Published on: January 28, 2015
You’d think a condominium law that has been in place for nearly two decades and is working well by all accounts would be reasonably secure. But apparently not.
The condominium superlien, widely credited with helping condominium associations navigate several economic downturns, including the most recent one, with minimal economic damage, is being questioned by lenders, weakened by courts and attacked by federal regulators, forcing industry executives to fight again battles they thought they had long since won.
A little legislative history will provide perspective. Before the superlien existed, widespread delinquencies and foreclosures triggered by economic downturns created immense financial problems for condominium communities. Boards had to slash services, increase fees paid by other owners or both, in order to compensate for the revenue they weren’t collecting from delinquent owners. Associations unable to balance their budgets collapsed.
Persuaded that condominium associations needed the revenue from common area fees for the same reasons that municipalities needed tax revenue (to provide essential services), Massachusetts lawmakers approved legislation in 1992 creating a priority lien for them. The law ensured that community associations could collect six months of delinquent fees plus legal costs and related expenses ahead of the claims of first mortgage lenders. If the lender foreclosed, the condominium association was paid first; if the lender didn’t foreclose, the condominium association could do so.
Financial institutions initially opposed the law but ultimately accepted and (in some cases) even embraced it, recognizing that financially stable condominium communities protected the interests of mortgage lenders as well as the interests of the communities themselves. With a priority lien of some kind in place in 21 states, including Massachusetts, it seemed to be an established part of the condominium landscape. But the superlien has become suddenly and inexplicably controversial again.
No Rolling Liens
In Massachusetts, an Appeals Court ruled last year that condominium associations may have only one priority lien in place at any time. That decision, in Drummer Boy Homes Association, Inc. v. Carolyn Britton and others) rejected the common industry practice, which was to establish overlapping or “rolling” liens that would cover all delinquent fees accumulated during multiple delinquencies or single delinquency periods extending for more than six months.
The association argued that rolling liens were necessary because, after making flawed loans in the first place to owners who couldn’t afford them, some banks took years to foreclose; a six-month lien wasn’t long enough to protect associations from the consequences of problems the banks had created. Rolling liens were consistent with the purpose of the legislation (keeping condominium associations financially stable), the association argued, and they were permissible because the statute expressly enabled lenders to pay ongoing fees to avoid further legal expenses. The court disagreed.
“Recognizing that a condominium association’s lien could be extinguished entirely by a foreclosing first mortgagee,” the court said, lawmakers approved “a limited six-month period of priority.” The purpose of the lien, according to the Uniform Condominium Act, on which the Massachusetts superlien was based, the court noted, was to create “an equitable balance between the need to enforce collection of unpaid assessments and the obvious necessity for protecting the priority of the security interests of mortgage lenders….The Association’s interpretation that it may file successive suits to extend its lien priority over a prior first mortgage beyond a six-month period of time would therefore undermine the purpose of the statutory scheme. We cannot accept such an interpretation.”
Coping with the Ruling
That ruling represents an obvious setback for condominium associations, but the loss of the rolling lien need not be problematic for most, as long as they deal expeditiously with delinquent owners. Boards or association managers should send the first late notice to owners 30 days after a payment is due and the second notice between 45 and 60 days after the due date, turning the collection over to their attorney between 61 and 75 days after a payment becomes delinquent. This will enable the attorney to send the required notice of intent to file suit to the lender no more than 135 days after a payment is missed.
Associations should have been following this collection schedule all along, but the certainty that the superlien ensured their ability to collect all delinquent amounts reduced the sense of urgency for many. That sense of urgency is now essential.
Even with an aggressive collection policy, some unpaid assessments will fall into the gap that rolling liens had closed, and associations should budget for those losses. We suggest setting aside six months of fees per unit for the average number of units foreclosed annually. An association that experiences three foreclosures annually should set aside 18 months of fees to cover possible losses. These losses may be painful for smaller communities, with few owners to share them, but they should be manageable for most. Boards should also remember that the priority lien covers only regular common area fees; it does not cover special assessments. The Drummer Boy decision doesn’t change that, but it does make it even more important to keep association revenues under the superlien umbrella.
Significantly, and happily for condominium associations, the Drummer Boy decision does not say that associations may impose only one lien over the life of a mortgage, as some had feared; it says only that associations must wait until one lien expires before moving to impose another one. While most banks appear to be accepting that reading of the decision for now, we expect that someone will challenge it in a law suit contending that the Appeals Court meant “one and done” – one lien over the life of a mortgage, regardless of how long a delinquency lasts or how many times an owner becomes delinquent.
Seeking Remedies in Massachusetts
Drummer Boy may be overturned before that question is raised. The association on the losing end of the decision has asked the Supreme Judicial Court to review it. We hope the court will accept the appeal (it isn’t required to do so) and will reinstate the rolling lien, though there is no certainty that it will.
Because a judicial remedy isn’t assured, the Community Associations Institute of New England (CAI-NE) is seeking a legislative remedy, supporting legislation clarifying that the Massachusetts superlien statute permits rolling liens. But a legislative fix isn’t assured either. Although local lenders seem relatively comfortable with the priority lien (one has even submitted a letter to lawmakers endorsing the rolling lien), large national lenders are likely to fight it here as they are fighting it elsewhere.
Some lenders sided with the plaintiff (and against the condominium association) in Drummer Boy; others have weighed in on a pending Rhode Island suit (Twenty Eleven LLC v. Michael Botelho) arguing (somewhat absurdly, in our view) that the priority lien in that state does not extinguish a first mortgage after a foreclosure.
At the federal level, the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, has expressed “concern” about the priority lien, which the agency says, violates a federal law barring holders of other liens “including HOAs, from taking any action that would extinguish a Fannie Mae or Freddie Mac lien, security interest or other property interest.”
That expression of concern was apparently triggered in part by court decisions in Nevada and the District of Columbia affirming the priority status of community association super liens and, incidentally, rejecting a lower court’s ruling in the Rhode Island case, noted earlier. The FHFA has asked a federal court to intervene in the Nevada case and vowed to “aggressively” enforce its policies on superliens “by bringing actions to void foreclosures that purport to extinguish [Fannie Mae or Freddie Mac] property interests in a manner that contravenes federal law.”
Shocked and Dismayed ─ Really?
The existence of the superlien has hardly been a secret. The Nevada and DC court decisions simply confirmed the long-standing and generally accepted understanding of superliens and how they operate. It is hard to understand why the FHFA and some lenders have professed to be shocked and dismayed by the discovery that a condominium claim might supersede that of a first mortgage lender. Perhaps the large volume of foreclosure-related losses lenders suffered during the housing downturn explains this new-found concern.
Whatever the motivation, arguments against the superlien are becoming louder. Recent articles have described the priority lien as a “power grab” by homeowner associations and warned that widespread HOA foreclosures will result if other courts follow Nevada and the District of Columbia in upholding the priority status of condominium liens. This is patent nonsense, of course and there is no evidence to support it. The superlien hasn’t spurred a torrent of HOA foreclosures in the past two decades, and there is no reason to believe it will do so now.
But against this backdrop, it is possible and perhaps likely that lenders will oppose the legislation CAI-NE is proposing to preserve the rolling lien in Massachusetts. It is also possible that Fannie and Freddie will join them. That is by no means certain, but it is a prospect supporters of the legislation should anticipate, along with dire warnings that mortgage rates will rise or lenders may abandon the Massachusetts market entirely if the rolling lien ―and perhaps the superlien itself – remains in place.
Lawmakers may not be swayed by these arguments, but they will consider them. The threat to the superlien is real.
“It’s a mess out there,” an opponent of the super lien declared in a recent article, decrying the court decisions upholding the priority status of the condominium superlien. In fact, it is precisely because the superlien has worked so well that it is not “a mess out there.” We think Massachusetts lawmakers understand this. We certainly hope they do.By Richard Brooks