Did you know that 63 million Americans now live in condominiums and communities subject to a homeowners association? That’s up from just 10 million as recently as 1980.
The surge in community living is creating thorny legal issues when homeowners default on both their mortgage and their community dues, fees and assessments. Specifically, who can foreclose on the property, and who gets the money first, the bank or the community association?
The answer depends on the state, and often leads to conflicts between state laws, federal regulations, and condo documents.
About half the states have laws that say that community associations have priority over a mortgage lender, so if the property is sold, the condo or homeowners association gets paid first. But these laws vary widely.
For instance, some states protect condo fees but not homeowners association dues, some say just the opposite, and some protect both.
Some states cap the amount the community association can collect off the top, either at a specific dollar figure or a certain number of months’ dues. This can create a cash-flow problem for a condo association, because it might be entitled to only a few months of fees even if a bank drags out a foreclosure for years. (Recognizing this problem, Connecticut, Florida and Nevada recently increased the amount of dues and fees that an association can collect.)
Even if an association is entitled to collect regular dues out of a foreclosure, it’s often unclear whether it can also collect interest, late fees, and penalties that may become due if an owner defaults. It’s also often unclear whether an association can recoup its attorney fees and other collection costs.
Some states allow an association to recoup its “reasonable” collection expenses, but banks might argue over whether certain expenses are reasonable. That’s particularly true if the fees owed are relatively modest but it’s legally expensive to recover them.
Some condo associations have been amending their declarations and bylaws to retroactively create a lien on pre-existing debts. It’s not always legally certain whether this will work.
On the federal level, Freddie Mac recently ordered its mortgage servicers to pay all condo and homeowners association assessments prior to foreclosure if not doing so would result in the association having “first dibs” on the foreclosure funds. Servicers must pay the assessments up to the limits provided by state law or the association bylaws, but there’s uncertainty as to what will happen if the state law and the bylaws conflict.
Fannie Mae is actively opposing attempts to expand the rights of community associations, and is threatening to respond by making condo and homeowners association mortgages harder to get, or requiring dues and fees to be escrowed in the same way that property taxes typically are.