RE: Condo's Priority Lien Can Extinguish Mortgage Lien

Wrobel, Stanley

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Sep 2, 2014, 8:17:43 AM9/2/14

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Missing from this decision is any indication that the Lender received notice of the proposed foreclosure by the condominium association.

The relevant provisions of Section 42-1903 of the DC Condominium Act require notice to the Unit owner prior to instituting a foreclosure for unpaid Condominium Assessments, but contain no such requirement for notice to the applicable Unit lender.

The decision contains the following statement:

"JPMorgan points out that the Condominium Act does not require that the condominium association give notice to mortgage lenders or other lienholders before foreclosure and does not permit either the property owner or the mortgage lender to redeem foreclosed property by paying the delinquent amounts." [p. 24]

DC law does not provide for redemption after a foreclosure occurs - in DC, any action to cure must be completed prior to the foreclosure sale occurring.

It may be reasonable and an acceptable business risk for 6 months of unpaid condominium assessments to have priority over a first mortgage lien on a condominium Unit, if the lender is entitled under the condominium documents to receive notice of delinquency in payment of condominium assessments, and an opportunity to cure by paying the delinquent assessments.

That business logic breaks down when, as Benny Kass has observed, the lender allows its loan to be delinquent for many months before instituting foreclosure, and the Lender does not monitor the status of condominium assessments for the Unit during the period of loan delinquency.

Note the 1/14/14 Fannie Mae change in underwriting guidelines [see below], permitting a 6 month priority for unpaid condominium assessments.

This is coupled with the existing Fannie Mae condominium underwriting requirement that the Lender receive notice of delinquent assessments.

Fannie Mae lending requirements for condominiums require that the condominium documents provide that the Unit lender will receive notice of delinquent assessments. [see below]

There does not appear to be an additional requirement that the Unit Lender also receive notice of a contemplated foreclosure for unpaid condominium assessments.

Many residential condominium documents are written to comply with the Fannie Mae underwriting guidelines for residential condominiums, even if the project does not go through the process of receiving Fannie Mae approval to purchase loans on Units in the Condominium.

DC Code 42-1903.13:

(c)(4) A foreclosure sale shall not be held until 30 days after notice is sent by certified mail to a unit owner at the mailing address of the unit and at any other address designated by the unit owner to the executive board for purpose of notice. A copy of the notice shall be sent to the Mayor or the Mayor's designated agent at least 30 days in advance of the sale. The notice shall specify the amount of any assessment past due and any accrued interest or late charge, as of the date of the notice. The notice shall notify the unit owner that if the past due assessment and accrued interest or late charge are not paid within 30 days after the date the notice is mailed, the executive board shall sell the unit at a public sale at the time, place, and date stated in the notice.

Fannie Mae Legal Requirements

Lender Representations and Warranties

(From Fannie Mae Announcement 08-01 - Published 02/29/08)

Rights of Condo Mortgagees and Guarantors – The project documents must give

the mortgagee and guarantor of the mortgage on any unit in a condominium project

the right to timely written notice of:

b. Any 60-day delinquency in the payment of assessments or charges owed by the

owner of any unit on which it holds the mortgage;

Revised: 04/20/12

Unpaid dues - Any first mortgagee who obtains title to a condominium unit pursuant to

the remedies in the mortgage or through foreclosure will not be liable for more than six

months of the unit’s unpaid regularly budgeted dues or charges accrued before

acquisition of the title to the unit by the mortgagee. If the condominium association’s lien

priority includes costs of collecting unpaid dues, the lender will be liable for any fees or

costs related to the collection of the unpaid dues.

Fannie Mae Selling Guide Announcement SEL 2014-02 -1/14/14]:

Selling Guide Announcement SEL-2014-02

January 14, 2014

(*With Update)

Priority of Common Expense Assessments

Fannie Mae is revising its policy concerning priority of common expense assessments for mortgages secured by units in condo and planned unit development (PUD) projects to permit no more than six months of regular common expense assessments to have priority over Fannie Mae’s mortgage lien. In jurisdictions that enacted a law on or before January 14, 2014 that provides for such lien priority for a period greater than six months (for example, Connecticut and Florida), *this policy grandfathers the existing law as of January 14, 2014. If applicable state law allows for greater than six months of lien priority for assessments, but provides an exception for Fannie Mae’s requirements, then the six-month maximum applies (such as Nevada).

Fannie Mae supports maintaining the maximum six-month limited priority lien for common expense assessments (typically known as homeowner association or HOA fees) that currently applies in most jurisdictions. The six-month period is clear and provides discrete and measureable risk exposure for mortgage lending on units located in condo and PUD projects. The six-month period sufficiently balances the rights and needs of lenders (including mortgage servicers and secondary market investors), HOAs, and borrowers.

Stan Wrobel

Stanley J. Wrobel, Esquire

Womble Carlyle Sandridge & Rice, LLP

1200 Nineteenth Street, N.W.

Suite 500

Washington, DC 20036

Direct Dial: 202-857-4430

Direct Fax: 202-261-0030

E Mail: swr...@wcsr.com

-----Original Message-----
From: nyclar...@googlegroups.com [mailto:nyclar...@googlegroups.com] On Behalf Of Benny L. Kass
Sent: Saturday, August 30, 2014 9:42 AM
To: nyclar...@googlegroups.com
Subject: RE: [nyclarealprop] Fwd: Condo's Priority Lien Can Extinguish Mortgage Lien

How does one respond to the question: "does it make sense that a condo foreclosure on a $10,000 delinquent fee can wipe out a $1 million mortgage?"

Very simply with three answers:

1. the bank could have foreclosed earlier. From my experience representing condo associations, it's a "game of chicken" -- who will foreclose first, the bank or the condo. We all know that banks have been extremely reluctant to foreclose thereby seriously impacting the condo association -- especially the small ones we have here in the Washington metro area. So I don't feel sorry for the bank that just let the mortgage keep getting higher and higher.

2. the bank could have paid the $10,0000 to the condo. Again, from my experience, several banks in the past few years -- when faced with a possible foreclosure by a condo association -- have paid the six months super priority lien including legal and admin expenses. Thus, the condo did not have to foreclose. Of course, if the bank still refrains from foreclosing, we are back to answer number 1 above

3. the bank could have (and I suspect will start) escrowing condo fees as well as real estate taxes. This will no doubt cost the borrower additional fees, since while real estate taxes are due every six months (or yearly) most condo fees are due monthly.

Benny kass

-----Original Message-----

From: nyclar...@googlegroups.com [mailto:nyclar...@googlegroups.com] On Behalf Of Daniel Rubock

Sent: Saturday, August 30, 2014 1:07 AM

To: nyclar...@googlegroups.com

Subject: Re: [nyclarealprop] Fwd: Condo's Priority Lien Can Extinguish Mortgage Lien

However, further note: footnote 7 does say "We also note that JPMorgan has not argued that the lack of a notice requirement renders D.C. Code §

42-1903.13 (a)(2) unconstitutional either facially or as applied to JPMorgan in this case. We therefore have no occasion to address those issues."

If such a constitutional challenge had been mounted, would it have been a "slam dunk"? (But is any constitutional challenge ever a slam dunk?)

-----Original Message-----

From: Daniel Rubock

Sent: Friday, August 29, 2014 10:01 PM

To: nyclar...@googlegroups.com

Subject: Re: [nyclarealprop] Fwd: Condo's Priority Lien Can Extinguish Mortgage Lien

The most shocking section of the decision to me is this:

"JPMorgan points out that the Condominium Act does not require that the condominium association give notice to mortgage lenders or other lienholders before foreclosure and does not permit either the property owner or the mortgage lender to redeem foreclosed property by paying the delinquent amounts." [p. 24]

How could such an approach support commercial condo lending, if a mortgagee could be foreclosed out of its interest with no notice? I suppose maintenance of escrows and vigilant lender checking that condo fees are fully paid would be in order, but still....!

Any reactions?

-----Original Message-----

From: Chris Hardin

Sent: Friday, August 29, 2014 11:05 AM

To: nyclar...@googlegroups.com

Subject: RE: [nyclarealprop] Fwd: Condo's Priority Lien Can Extinguish Mortgage Lien

The DC court got it right. In super-priority lien states, an HOA foreclosure sale must extinguish a lender. There is no other option.

If the court had ruled that the lender was not extinguished, great harm would come to HOA's in the form of Reverted Properties. Reverted properties are properties which HOA's attempt to sell at foreclosure sales to 3rd party buyers but cannot because no buyers will buy them. When properties do not sell at HOA auctions to 3rd party buyers, ownership of the properties transfer to the HOA's, which means the properties become REO's of the associations. Associations then must insure and maintain these properties until lenders eventually get around to foreclosing on them.

In addition to the problem of reverted properties, a second problem arises if the lender's security interest is not extinguished; buyers are forced to become slum lords. In the rare instances, buyers will buy some of the better quality houses at HOA auctions and rent them out on a short-term basis until the lender forecloses on the property. These buyers need to quickly re-coup their investment before the lender foreclosures. This short-term ownership & rental incents the buyer to not pay assessments or maintain the property thereby creating a slum lord situation in the middle

of the HOA. However, if the security interest of the lender is

extinguished, the buyer is not faced with the ticking time bomb of a lender foreclosure and so can confidently pay assessments and maintain the property.

Over the last few years these problems have occurred to a limited extent in states like Nevada because certain people in the HOA industry did not understand the intent of the Nevada law. Due to misapplication of the law, HOA's in Nevada are now burdened by hundreds of reverted properties. The law did not intend for HOA's to become reluctant owners waiting for lenders to foreclosure and take away the properties.

Nevada law intends that properties being sold at an HOA sale be sold free of subordinate debt, including lender debt. This will cause buyers at the auction to offer prices similar to what they would bid if the property was being sold at a lender foreclosure sale. It makes no difference to a buyer if the property is debt-free by virtue of a lender foreclosure sale or an HOA foreclosure sale. A debt-free is a property is debt free property.

When the property sells under the correct application of the law, the lender should receive the same net proceeds whether the property is sold via HOA foreclosure or lender foreclosure sale because the winning bid at the auction should be about the same. The lender has the option of paying the 9 months super priority lien amount and retaining its interest in the collateral property or allowing the HOA foreclosure to proceed so that it can then receive the same proceeds as if the lender itself had foreclosed.

When the super priority lien is applied correctly by all involved, all the parties get paid their full amount and everyone is happy. This is not occurring now in Nevada because the stakeholders in the HOA industry are not using the super priority lien correctly. This is creating confusion and lawsuits.

The good news in Nevada is that an increasing number of stakeholders are beginning to use correctly use the priority lien. This is causing prices at auctions to rise which means more proceeds are available for disbursement to

the HOA and lender. The number of foreclosures is falling because people

are taking the HOA lien seriously and paying off the delinquent amount prior to foreclosure. This means that system is beginning to work correctly. As the number of compliant stake holders increases, auction prices will continue to rise and the number of foreclosures will continue to fall.

-----Original Message-----

From: nyclar...@googlegroups.com [mailto:nyclar...@googlegroups.com]

On Behalf Of Benny L. Kass

Sent: Friday, August 29, 2014 5:35 AM

To: nyclar...@googlegroups.com

Subject: [nyclarealprop] Fwd: Condo's Priority Lien Can Extinguish Mortgage Lien

This was just handed down in dc

Sent from my iPhone

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Wrobel, Stanley

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Sep 2, 2014, 9:00:38 AM9/2/14

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