Even though the real estate market is gradually improving, condominium and homeowner communities are still faced with instances where a delinquent member abandons their unit/home and stops mortgage payments, but the lender does not foreclose. While condominium associations often believe they are “stuck” in these types of situations as the unit/home owner is uncollectable, and the lender will not foreclose, it is possible for the association to file a complaint with the Consumer Financial Protection Bureau (“CFPB”) to encourage a lender to foreclose. This article reviews some of the issues that may arise with an association member in default on their mortgage, and describes some potential options available to an association to address the issue.
The Problems Associated with a Failure to Timely Foreclose
When a member stops paying his assessments and walks away from a unit/home, his lender is expected to foreclose on the mortgage. When the lender fails to timely foreclose, however, the association is often left with property that sits vacant for months or years. Vacant property has a tendency to decrease a community’s property values and to increase blight. In addition, homeowner and site-condominium communities face the prospect that the vacant and abandoned unit/home can become an attractive nuisance and potential avenue for squatters in which to move. As well as the potential for decreased property value and blight problems faced by associations, condominium associations will sometimes also incur additional costs to winterize these vacant units to prevent burst pipes that could potentially cause damage to the common elements and/or neighboring units. Furthermore, some condominium associations end up paying for utilities in the vacant unit in order to ensure a service is maintained, such as a fire alarm system.
As set forth in a previous blog regarding types of foreclosures, due to the continued existence of underwater mortgages, associations will often choose not to foreclose a delinquent member and to thereby attempt to locate a new owner because in many instances they will be unable to recoup the delinquency from the sale because of the association’s secondary lien position. Unfortunately, the net result is that an association is often left with a lien against abandoned property for which the association receives no assessments, and the lien may be subject to a first priority interest lender who refused to foreclose on its mortgage and allow a new owner to take possession.
Why Lenders Fail to Foreclose
Although there can be a number of reasons for a lender not to foreclose, the main reason is usually that lenders simply do not want to pay assessments. If a lender is the highest bidder, then the lender would own the property, entitled to the privileges and burdens of home ownership— including the obligation to pay assessments. If a mortgage is underwater, then there is little incentive for a lender to take ownership and increase the cost of the loan by paying assessments. Thus, lenders will typically wait until there is a seller in place prior to initiating foreclosure proceedings or even taking some affirmative action that could be deemed taking possession of the unit/home, such as changing the locks.
A further unfortunate twist of fate that associations face is that the association ends up preserving the lender’s collateral (the unit/home) when it maintains the common elements of the project, such as the roofs of the buildings, the pool and tennis courts and clears the streets and sidewalks of snow in the community.
Thus, the reality of the situation is that the other members in the community may end up paying the delinquent member’s share of the expenses while the delinquent member and that member’s lender continue to benefit from the association maintaining the community and/or the unit/home. Moreover, if the association is facing multiple delinquencies, it can cause a hardship that may impact the association’s bottom line and its ability to maintain services and upkeep of the community, which naturally would result in a reduction of the value of all the units/homes in the community.
Past Methods to “Encourage” Lenders to Foreclose, Pay Assessments, or
to Obtain Ownership of the Unit/Home
Associations have not sat idly by while lenders failed to foreclose. One method has been to contact the lender and request that they voluntarily abandon the unit/home. This method had been limited in effectiveness because there is no reason for a lender to agree except in those limited circumstances where the home/unit is exceedingly underwater, the unit/home has already sustained damage, the damages would require extensive costs to repair prior to sale, and the lender has already written off the debt.
A second method is known as a “mortgage terminator” lawsuit, which is a marketing term used to describe a lawsuit filed by a condominium or homeowners’ association, after the association has taken title to a unit (typically through foreclosure of the association’s lien) against the secured lender (the owner of the mortgage) to “terminate” the mortgage. If the lender appears, the association seeks to have the lender begin or finish the foreclosure process. If the lender fails to appear, the association seeks a default judgment granting the relief sought, which includes cancellation of the mortgage of record. Unfortunately, in Florida, where this type of action was first used, the associations who obtained “title” to the unit/home are finding that they are unable to obtain title insurance policies because of the concern that the default judgments obtained will not be honored because the lender was not legally required to appear in the association’s lawsuit and, thus, the lender may still have the right to foreclose on the unit/home. In other words, there is a concern that even with a lender’s default, the “Schwarzenegger” lender is saying “I’ll be back.” The title issue is also present in other jurisdictions where associations have used the mortgage terminator approach.
Some of the associations who utilized the “mortgage terminator” and then sold the properties without obtaining title insurance are discovering that that they can be sued by their buyer who thought they were purchasing clear title. Instead, however, the new owners could be forced to move out when the lender takes title after foreclosing on its security interest or they have to pay rent to a lender on a unit that they thought they owned.
Another method utilized by associations has been to seek to hold the lender responsible for its proportionate share of the expenses for maintaining the lender’s collateral, the unit/home, rather than seeking payment of the entire amount of the assessment. A letter to the lender explaining that the lender is responsible for the proportionate share of the expenses to preserve its collateral and identifying the amount for which the lender is responsible will sometimes result in the lender voluntarily paying the amount. However, in the majority of instances, the lender will either not respond at all or, if it does, it will indicate that it will only begin to pay if there is a court order. Thus, the association is left with the option of filing a lawsuit to seek the lender’s prorate contribution of expenses for the association’s preservation of the lender’s asset, which can be both time consuming and expensive if the lender defends the matter vigorously and appeal judgments against them.
However, all is not lost. Certain procedures which can be taken under the Dodd-Frank Act can help an association encourage a secured lender to foreclose on a mortgage in default.
How can the Consumer Financial Protection Bureau help?
The Dodd-Frank Act (“Act”) was signed into law by President Barack Obama on July 21, 2010. As the preamble to the Act states, it was enacted to
promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.
The Act directs the “CFPB” to facilitate the coordinated collection, monitoring, and response to consumer complaints regarding certain financial products and services. The CFPB officially opened for business on July 22, 2011.
The Act provides a mechanism for an association to file a complaint with the CFPB regarding a bank’s failure to initiate a foreclosure proceeding, its delay in ongoing proceedings, or regarding a bank’s failure to preserve a unit. The process for submitting a complaint to the CFPB is laid out on the Community Association Institute’s (CAI) website. In addition, the issue is of such significance to CAI that it has requested that it be notified of the filing of a complaint with the CPFB by an association in order to help support its advocacy efforts.
Why Should Associations File a Complaint?
There is no guarantee that the submittal of a complaint to the CFPB will result in the CFPB taking action requiring the bank to foreclose, to expend funds to maintain the unit or to voluntarily abandon the unit/home and discharge its security interest. However, by submitting a complaint to the CFPB when warranted, it is possible that an association could obtain relief in a situation where a lender chooses not to foreclose and hinders an association’s ability to collect assessments.
If your association is facing delayed foreclosure proceedings or has vacant/abandoned units because the member has left and the bank is not pursuing foreclosure for any reason, if warranted, you should consider filing a complaint with the CFPB. If you have any questions about this article or wish guidance on submitting a complaint with the CFPB or have questions regarding any condominium or HOA issues, generally, please contact us.