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THIRD-PARTY LENDER FORECLOSURES

policy

The Community Associations Institute (CAI) endorses legislation that provides a fair and equitable foreclosure process by third party lenders that protect homeowners, property values, and the financial health of community associations.

CAI specifically advocates for and endorses:

  1. Lien priority laws that protect and enhance the priority of unpaid assessments as related to other loans secured by lots and units in community associations. CAI endorses the lien-priority language in the Uniform Common Interest Ownership Act.

  2. Foreclosure laws that require the prompt foreclosure of delinquent mortgages secured by homes in community associations and timely recordation of foreclosure deeds or, in the alternative, where the foreclosure is delayed, payment of association assessments by the lender. 

  3. Laws that require lenders to protect and maintain homes subject to foreclosure prior to foreclosure and during the foreclosure process if the loan is in default and the unit or lot owner has abandoned responsibility for maintenance and upkeep of the unit or lot.

  4. Adoption and enforcement of regulations by Government-sponsored enterprises that require lenders and mortgage servicers to proactively maintain vacant homes. 

Background 

CAI understands and respects the rights of lending institutions to foreclose in the case of a loan default. Lenders have frequently delayed the foreclosure of mortgages in default even when homes in community associations were abandoned, thereby having multiple negative impacts on the community. In community associations, not only does the delay in pursuing foreclosures depress property values and impede market recovery, but there is also the additional detrimental impact of depriving associations of the needed income to maintain the property for the benefit of other owners, as well as lenders. 

For community associations, foreclosure delays are particularly problematic because of their common interest ownership structure. Homes heading toward or in foreclosure may add an element of blight to the neighborhood. Properties are often neglected, the homes often fall into general disrepair and mandatory assessments to the association go unpaid by the owner or lender, thereby adding an additional financial burden to the other owners. The negative impact of foreclosures in community associations are amplified due to delays in commencing and prosecuting foreclosures by lending institutions.

Owners of distressed properties often fail to pay their share of association budgeted expenses by withholding the association's primary revenue source - assessment income. When that same owner is subject to a lender foreclosure, the association frequently suffers a loss during the foreclosure process that is often unrecoverable against the owner. Owners subject to foreclosure may file bankruptcy or may simply stop paying their mandatory assessments to the association. These losses will materially increase if the mortgage lender either delays initiation or prosecution of foreclosure proceedings. In short, any delay increases losses to the association because it does not start receiving the mandatory assessments until the foreclosure sale is completed and the lender or a new owner begins making the required payments.

During any period of delay, the remaining owners in the association effectively subsidize all common expenses that the delinquent owner fails to pay or they suffer from the inability of associations to undertake necessary maintenance of roadways, parks, open space and, in many communities, the exterior of buildings, all of which impact the value of all homes in the community, including the foreclosed property. The added expense leads to an unfair burden on the remaining owners in the community association when they had no part in the purchase of the unit or lot or in the lender’s credit determination when granting the mortgage. In some instances, the increasing failure of delinquent properties results in a death spiral as previously performing owners find it impossible to pay increasing assessments required to cover delinquent owners.  Given this, mortgage lenders with the discretion to lend or not should not receive the maintenance benefits of association expenditures while failing to contribute a proportional share of the expenses. 

policy history

Approved by the Government & Public Affairs Committee, April 14, 2015

Adopted by the Board of Trustees, October 26, 2016


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