Court Upholds Condominium Association Foreclosure that Extinguished Bank's Lien

In late 2009, a Washington condominium association foreclosed on a first position lien for delinquent assessments and purchased the unit at a trustee's sale for $8,818.17.  Deutsche Bank, which had a junior lien on the unit for $240,000 that was extinguished by that foreclosure sale, was notified of the association's foreclosure but did not respond.  Litigation later ensued concerning the validity of the association's foreclosure.  

The Washington Court of Appeals ruled in an unpublished opinion this summer that the association was entitled to foreclose on its lien (which had a limited six-month priority over the bank's lien pursuant to the Washington Condominium Act and its Declaration) regardless of whether there were any intervening liens and for any amount.  The court noted that Deutsche Bank failed to pay the association's lien, bid at the trustee's sale, or exercise its redemption rights despite being given ample notice and opportunity to do so.

Many foreclosures by condominium associations do not end well due to bank foreclosures and owner bankruptcies, so it is always good to be reminded that they can result in successful outcomes too.  The association's attorney can help it decide whether foreclosure is advisable and likely to result in payment.

Washington Supreme Court Invalidates Foreclosure Due to Violation of State Law

The Washington Supreme Court recently held in Albice v. Premier Mortgage Services of Washington, Inc. that a failure to comply with a statutory requirement relating to the timing of a non-judicial foreclosure sale invalidated that sale.  According to RCW 61.24.040(6), a trustee may continue a sale only up to 120 days from the original sale date.  The sale in this case was invalid because it took place 161 days from the original sale date.

           

Washington condominium and homeowners associations also face judicial scrutiny if they fail to comply with all applicable statutory requirements relating to their foreclosures.  Association boards should strive to make their foreclosures above reproach from a procedural standpoint.  Consulting with an experienced community association attorney on a regular basis is the best way to achieve that goal.

Super Priority Lien Gives Washington Condo Associations Leverage Over Lenders

The Washington Condominium Act grants condominium associations a super priority lien over mortgage holders. This super priority lien ensures that some delinquent assessments (those that are due during the six months immediately preceding the foreclosure) will be paid by lenders if foreclosures occur. It can also be a powerful weapon if lenders do not respond to associations’ foreclosure actions. In the recent decision of Summerhill Village Homeowners Association v. Roughley, the Washington Court of Appeals held that a mortgage on a unit can be completely eliminated by a condominium association’s foreclosure action if an association has a super priority lien and the lender does not respond.

If a Washington condominium’s declaration was recorded after July 1, 1990, then it automatically has the right to claim the super priority lien contained in the Washington Condominium Act. If a Washington condominium’s declaration was recorded on or before July 1, 1990, then its association can probably not take advantage of the super priority lien until its declaration is amended to include it. All Washington condominium associations that cannot currently claim the super priority lien should strongly consider amending their declarations to give themselves the ability to do so.

A condominium board that wants to amend its declaration should consult with an experienced real estate attorney to ensure that all applicable legal requirements are met. Failing to obtain such legal advice can have dire consequences. In a recent unpublished decision, the Washington Court of Appeals affirmed a trial court’s ruling that an amended set of covenants for a homeowners association was void and unenforceable because it was not properly executed.

How to Collect Unpaid Assessments or Dues from Banks After Foreclosures

Bank foreclosures are unfortunately expected to peak in 2011. RealtyTrac Inc. estimates that more than 1 million homes will be repossessed this year. The Mortgage Bankers Association just reported that 4.6% of homes were in the foreclosure process last quarter, which is an all-time high for that survey. Condominium and homeowners association boards need to be prepared to deal with bank foreclosures in their communities.

It is a good practice for associations to take pro-active steps to inform banks of their interest in the properties at issue. If owners fail to pay assessments or dues, liens should be recorded on their units or lots. This makes it more likely that foreclosing banks will contact the association. If notices of trustee's sales are received, letters should be mailed to the named trustees regarding the applicable assessment obligations.

If a bank has completed a foreclosure against a property within your association, the board should promptly contact the bank to request payment of any amount due to the association at that time and the regular assessments after the foreclosure date. However, the bank may well ignore such a request. Many community associations have discovered in recent months that many banks' preferred practice is to foreclose and then refuse to pay any pre-foreclosure delinquency or post-foreclosure assessments until the property is re-sold. If your association encounters such a situation, it is entitled to treat the bank the same as any other owner and initiate a collection action against it.

Banks often respond quickly to demand letters from attorneys after foreclosures. One important reason for this is that banks (sensibly) do not want to pay their attorneys and associations' attorneys to argue about money that they are clearly obligated to pay. Associations' legal right to obtain awards of attorney fees related to debt collection against banks provides a powerful incentive for banks to pay associations sooner rather than later.

If banks persist in refusing to pay delinquent assessments or dues after receiving attorney demand letters, associations can pursue their own foreclosure lawsuits and even establish receiverships over properties to collect rent. Those types of aggressive actions are sufficient to convince most banks to pay associations what they are owed.

How Should Your Association Respond to Banks' Foreclosure Delays?

National Public Radio reported earlier this month about the “shadow inventory” problem in the U.S. housing market. There are currently about six hundred thousand homes that banks have foreclosed but not yet put on the market. There are millions more homes in the early stages of foreclosure or more than ninety days past due on the mortgage. RealtyTrac estimates that approximately three million foreclosed homes will enter the market over the next three years. Banks appear to be responding to this situation by slowing down the pace of their foreclosure activity. Why?

Banks own a large number of mortgages on homes that have lost a significant amount of value. However, such transactions do not appear as losses on their books until the homes are re-sold for less than the values of the mortgages. Spreading out the re-sale of foreclosed homes over a longer period of time gives banks time to raise money to cover losses and could result in smaller losses if the market improves. Banks are also concerned about flooding the market with repossessed homes over a short period of time, which would cause home prices to decrease further and could produce another housing crisis. In addition, banks may be finding it difficult to keep up with a volume of foreclosures that has increased tenfold over the last several years.

If foreclosures are inevitable, Washington condominium and homeowners associations have a strong financial interest in them proceeding rapidly. When lender foreclosures are not completed in a timely manner, community associations are faced with an unpleasant choice – endure very long delinquencies or pursue their own foreclosures. Boards may need to adjust their existing collection practices in light of the present slow pace of lender foreclosures. More extensive use of associations’ collection powers has the potential to speed up transitions to new owners and even produce income from delinquent properties until foreclosures are completed.

For more information about community associations’ use of foreclosure, please review these past posts on that subject:

New Tenant Protection Law Helps Associations Collect Delinquent Assessments
The Rising Use of Foreclosure to Collect Delinquent Assessments

New Wave of Lender Foreclosures Threatens Community Associations

According to a recent industry report, the number of U.S. homes taken over by banks jumped 35 percent in the first quarter from a year ago. If the current pace of foreclosures continues, more than one million homes will be seized this year. Rick Sharga, a senior executive at RealtyTrac, Inc., indicated that banks are beginning to work their way through the backlog of distressed properties and predicted that the pace of lender foreclosures will accelerate in the months ahead.

If a Washington condominium or homeowners association receives a notice of default or a notice of trustee’s sale with regard to a delinquent unit, it should take prompt action to record a lien on the property and notify the trustee of its interest. Once these initial steps have been taken, the board should evaluate whether it should establish a receivership over the property or pursue a personal lawsuit against the owner in advance of the trustee’s sale.

If an owner's lender completes a foreclosure, the association’s lien for delinquent assessments will be mostly or completely erased. If a limited priority lien remains on the property after the foreclosure, the association can ask the new owner to pay it. The association can also obtain a personal judgment against the former owner for the full amount of the debt and pursue garnishment remedies.

Aggressive legal action to collect a debt can produce results even with a lender foreclosure on the horizon, but this is not always the appropriate response. In some circumstances, the best course of action may be to simply wait for a lender’s foreclosure to occur.

New Tenant Protection Law Helps Associations Collect Delinquent Assessments

The Protecting Tenants at Foreclosure Act went into effect in May of 2009. This federal law requires a foreclosing party to provide 90 days notice before attempting to evict a tenant. It also allows a tenant under a lease executed before the foreclosure started to remain for the rest of the lease term unless the property is conveyed to a person that intends to occupy it as a primary residence (which is usually not the case in lender foreclosures). These tenant protections also enhance community associations’ ability to collect unpaid assessments.

All Washington condominium associations and most Washington homeowners associations have the power to foreclose their delinquent assessment liens. An association is entitled to the appointment of a receiver over the property during a foreclosure action if the property is not occupied by the owner. A receiver seeks to collect rent to pay off receivership costs and unpaid assessments. The new federal law allows receivers to install long-term tenants into properties (or execute long-term agreements with existing tenants) even though lender foreclosures during the lease terms are probable. Collecting rent for a number of months could resolve many delinquencies.

The increasingly frequent elimination of delinquent assessment liens by lender foreclosures has been a major source of frustration for condominium and homeowners associations this year. Receivership is now a more potent collection tool that can be used to address this problem in some circumstances. A board should give this option serious consideration if the owner of a vacant or leased property owes the association a significant sum. Temporarily stepping into the role of landlord may be the only realistic way to collect the unpaid assessments.

The Importance of Foreclosing Properly

New York Supreme Court Justice Arthur M. Schack has a motto taped on the wall near the entrance to his chambers – “Be sure brain in gear before engaging mouth.” This is good advice for us all. The New York Times recently featured a profile of this fiery jurist, who has denied 46 of the 102 foreclosure motions that have come before him over the last 2 years. His hard-nosed approach reflects the reality that more judges are scrutinizing foreclosure actions and holding them to a higher standard.

In Justice Schack’s courtroom, if a bank can not prove ownership in a foreclosure action, the case is over. This is a problem because many mortgage documents can no longer be found. It is often unclear which bank owns a mortgage. “If you are going to take away someone’s house, everything should be legal and correct,” he maintains. “I’m a strange guy — I don’t want to put a family on the street unless it’s legitimate.”

Condominium and homeowners associations should scrupulously follow the appropriate legal procedures when pursuing foreclosure actions. This will maximize their potential for success.

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.