Homeowner’s Association Lien Foreclosure, by Jonathan Olcott, Arizona attorney, By Jonathan Olcott, Olcott & Shore, PLLC. www.olcottlaw.com – as published in the Arizona Journal of Real Estate & Business
Under A.R.S. Section 33-1256 (condos) and ARS Section 33-1807 (planned communities, an association has a lien for unpaid assessments, fines, attorney fees and interest. The lien is inferior to all first mortgages and certain government liens. It is superior to mechanics liens and second mortgages. It is also not subject to the homestead exemption. On its face, it is a powerful collection tool. It is largely a myth that associations take many homes from homeowners. Because of the homeowners’ financial realities, few homeowners lose their homes to associations.
My office filed approximately 50 lien foreclosure cases in 2002. In only two cases did the association obtain the title to the unit. The financial realities discussed below explain the low percentage of completed HOA foreclosures.
Example A. Jones lives in a planned community with a retention basin and a children’s play area. Because of the minimal amenities, the assessment is only $35.00 per month. She purchased the home for $140,000.00, with $20,000.00 down, and a $120,000.00 mortgage. It has amortized to a $110,000.00 principle balance, and appreciated to $150,000.00. Her monthly payment is $1100.00. She loses her job, and is not able to pay her bills.
Example B. Smith lives in a condominium with a clubhouse, pool and sport court. His assessment is $120.00 per month. He purchased the unit for $80,000.00, with a $10,000.00 down payment, and a mortgage for $70,000.00. It has amortized to a $75,000.00 principle balance, and appreciated to $85,000.00. His monthly mortgage payment is $600.00. He loses his job, and is not able to pay his bills.
In both examples, Jones and Smith have equity in the units. They both have homestead exemptions that cover the entire amount of the equity. In prioritizing payment of their bills, both if rational would remain current on obligations that preserve the equity, and would cut back on the credit card payments, and payments on other unsecured obligations.
If their financial positions worsen, they might be forced to skip the mortgage or association payment. If finances continue to deteriorate to where Smith and Jones will lose their houses, consider whether it is more rational to keep the association payment current, or the mortgage payment current.
If Jones stops paying the mortgage, Jones will keep $1100.00 in her pocket every month. In contrast, if Jones stops paying her association assessments, she keeps only $35.00 per month in her pocket. If Smith stops paying his mortgage, he will keep $600.00 per month in his pocket every month. If Smith stops paying the association assessments, he keeps only $120.00 in his pocket every month.
If both Smith and Jones stop paying both their mortgages and their association assessments, they will lose the units to the mortgage holders. That is so, because the trustee sale process is considerably more rapid than an association judicial foreclosure lawsuit. The judicial foreclosures take several months, with a six-month right of redemption. In many association foreclosure cases, the first mortgage holder begins the trustee sale process after the association has started the judicial foreclosure process, yet the first mortgage holder completes the trustee sale process before the HOA judicial foreclosure process is completed.
It follows that it is irrational for a homeowner to lose a home to an association. Our firm has experienced several foreclosure cases against homeowners who suffered from mental illnesses. In those cases, we work aggressively with adult protective services, the public fiduciary or the children of the homeowner. We do not foreclose on homeowners who suffer from mental problems. Neither do we foreclose on homeowners who genuinely work with us to pay the debt over time. In reality, there are quite few completed association lien foreclosure cases.
The few lien foreclosure cases that are completed can make headlines. As established below, there has been a failure in the few instances where a homeowner is current on the first mortgage, yet loses the home to an HOA. In the most recent case, an association began foreclosure proceedings against a woman. She appeared to have a genuine hardship (cancer). The attorney who handled the case was not an HOA industry attorney. He represented landlords. He treated the case like an eviction. Most HOA industry attorneys would have worked with the hardship case and resolved it.
In light of the recent headlines, the legislature is addressing these issues. The most common target is the lien. One industry faction proposes to drastically reduce the power of the HOA lien. It is certain that lien emasculation legislation would have far-reaching financial effects on the entire residential real estate market. The breadth and severity of the financial effects are not certain. It is troubling that the legislature would even consider lien emasculation legislation without studying the likely financial effects on the HOA industry.
The undersigned along with NICM has drafted two bills that are currently under consideration in both houses of the legislature. One bill is short, and provides disincentives for HOAs to refuse to participate in inexpensive binding arbitration for disputes with homeowners. The other is a comprehensive regulatory bill that licenses management companies. The comprehensive bill also contains a dispute resolution process similar to the Registrar of Contractors process.
The legislature is receptive to alternate dispute resolution for HOA conflicts. The HOA industry will be better served with inexpensive dispute resolution, than with legislation that emasculates the HOA lien.