Foreclosures and Their Effects on HOAs

Homeowners and condominium associations everywhere are suffering. People are walking away from their properties and not paying their dues. Those still holding onto their properties are left making up for the deficit of others who are not paying these dues. However, there is a small ray of sunshine among all these gloomy issues.

How did we end up in this mess in the first place?

Due to deregulation of the mortgage industry, banks across the country were able to loan money as mortgages on houses without having to worry about whether or not the person taking out the mortgage would be able to make their mortgage payments. The reason they were able to do this: they could sell mortgages into investment pools before they even lent the money. Then, at the same time the banks sold the loans into these investment pools, they took out insurance, so—even if the mortgagee defaulted—they would still get paid insurance.

When a bank sold a mortgage to another bank/investment pool, they assigned all their interest in that mortgage to the buying party. This reduced the risk to the bank, and therefore reduced the care the bank took to review the credit worthiness of each borrower, because the bank would not have to bear the consequences of a default. The bank got paid commissions for making the loans, they got paid when they sold the loans, and they got paid through insurance when the loans they no longer owned defaulted. What no one expected, however, was a massive wave of defaults resulting in an unprecedented drop in home values across the country.

Now, because of the steady flow of owners defaulting, banks are stuck owning too many homes. A foreclosure takes place when the property is sold at auction. Often, no one bids at the auctions, so the banks end up owning the property. Banks are reluctant to foreclose on more homes while their inventory of foreclosed homes is already high. Properties lay abandoned for years before banks finally do foreclose. While banks wait, the former owners often have no interest in maintaining assessments current, so, it is therefore the HOAs who suffer while the banks wait around to take action.

Where’s the Sunshine?

Challenging the banks is paying off!

An association can obviously try to collect pre-foreclosure assessments from the pre-foreclosure owner. However, under some circumstances, a condominium or homeowner association can also challenge the right of a bank to foreclose. The bank is a much better source of assessments than the foreclosed-upon owner. If the bank serves the HOA with notice of a judicial foreclosure, the HOA should hire an attorney to fight for the HOA’s lien rights. Typically, the HOA lien would be second in priority to a first mortgage holder of record, however, often banks are unable to prove that they actually are the first mortgage holder and—therefore—have no right to foreclose. A non-judicial foreclosure is more common, and it can be challenged as well.

The HOA’s ability to challenge the foreclosures stems from the bank’s use of MERS. MERS stands for Mortgage Electronic Registration System. Certain banks decided it was time to come up with a new system for the digital age, a system that would track all the buying and selling of mortgages, as the mortgages were sold from bank to bank, to investment trusts, etc.

MERS was meant to replace the need to record all assignments of the mortgages in the county records, and did away with proper assigning of the promissory notes. MERS was meant to track the entity that bought and sold individual mortgages, but it did not always do so. Now, when banks foreclose on a property, there is often no way to prove how they came to own the mortgage. All that can be proved is that the foreclosing bank has a document stating that MERS assigned that mortgage to the bank. There are missing links; all the previous assignments of that mortgage are nowhere to be found. As an example: Bank A lends a mortgage on a house and holds the deed of trust and the promissory note. Bank A then sells that interest to Bank B. Bank B sells it to Trust A, Trust A to Trust B, and finally Trust B to Bank C. Bank C then forecloses. The only proof of all these assignments that can be traced is that—at some point—Bank A had an interest and then, somehow, MERS (claiming that it is acting on the behalf of Bank A) assigns its interest to Bank C. Often, Bank A has filed for bankruptcy long ago, so—obviously—it did not have an interest for MERS to assign to Bank C. The chain of ownership is broken beyond repair…

That all being said, the banks know that their gig is finally up. Numerous court cases have been won on behalf of homeowners recognizing the fact that banks are unable to prove their interest in a property and their right to foreclose. VF Law is one of the firms taking the position that, if the bank cannot prove its interest in the first mortgage, they have to payoff the HOA lien from before the foreclosure. The title companies are often not willing to ensure title unless the banks clear the recorded HOA liens.

So, while we are all wading through this economic downpour, we can enjoy this one ray of sunshine: The fate of pre-foreclosure dues from an insolvent owner is no longer a necessary write off; there are now other means to collect that money for the HOA. If you have more questions or are in a similar situation, feel free to email us for help at lawfirm@vf-law.com