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for people considering the purchase of a unit in HOA community to get financing because most lenders require their mortgage to be in the senior lien position. Any second mortgage on a HOA Property is
eliminated by the foreclosure of the senior HOA lien. In the event that the second mortgage was recorded before the HOA Lien, it would stay on the property after any HOA foreclosure just like a first mortgage lien.
Super Liens
Roughly 20 states give HOA liens a special status known as a “super lien” under very specific situations. The conditions vary by state. For example, Colorado law gives HOAs a super lien with priority over a first mortgage when a homeowner becomes six months delinquent on assessments. When a HOA forecloses a super lien, it eliminates the first mortgage along with all other junior liens on the property. Because a super lien can eliminate a first mortgage, most mortgage lenders want to maintain their
first position. If they are able to do so, they will pay off the super lien amount so that the property does not end up in foreclosure.
Recent Changes
The recent Court of Appeals ruling in the Chase Plaza Condominium Association vs. Chase Bank, N.A. made on August 28, 2014 determined that an association’s statutory “super-priority lien” for unpaid assessments took the senior position, not just for payment priority, but also over the lender’s mortgage lien. The issue in the Chase case concerns the aftereffects of the association when it forecloses its assessment lien. The question then arises, is the association’s lien only a priority of payment, or a true priority lien, whicheliminates the lender’s mortgage lien? The Court of Appeals disagreed with the trial court and held that the foreclosure of the association’s assessment lien took senior position for both payment and as a priority lien extinguishing the first mortgage or deed of trust on the property. The Uniform Laws Commission has recently amended Section 3-116 of UCIOA to resolve the ambiguity around super lien status, recognizing that the most recent decision is causing a lot of anxiety for lenders and associations alike.
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Outcome
The Chase decision has significant effects for both lenders and associations. This decision giving HOA Liens true priority means they will have a much more powerful tool to use to collect delinquent assessments. For lenders, the decision will complicate how banks can enforce current loans. This also may mean making more modifications to underwriting requirements and loan document escrow provisions for HOA properties. Another possible effect is that there will be new secondary mortgage requirements for condominium documents to require waivers, notices, and opportunities for lenders to satisfy the HOA Lien in order to protect their collateral.
Conclusion
In light of the recent mortgage meltdown, this is not welcome news for mortgage lenders or homeowners. If a HOA foreclosure sale price is unreasonably low, lenders will be left with an enormous unsecured debt and a homeowner will be left with a huge deficiency judgment to the lender. This could all ultimately result in less available financing for HOA properties on the market because the ruling makes it risky for mortgage lenders to take on these types of property without a good way to protect their collateral.•
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