This Is our Village

Tuesday, October 26, 2010

Posted on October 20, 2010 by Kevin Miller

The Association's Decision to Foreclose

In nearly every case where a first mortgage of record exists on a property, the association's lien is subordinate or inferior to that mortgage. This means if an association elects to foreclose its lien and takes title to the property, it will take title subject to the right of the first mortgagee to foreclose its mortgage. Associations in the past were reluctant to foreclose when the mortgagee already commenced its own foreclosure action or when the value of the property did not exceed the amount of debt secured by the first mortgage. That's changing now.

Associations are now making the decision to foreclose more often under these circumstances. The primary reason for this is serious delay in the prosecution of the mortgagee's foreclosure case. These delays are brought on by a variety of factors including the sheer volume of cases handled by the mortgagee's law firm, protracted efforts to work with the borrower either to short sale the property or modify the loan, problems associated with serving necessary parties with the foreclosure complaint or locating original documents that are to be filed with the court, back log in the courts and even strategic decisions by mortgagees to slow down the process.

In some cases, associations can obtain favorable results when foreclosing, even against properties that have fair market values below their mortgaged amount. Sometimes the homeowner has the means to pay the association but has elected to spend money on other concerns. Because foreclosure results in the owner losing title to the property, if the owner has the means to pay and does not desire to walk away, they pay rather than lose title. Foreclsoure can be a powerful deterrent for owners who have the means to pay but elect not to or to pay late because they hear others doing the same. Another option is the association's right to rent the property once it takes title, if permitted by the association's governing documents. For some associations, the rental market is favorable and significant income can be recovered before the mortgagee forecloses and takes title.

Many times the owner cannot or will not pay and rental is not a viable option. However, associations still make the decision to foreclose for any number of reasons. Because so many mortgage foreclosures are being contested by owners raising defenses unique to the mortgage foreclosure action, and thus stalling the mortgage foreclosure case for months or even years, the association can effectively render those defenses moot as they relate to the mortgagee's foreclosure by foreclosing the association's lien. When the owner is divested of title by the association, the owner will drop or lose the fight against the lender in the mortgage foreclosure action, thus paving the way for the lender to take title and begin paying assessments. Another option for associations taking title is negotiating a short sale with the lender or tendering a deed in lieu of foreclosure to the lender. I have also filed motions in mortgage foreclosure actions notifying the court that the association has taken title and does not contest the mortgagee's foreclosure, therefore, speeding up the lender's acquisition of title. These associations understand the key is getting a paying owner into the property sooner rather than later. That way, more in terms of future assessments are recovered rather than lost while a mortgage foreclosure lingers on for years and no one pays the assessments.
What every association should consider is each case is different and the association is well served if it carefully considers all of its options and selects a strategy that works best in any given case. In this ever changing environment, there is no one size fits all approach.
Dave Israel


  1. David:

    What if the owners has walked
    away from her unit over 3 years
    ago and our lawyer related to us
    that the unit is going to auction and wanted to know if we wanted
    to put a bid on the unit.
    Should we?

  2. Hi Nut,
    October 26, 2010 5:38 PM,

    Is there a mortgage on the unit, and will it convey to the new owner?

    If not, and if the price is right, perhaps you could rent it out or sell it at a profit.

    This is a business decision for your Association to make.

    The Board should not make this sort of decision in the dark, it is a major step and your unit owners must be involved.

    Dave Israel

  3. Hi Nut, Print the article, give it to all your residents, put their thinking caps on.
    Good article thx Dave.

  4. Good article Dave,
    The question remains, why has the government not stepped in to make it cost prohibitive for banks to UNREASONABLY delay the foreclosure process. As many of you have heard, the servicers and attorneys for the banks have fraudulently signed over 10,000 affidavits, effectively causing foreclosure actions to come to a standstill.
    Fines for such action should include criminal prosecution and Licences to Practice Law revoked!

    The legislature could have made broad and sweeping changes if not for the 2 1/2 billion dollars paid to the Bank Lobby. The system is broken. I believe one judge basically said in his court to the bank attorney, show proof of ownership (promisary note) or forfeit the property! If there were more judges like that, we wouldn't have so great a problem, which will take years to resolve.

  5. I will relate a tale from our Ass'n.
    We had an owner which left because she had to live with her daughter; a 1/1&1/2 upstairs unit, no lift. She tried to sell it with no success for 3 years. Finally, she stopped paying her maint. & WPRF. After 3 months behind, I called her & asked her what was she going to do? The reply was, There is nothing I can do, I have no money. Board met and as an Association, offered to buy the unit, for $1,000 & pick up the payments owed. The unit owner accepted, the Ass'n acted, paid WPRF And sent a letter out offering the unit to all unit owners for what was the cost to the Ass'n. ( Title search, Lawyer fees, etc,) One of our unit owners purchased it, is renovating the unit and to make this story short, no more missed payments. Was it legal ? Was it correct ? I don't know but I do know that our Ass'n is fortunate enough to have no owners in arrears.

  6. Ken,
    You are one of the lucky ones. No motgage existed and there were only minor encumbrances, W.P.R.F, Real Estate Taxes, etc. and the assessment delinquencies and closing costs.

  7. Randall
    You are correct but it was not all luck,hehe. I went on line to research the property, such as a mortgage, taxes owed or not, etc. I believe in doing my homework and it turned out well for the Ass'n. We indeed are fortunate

  8. Ken, where do you find taxes owed, maybe I had not noticed that, I have the rest. TIA


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