Posted on February 20, 2012
No, this debate is over whether community associations should have the right to use foreclosure as the ultimate delinquent assessment collection tool. Foreclosure is the enforcement device that allows a creditor, in this case a homeowners association, to force the sale of an owner’s condominium or single family house to collect a delinquent association assessment.
The practical arguments among the various participants in this debate go back and forth something like this: Assessments are a community association’s cash flow lifeline-if owners fail to pay, the association cannot keep its commitments. Foreclosure for failure to pay delinquent assessments is the only enforcement mechanism that works.
The legal arguments include: There is really no contract between owners and their association that gives the board of directors the right to foreclose because the owners weren’t parties when the association was created. State legislatures have not clearly provided for an association’s right to foreclose.
We should not allow owners who do not pay their assessments to live on the backs of those owners who do. Foreclosing on someone’s home is immoral and community associations should have no right to do it. People are losing their homes for a variety of reasons, but there has been an outcry over whether community associations should be able to enforce delinquent assessments through foreclosure.
Community associations are creatures of statute. Community associations do many of the same things that local public entities do-maintain streets and parks and community swimming pools.
Clearly homeowner associations are not cities, counties, or community service districts and municipalities have no interest in using their taxing powers to provide cash flow to homeowners associations. Any argument that contends that community associations could survive without a mechanism to enforce owner financial support is simply not credible.
“Foreclosure” is shorthand for the legal process used to enforce a creditor’s lien rights. By either method the obligee of a debt, in this case the homeowners association, is given a contractual or statutory right to secure payment of the debt by recording a lien against the real property of the obligor, in this case the individual owner of a lot or condominium in a community association. The lien will be senior to the rights of most other secured creditors whose rights accrue after the lien is recorded and, in some ways, the lien right is senior to that of the owner (since the lien must, if equity exists, be paid before the property can be sold).
Associations are thus given the status of “secured creditor” that is, the obligation of the owner to the community association is secured with a lien on the owner’s interest in the real estate. Keep in mind, however, that any mortgage lender would likely have rights that are superior to those of the community association, and if the owner were delinquent with assessments, they could likely be delinquent in mortgage payments and/or property tax payments, either of which would take precedence over the association’s lien in most states. If the association pursued an actual foreclosure in that instance unless the equity in the property was sufficient to cover all of the outstanding obligations, the association would end up with nothing.
Why should the association be allowed to “foreclose” the owner’s interest to enforce its claim for delinquent assessments and perhaps deprive the owner of his or her home? What if this wasn’t a community association but rather a rental property? What happens if a tenant fails to pay the rent? If an owner fails to pay the property tax, the local municipality or the county will “evict” the owner eventually-this time through the foreclosure process known as a “tax sale.” And property taxes often pay for some of the same services provided by a community association-street and landscaping maintenance, and recreation facilities. Should the association not have a similar right when it is relying on owner assessments to pay the roofer? The mechanic’s lien doesn’t discriminate between those owners who have paid their association assessments and those who have not.
Also obscuring the debate are the accusations of self-interest against the community of professionals that services community associations-particularly those collection agencies that utilize non-judicial foreclosure. Their job is to induce the owner to pay the debt. How does a board of directors discharge its obligations to its members if it cannot protect the association’s income stream? The association would have lien on every property, but would only collect assessments from equity when a property was sold. The “assessments” would be more like property taxes.
The Great Foreclosure Debate – Should Community Associations Use Alternatives to Foreclosure?
