whose firm represented lenders in the Nevada court decision. “It’s quite a mess out there.”
An HOA power grab
HOA liens, along with others, such as contractor’s liens (when a contractor who performs significant work on a home goes unpaid), have traditionally been known as “junior liens” and have been subordinate to the mortgage lenders. Now however, thanks to the “super lien” laws, the HOAs can vault over even the banks when getting paid in foreclosure.
“HOAs are getting more savvy,” said Jason Tufaro, vice president with Matt Martin Real Estate Management in Frisco, Texas, a company that works with both banks and HOAs on the topic. “They know the first thing an owner who’s in financial trouble will do is stop paying their HOA fees. The last thing they’ll not pay is the mortgage.”
Since the Great Recession and the subsequent real-estate downturn, many HOAs have struggled to get cash-strapped owners to pay the fees. Nearly 103,000 condos were foreclosed in 2010, at the height of the real estate crisis; almost double the rate of 2008, according to RealtyTrac, a real estate research firm. (Foreclosures have since declined as the economy improved.)
“Given the massive numbers of delinquencies, lenders weren’t moving as quickly as the HOAs would have liked,” when it came to foreclosing and making the HOA lien holders whole, said Joey Lubinski, a partner in Ballard Spahr’s Denver office. “If the lender isn’t moving forward to take the title themselves, then the HOA felt it had to step in,” he said.