By Deborah Goonan, Independent American Communities
It looks like the HOA Industry, led by Community Associations Institute (CAI) is pushing the HOA Super Priority Lien. But instead of enacting legislation, CAI attorneys are engaging in amicus curiae or “friend of the court” briefs to influence Supreme Court decisions when legal disputes arise after an HOA beats the mortgage lien holder to foreclosure, thereby extinguishing the lender’s lien.
In plain language, “extinguishing the lender’s lien” means that an investor bids on a property at the HOA auction, but does not have to pay off any outstanding mortgage balance in order to own the newly acquired property free and clear.
The practice has led to cases where an investor is able to buy homes at HOA auction for a fraction of their appraised value and mortgage-free – a veritable windfall for the savvy investor. Obviously, however, the practice is fraught with moral hazards and opportunities to strip property owners of their rights to a fair price at auction.
Lenders have been left holding the unpaid mortgage debt in Nevada, Washington DC, Texas, and now Rhode Island.
Rhode Island Supreme Court gives HOAs priority above mortgage liens
Condominium association liens now hold “super-priority”
In case you have any doubt who is behind this effort, I present to you a screen shot of public commentary made by Stephen Marcus, CAI attorney from an prominent attorney firm representing Condo Associations in Massachusetts, Rhode Island, and New Hampshire.
Hmmm. Very interesting commentary and point of view, don’t you think? According to Marcus, banks deserve to be stiffed because they have burdened condo associations with owners that never should have qualified for mortgages in the first place.
As my grandmother used to say, “Two wrongs don’t make a right.”
In my non-attorney, common sense opinion, I see no upside to homeowners or consumers with super-priority liens being allowed to wipe out first mortgages or deeds of trust. How does allowing investors to essentially steal a home for a fraction of its true value help other owners? When nearby homeowners decide to sell their units, the foreclosed comparable will only reduce overall appraised values and corresponding sale prices.
The push for collecting assessments (HOA “taxes”) in escrow
And the interesting new push here is that some CAI attorneys are now conceding that HOA assessments are akin to taxes, and they should be escrowed by the lender to better ensure the HOA gets paid. After all, property taxes are collected in the same way for homes purchased with a mortgage.
I can certainly understand where Marcus is coming from. There is no doubt that both lenders and HOAs would reduce past due assessments and avoid extinguishing of the first mortgage by using escrow services to automatically collect HOA assessments at the same time as the mortgage payment is made.
The problem is, there is an epidemic of Owners’ Associations failing to provide adequate or expected levels of service as promised by the governing documents. And then there are mulitple reports of theft, fraud, and misappropriation of Association funds. If an owner cannot withhold payment to the HOA, and is forced to pay the lender the Association’s assessment payment each month, What meaningful recourse does the owner have?
And please don’t say, with regard to an ineffective or corrupt board, to “vote the bums out.” I’ve already covered that fantasy in a previous blog.
Homeowners and condo associations need to be held to municipal or county governance standards
So…let’s be consistent about how we treat homeowners’ and condo associations, shall we?
If we are going to start treating Association Governed Residential Community assessments as taxes, then we must also convert the governance model from a private non-profit corporation to a public government or legitimate agency of local government.
That means we would need to reallocate votes one per person, rather than per share of property owned.
It would mean eliminating common interest – and corresponding liability – of home and condo owners. Essential services would be once again considered a matter of public interest, rather than an ongoing guaranteed income stream for developers and management companies.
Consolidation of services would make sense as well, in order to spread out the cost for similar maintenance and security contracts over more HOA “tax” payers.
If we are going to collect taxes, then don’t we need to elect and compensate qualified, vetted candidates to serve on a community or regional council instead of a relying on an often understaffed, unqualified, volunteer board?
Of course, that can only be done in a real election at the local polling place, just as we do in for cities and towns all over the US.
If we allow lenders to escrow HOA assessments, and leave the current Association-style corporate governance model intact, millions of taxpayers in homeowners’ and condo associations will truly experience “taxation without representation!”