Often our first contact with an association begins with a discussion about a member who is seriously delinquent in the payment of their assessments. The Board wants to know what they can and should do. The answer we give often comes as a surprise.
Have you thought of a non-judicial foreclosure?
Many Boards do not realize that most master deeds and CCRs include a provision that allows for the non-judicial foreclosure of delinquent assessments. Of course, this provision is akin to the “nuclear option”. In effect what we are doing is selling this delinquent member’s home on the courthouse steps because they are delinquent in paying their homeowner’s association assessments. Of course, doing nothing means that the Board may have to explain to the members that do pay their assessments why this one owner gets to free-ride on everyone else’s good will. There are few good options here.
So, what does it mean for an association to foreclose? The association must comply with the statutory requirements regarding foreclosure sales. It must also comply with the requirements in its governing documents regarding such sales. Generally, this requires providing notice to all parties having an interest in the property, publishing at least three notices in a newspaper of general circulation in the county over at least a twenty day period, and calling the sale. The sale provisions need to waive certain property rights, such as the right of redemption, equitable right of redemption, homestead, and dower. Finally, the foreclosure provisions will explain how proceeds are to be distributed if there is active bidding (and in our experience, there is not).
The questions most Board’s ask is – what about the mortgage? Excellent question. The promissory note secured by the deed of trust/mortgage was executed by the delinquent member, not the association. Thus, the association is not obligated to make payments on such promissory note even if the association acquires title to the property. Now, if the mortgage/deed of trust is superior to the lien of the association (likely the case), then the bank’s lien evidenced by such mortgage/deed of trust would be superior to any ownership interest conveyed by the association’s foreclosure of its lien for delinquent assessments. This means that the bank can foreclose the mortgage/deed of trust and wipe out the ownership interest conveyed by the association’s foreclosure. But, is this really a problem? The issue was the delinquent owner, not the bank. Presumably by the time the bank is involved the delinquent owner is gone. Further, once the bank forecloses, the income stream related to the assessments from the property will restart. Economically, the association may be out the costs of the foreclosure, but it has turned a non-performing property into a performing property over the long-term. Which would you rather have, a property with an owner who is consistently delinquent, or spending some funds to restart an income stream?
Obviously, this post merely scratches the surface of this issue. Given the differences in each development’s documents, how the process works can be different. Further, the costs of a non-judicial foreclosure can be significant. That being, it is a process that works for associations and should be considered and discussed by their Boards in certain cases.