June 26, 2009

The Rising Use of Foreclosure to Collect Delinquent Assessments

Foreclosure is the most powerful weapon in a community association’s collection arsenal. If that process is completed, it will result in the property being sold to satisfy an owner’s debt to the association. The Wall Street Journal noted in an article last week that the rising number of substantial delinquencies is forcing many condominium associations to begin more foreclosure actions. The article points out that those associations are increasingly even finding it necessary to foreclose on units that lenders have seized from owners after they fail to pay their mortgage. An understanding of how foreclosure actions can be used to address delinquencies has unfortunately become essential for persons serving on most community association boards.

Foreclosure actions have the potential to bring owners’ lenders into the picture. Lenders may work with owners to refinance loans in a way that allows debts owed to a community association to be paid. They may permit delinquent owners to stop making mortgage payments for a short period of time in order to give those owners the opportunity to pay associations. Lenders may even decide to pay some or all of the past due assessments and add the amount paid to the owner’s loan. If payment from owners and lenders is not forthcoming, more drastic measures are required.

When units or houses are vacant, associations can ask courts during judicial foreclosure actions to appoint a receiver over the property at issue to lease it and collect rent. This can result in associations receiving full payoffs within a few months. When delinquent units or houses are still occupied, associations can seek to sell them at auction. If a property is purchased by a third party, then the owner’s debt to the association will be paid from the purchase price. If no one purchases the property, then the association becomes the owner of the property (subject to senior liens) and can seek to transfer it to a senior lien holder in exchange for payment, lease it, or sell it. At a minimum, completing a foreclosure sale will eventually replace an owner that does not pay assessments with an owner that does pay them.

All foreclosure actions involve significant financial risk (for example, attorney fees incurred are sometimes not recoverable) and cause neighbors to suffer great hardship. They should be pursued only after carefully considering all available alternatives. However, if an owner is seriously delinquent and lacks the ability to pay that debt and the ongoing assessments in the foreseeable future, a board can reasonably conclude that foreclosure is unavoidable.