A homeowner association's ability to foreclose on a property for failing to pay assessments is a potent tool in collections. Unfortunately, many associations do not utilize this avenue of collections due to a belief that the association would become obligated to pay the first mortgage on the property if it ended up owning the foreclosed unit. While a homeowners association certainly has the ability to pay the first mortgage the association does not obligate itself to do so if it forecloses on its assessment lien.
When a property is first purchased, the homeowner generally signs two documents: a promissory note and a deed of trust. The promissory note is a document that evidences the debt the homeowner borrowed to purchase the property. The homeowner covenants and agrees to be personally responsible for the full amount of the debt as shown on the promissory note. The deed of trust is a document that creates a security interest in the property. This document enables the mortgage holder (i.e. bank) to initiate a foreclosure action and take ownership of the property if the homeowner fails to pay his/her mortgage.
Typically, when an association decides to foreclose on its assessment lien the first mortgage holder is the only party with a superior lien. If the association is successful and obtains title to the property after the foreclosure process, the original note and deed of trust remain valid. However, as the association has not signed the promissory note, the personal obligation to pay the mortgage remains with the original homeowner. Unlike the promissory note, the deed of trust is an encumbrance on the property. As first mortgage holders typically have a superior lien position to an association’s lien, the deed of trust will continue to encumber the property even after the association’s foreclosure is complete.
After an association takes ownership of a unit through a foreclosure, it is usually left with two options. The association can pay the first mortgage holder to prevent the filing of a foreclosure action by the bank. Another option is for the association not to pay the first mortgage holder and simply allow the property to fall into foreclosure again. One creative solution some associations are using is to not pay the first mortgage and rent the unit until the mortgage holder obtains title to the property through foreclosure. Remember this process typically takes three to six months, if not longer, so the lease can be for a three month term and then continue on a month-to-month basis.
The goal of any association that is initiating a foreclosure action is not to obtain the property. Rather, associations should look to mitigate the loss they are suffering from the delinquent homeowner by taking steps to either push the homeowner to pay or create a situation where a new party is responsible for the assessments. For this reason, many associations don’t mind taking ownership of a unit and allowing the bank to foreclose – at least that way, a new party becomes responsible for the assessment.
If you have any questions about the foreclosure process, please contact a HindmanSanchez attorney at 303.432.9999.