ASSOCIATION LIENS AND MORTGAGE PRIORITY
We got a great question the other day from a buyer of Association Foreclosure properties. He asked if a 2nd mortgage was superior to the Association lien foreclosure. That’s when the Condominium, Homeowner or Property Owner Association is unpaid and forecloses its lien.
A lot of people out there are buying at Association foreclosures with the belief that the Association lien is superior to the lien of any mortgage on the property.
The lien of the Association is created by the Declaration of Covenants recorded in the public records – where deeds are recorded in the county. The lien is superior to all liens recorded subsequent to the recording of the association Declaration, except those that are “excepted” in the Declaration itself.
Understand the priorities!
For example,look in a Declaration for what it says about Mortgages or Exceptions under the section that creates the lien rights. Typically the language will read that the lien of the Association is subordinate to any institutional mortgage. But that language is often in a modified form. For example here are some more limiting clauses we have seen: (1) The lien of the Association is subordinate to any First Mortgage from an institutional lender…..; (2) The lien of the Association is subordinate to any Institutional mortgage…….; (3) The lien of the Association is subordinate to any mortgage that is amortized…..; (4) The lien of the Association is subordinate to any mortgage on a unit provided the amount of the mortgage is no more than 50% of the then tax assessed value of the unit…. The combinations are varied but you should get the idea.
Loopholes – how to make a diamond from a lump of coal –
This leaves interesting loopholes. For example, a family given mortgage is not an “institutional” mortgage, so it is inferior to the Association lien. Another example is a second mortgage, since it is not a “first” mortgage and thus is inferior to the Association lien. Or another example is a reverse mortgage or a home equity loan, since neither are “amortizing” mortgages. Each of these examples “limit” the type of mortgages that are superior to the Association’s lien. Any inferior mortgage can be foreclosed out in an Association lien foreclosure, leaving the buyer at the foreclosure without the problem of paying off that mortgage!
An explanation of the issue of priorities was recently discussed in my article: Association Foreclosure.
Understanding and examining the underlying language in the Declaration is one of the most critical issues to be examined in both making a mortgage, foreclosing a mortgage and if you are a buyer at a foreclosure sale, for you too. Understanding these priorities is often a key to a successful foreclosure purchase or a disaster and loss of the investor’s money.
Copyright 2018 Richard P. Zaretsky
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.