Extinguishment of Mortgage Lien by HOA/Condo

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D.C. Court of Appeals Extinguishes Lender’s Mortgage Lien Following Lien Foreclosure

Article by Roger D. Winston and Joseph E. Lubinski

Brought to my attention by Charlie Lincoln and Charles Koppa, forensic analyst

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For unknown reasons I cannot upload the email that was sent to me by Charles Koppa which enclosed the email from Lincoln who I presume was quoting from an article by Winston and Lubinski.

In many states, including Florida, the statutes protect homeowner associations and condominium associations from foreclosure abuse by the banks. The usual method of protection is to give the Association lien for unpaid assessments priority over any claim by any party asserting rights arising from a lien encumbering the property pursuant to a recorded mortgage.

This protection was put in place as a result of banks delaying foreclosure so they would not have to pay for the association assessments, taxes, maintenance and insurance. I have previously written about this over the years. Apparently attorneys for homeowner associations and condominium associations have realized that they can protect their clients. Where the assessments have not been paid pursuant to a declaration of condominium or a declaration of restrictions the Association can file a lien with the county recorder’s office. Upon proper notice, the Association can file a foreclosure action naming not only the unit owner, but also other lien holders including parties claiming rights under a mortgage.

A recent decision by the District of Columbia Court of Appeals, the associations assessment lien was deemed senior to mortgages and deeds of trust “to the extent of the common expense assessments based on the periodic budget adopted by the unit owners Association which would have become due in the absence of acceleration during the six months immediately preceding institution of an action to enforce the lien.”

The case is Chase Plaza condominium Association v  J.P. Morgan Chase Bank. The Court of Appeals reversed the trial court stating that the foreclosure of the Association’s Lane extinguished the alleged lenders mortgage lien. “The court based its decision on common-law principles of lean priority and the absence of a clear intent in the associations governing documents to subordinate the associations assessment lien as against mortgages and deeds of trust.”

This decision will no doubt have significant impact on litigation between associations and alleged lenders. It is also an opportunity to distinguish between the proof presented by the Association at trial (or summary judgment) and the proof presented by the alleged lender.

The Association will bring in its bookkeeper or management agent who will be the party who keeps the books for the Association and will be able to testify as to all details concerning payments received from anyone, how they were posted, and what balance is due using simple arithmetic.

In cases where the loan is subject to claims of securitization the alleged lender will be relying upon layers of presumptions and assumptions rather than proof. This will highlight the essential defects and fraudulent nature of claims to collect, enforce or foreclose on mortgages that should be nullified or on assignments that are void.

This presents some interesting opportunities for both associations and unit owners who are having trouble with their lender. There does not appear to be any prohibition against the Association entering into any agreement with the unit owner who is delinquent in his or her assessments. The Association could extinguish the mortgage lien and then rent or sell the unit to the original unit owner. This would avoid another housing unit becoming a statistic in zombie foreclosures. It would also avoid many foreclosures that would otherwise be filed by alleged lenders.

The authors note that “for lenders the decision complicates loan enforcement strategies on current loans and may require modification to underwriting requirements and loan document escrow provisions in the future. In addition, this interpretation may result in new secondary mortgage agency requirements for condominium documents to require waivers, notices and/or opportunities for lenders to cure.”

The protection offered by legislatures of each state that has passed similar legislation is therefore expected to come under challenge by the banks, whose abuse went to the protection of associations in the first place. It will be interesting to see what happens.

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