The Association's Decision to Foreclose
In nearly every case where a first mortgage of record exists on a property, the association's lien is subordinate or inferior to that mortgage. This means if an association elects to foreclose its lien and takes title to the property, it will take title subject to the right of the first mortgagee to foreclose its mortgage. Associations in the past were reluctant to foreclose when the mortgagee already commenced its own foreclosure action or when the value of the property did not exceed the amount of debt secured by the first mortgage. That's changing now.
Associations are now making the decision to foreclose more often under these circumstances. The primary reason for this is serious delay in the prosecution of the mortgagee's foreclosure case. These delays are brought on by a variety of factors including the sheer volume of cases handled by the mortgagee's law firm, protracted efforts to work with the borrower either to short sale the property or modify the loan, problems associated with serving necessary parties with the foreclosure complaint or locating original documents that are to be filed with the court, back log in the courts and even strategic decisions by mortgagees to slow down the process.
In some cases, associations can obtain favorable results when foreclosing, even against properties that have fair market values below their mortgaged amount. Sometimes the homeowner has the means to pay the association but has elected to spend money on other concerns. Because foreclosure results in the owner losing title to the property, if the owner has the means to pay and does not desire to walk away, they pay rather than lose title. Foreclsoure can be a powerful deterrent for owners who have the means to pay but elect not to or to pay late because they hear others doing the same. Another option is the association's right to rent the property once it takes title, if permitted by the association's governing documents. For some associations, the rental market is favorable and significant income can be recovered before the mortgagee forecloses and takes title.
Many times the owner cannot or will not pay and rental is not a viable option. However, associations still make the decision to foreclose for any number of reasons. Because so many mortgage foreclosures are being contested by owners raising defenses unique to the mortgage foreclosure action, and thus stalling the mortgage foreclosure case for months or even years, the association can effectively render those defenses moot as they relate to the mortgagee's foreclosure by foreclosing the association's lien. When the owner is divested of title by the association, the owner will drop or lose the fight against the lender in the mortgage foreclosure action, thus paving the way for the lender to take title and begin paying assessments. Another option for associations taking title is negotiating a short sale with the lender or tendering a deed in lieu of foreclosure to the lender. I have also filed motions in mortgage foreclosure actions notifying the court that the association has taken title and does not contest the mortgagee's foreclosure, therefore, speeding up the lender's acquisition of title. These associations understand the key is getting a paying owner into the property sooner rather than later. That way, more in terms of future assessments are recovered rather than lost while a mortgage foreclosure lingers on for years and no one pays the assessments.
What every association should consider is each case is different and the association is well served if it carefully considers all of its options and selects a strategy that works best in any given case. In this ever changing environment, there is no one size fits all approach.
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As naïve as it sounds, foreclosure is business, not personal. There are some fundamental questions that need to be asked to curb the passion and focus the decisions on the economics of business. In truth, the Association does not want the foreclosure but rather what results from it, the sale. So we need both the foreclosure and the sale for the Association to be able to get the money it is owed.