Boards are required to collect delinquent assessments or face budget shortfalls. Because many owners are upside down in their mortgages (they owe more than the property is worth), some stop paying their mortgages and association dues.
To protect the membership, boards should at the earliest opportunity record a lien against delinquent owners. In addition, boards should record a blanket request for notice of trustee's deed upon sale so they can quickly learn of the new owner's identity whenever a lender forecloses. To illustrate how the foreclosure process works, assume the following liens are on the property:
- 1st: mortgage of $500,000 on property worth $450,000,
- 2nd: association's assessment lien for $8,000, and
- 3rd: judgment lien for $15,000.
Senior Lender Foreclosure. If the 1st lienholder forecloses ahead of the association, the association's lien will be wiped out and the $8,000 owed by the delinquent owner becomes unsecured. However, the association can still make a claim on any surplus funds resulting from the senior lienholder's sale. Usually there are none. Even though the association's secured position is lost, it can still sue the former owner for a money judgment. If he/she appears judgment-proof, i.e., has no assets, the board could write off the bad debt and not waste any further money on legal fees chasing uncollectable debt, especially if the owner declares bankruptcy.
If the lender begins foreclosure ahead of the association, the board should still proceed with its own collection action. Waiting for the bank is not a good idea since the bank's sale might never occur and would leave the association even further behind in its collection efforts. Bank foreclosures may stall because:
- the bank is slow to pursue the sale due to internal bank problems,
- the bank makes a conscious decision not to sell because it does not want the property in its portfolio,
- the owner works out a repayment plan with the bank,
- the owner stops the sale by curing the default, or
- the owner negotiates a short sale with the bank.
Association Foreclosure. If the association is the first one to foreclose and is the successful bidder at the trustee's sale, it takes title to the property subject to all senior liens and free of all junior liens and subject to the right of redemption. This means the 3rd lien for $15,000 is wiped out because it is junior to the association's lien. However, the association takes ownership of the property subject to the $500,000 mortgage. For some associations, this is preferable if it gets a problem owner out of the property.
Recommendation. Because of the complexity involved in the lien and foreclosure process, boards should use companies experienced with the community association industry.
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