Lender Foreclosure
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LENDER DISCLOSURE

Lien Priority. Loans by banks to fund the purchase of a home are known "purchase money loans" and are secured by a "first deed of trust." Such deeds are recorded and become a lien against the property. They are in the "first" position and have the highest priority except for government property tax liens. Liens recorded by an association against a property for delinquent assessments are behind or "junior" to any other liens recorded on the property. Because of their junior status, an assessment lien is wiped-out if the lender forecloses on an owner. (Streiff v. Darlington (1937) 9 Cal.2d 42 (1937) 9 Cal.2d 42.) When this happens, the debt owned to the association still exists and is still collectible, but is no longer secured by the property. To collect the delinquent assessments, the association must obtain a personal money judgment in small claims court or superior court. (For more information, see Lien Priority.)

Notice of Transfer. Whenever a lender forecloses on an owner, the association's collection efforts are hampered because lenders often fail to notify the association of the name and address of the new owner (whether it be a third party or the bank itself). If there is no third party purchaser at a bank's foreclosure auction, the property goes into the bank's REO Department, which could be in another state, further complicating an association's collection efforts. Effective January 1, 2009 (Senate Bill 1511), lenders must notify associations whenever then foreclose on property in an association. The trustee must mail the deed within 15 business days of the sale. (Civ. Code §2924b(f)(1).)

Request for Notice. Effective January 1, 2010 (Assembly Bill 2016) associations may record a blanket "Request for Notice" which requires a trustee to mail to the association a copy of the trustee's deed once a foreclosure sale takes place. (Civ. Code §2924b.) It must contain:

  • A legal description or assessor's parcel number of all units/lots in the development.
  • The name and address of the association or managing agent.
  • A statement that the association was created for the purpose of managing a common interest development.

Recordation Requirement. So as to avoid their notice requirements under the above statute, many banks were foreclosing on properties and then refusing to record the transfer of ownership. This allowed them to escape the payment of homeowner association assessments because they believed their duty to pay did not begin until they recorded the deed. Effective January 1, 2013 (Assembly Bill 2273) lenders must record foreclosure sales within 30 days of the sale date. (Civ. Code §2924.1.)

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

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