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January 16, 2008
FORECLOSURE IS NOT THE END OF THE ROAD FOR MANY.
These are difficult times. Homeowners who get into the purchase of property on creative loans or who have lost their means and are at risk of losing their homes have to make decisions about things that involve their financial future. Knowledge is the key to making the best decisions. The options may not all be desirable, but there may be some less desirable than others.
One of these pieces of information that is important to understand is what happens if you own a home in a California HOA and the bank or the association forecloses, what are the odds that either (the lender or the HOA) will pursue you for the losses they experience when the mortgage or assessments are not paid?
This specific question was asked recently:
"We recently had our condo foreclosed by the bank. At that time it had a lien on the property by the homeowners association. Now they are suing us for the assessment fees the lien was for, even though the property has been sold. Are we still liable and can they win by law?"
I would not want anyone reading this blog to consider the contents as legal advice because there are many factors that could affect the lender's, the HOA's, or the debtor's rights in a debt owed situation. The information is just that, information and ideas as to what can be done, or what might happen in any given situation. If you own property in a common interest development in California, and foreclosure is a possibility, either by the bank or the HOA, letting your home go back to the lender or be sold at an HOA sale may not be the least painful option for you. If you have a chance a short sale at a loss may be "less problematic." And there is a difference whether the foreclosure sale is conducted by the lender or the HOA. If there is a chance of a payment plan or workout with both entities, then even if it is a stretch or you have to give up something else, it will probably be much better than suffering a foreclosure. Maybe bankruptcy is the best option. Why would you want to do what you can to avoid a foreclosure? Aside from possible tax ramifications for debt that is "forgiven", there are other considerations. And why is it fair that HOAs should have this extra option of pursuing the debt personally against an owner when an HOA property is foreclosed?
While most lenders in California, at least as to first purchase money mortgages (not talking about refinancing), do not have the right (because of the loan provisions) to seek losses from homeowners whose homes are foreclosed, HOAs are not so limited. An HOA hasthe right to seek unpaid assessments and all of the reasonable costs that accrue with regard to the collection matter from the individuals who owned the property during the period of unpaid assessments when it was foreclosed by the lender. In fact, an HOA is entitled to pursue more than one avenue of recovery (such as foreclosure and a personal debt recovery action) until the debt is paid. If a home is foreclosed by the HOA, and sold at a sale arranged by the HOA, then the debt is would be considered satisfied, but if the bank forecloses and there is not enough money to pay the outstanding HOA debt, the HOA may take measures to recover the losses from the owner who suffered the foreclosure.
People may ask: why is this so? In simple terms, loans are governed by a deed of trust (contractual agreement) and laws that govern lenders and protect homebuyers.
Consider these differences:
If a lender does their due diligence with regard to examining financial capability, and requires a certain down payment, the risk on the loan they make can be minimized, even if they end up having to take the property back. An HOA does not have the luxury of examining the financial capability of a buyer or of asking for some collateral. What the HOA does have is a set of CC&Rs that require owners to pay assessments, and provide remedies if the assessments are not paid, one of which is often foreclosure.
If a loan goes bad, the lender is the only party that is hurt by that (except of course in the case where investors are counting on good lending decisions). When a homeowner does not pay their HOa assessments, everyone else who owns property in the association pays the price for that.
The lender has no obligation to maintain the property it takes back in foreclosure. If it carries a big inventory, this tends to be problematic for the neighbors. In an HOA, the Board must continue to maintain all properties to a certain standard, or take action to attempt to get the owner to do that. That includes the property of the delinquent owner. If that property is allowed to bring the values down of surrounding property, that hurts the other owners. They (through the Board) can be faced with the difficult decision of whether to let the foreclosed property be, or collect extra money to fix it up and then try to recover that money from the Owner (which may be the person that owned before the foreclosure, and/or the lender that took the property back).
It's hard to feel bad for the lenders - they are the ones with the most choices. It's not hard to feel bad for the owners who got in over their heads for whatever reason - which could include a complete lack of understanding of an ARM loan, or for the HOAs (and other homeowners in them) that suffer when the individual loses their home or "walks away".
Posted by Beth Grimm at January 16, 2008 8:33 PM