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If a Condominium or Homeowner’s Association Foreclose on a Unit, Which Mortgages Remain in Place?
At RKG Law, we assist many Associations in collecting unpaid assessments, fines, interest and late fees. There are a number of ways that an Association can collect. Usually, we start with a letter. Sometimes we have to go the whole way to foreclosure. When an Association forecloses on a Unit, it needs to understand what happens to any other liens or mortgages that are on the property.
Recent Case: Foxfield at Naaman’s Creek Homeowners’ Association v. Eventoff
A recent Superior Court case (Foxfield at Naaman’s Creek Homeowners’ Association v. Eventoff) decided how to treat a reverse mortgage on a Unit. The general rule is that when anyone forecloses on a lien, all of the liens with a “lower” priority get wiped out or “divested.” All of the liens with a “greater” priority remain in place. So, if there are three mortgages on a house, and the second mortgage forecloses, it divests the third mortgage. But the first mortgage remains in place.
The Importance of Understanding Lien Priorities
When an Association forecloses, it needs to understand the priority of the other liens on the Unit. Section 3315 of the Pennsylvania Uniform Condominium Act (and §5315 of the Pennsylvania Uniform Planned Community Act) says that an Association has a lien for assessments or fines from the moment they are due. Section 3315(b) (and 5315(b)) then goes into the priorities of the Associations’ lien as compared to others. The Association’s lien for assessments has a higher priority than any other liens except for: (i) liens recorded before the Declaration; (ii) “first mortgages” recorded before the due date of the delinquent assessment; and (iii) liens for taxes and other governmental assessments.
The Court’s Decision on Reverse Mortgages
Here, the Unit had a reverse mortgage on it. It was recorded after the Unit Owner bought the Unit. But the reverse mortgage was recorded before the past due assessment. The Association said that the reverse mortgage was not a “first mortgage” because it was not used to purchase the Unit (a “purchase money mortgage”). But the Bank that held the reverse mortgage asserted that it was a “first mortgage” because it was the highest priority mortgage that was present when the Association foreclosed.
The Court very correctly agreed with the Bank. A “first mortgage” does not mean a “purchase money mortgage” or “the very first mortgage the owner recorded on the Unit.” A “first mortgage” is the mortgage that has the highest priority on a piece of real estate. In most cases, all we have to do is read the mortgage itself. It will say “First Mortgage” or “First Priority” or something like that. Or it will say something like “Second Mortgage” or “Subordinate Mortgage” if it is not meant to be a first mortgage.
The Outcome: A $75,000 Sale and a $400,000 Mortgage
In this case, the reverse mortgage was a first mortgage. It was the highest priority mortgage on the Unit, and it was recorded before the unpaid assessments because due. That means it remained in place when the Association foreclosed. A buyer paid $75,000 at the Sheriff’s Sale to obtain the Unit. But he also inherited the $400,000 mortgage on the property.
How This Case Affects Collection Practices
This analysis might affect the steps an Association takes to collect assessments. We file lots of foreclosure complaints for Associations. The vast majority of the time, Unit Owners pay before their property goes to a Sheriff’s Sale. After all, most people do not want to lose their homes (that may cost hundreds of thousands of dollars) over a few thousand dollars in assessments. But if the Association does go the whole way to a Sheriff’s Sale, the presence of a first mortgage could determine whether someone will bid on the property or whether the Association will take it.
Practice Note: Online Bidding at Sheriff’s Sales
Finally, one more practice note. Before COVID, I would occasionally show up at a foreclosure sale on behalf of an Association. There were times when I was foreclosing on $10,000 in assessments against a $500,000 home with a $500,000 (or more) first mortgage. More than once, someone was ready with ten or twenty thousand dollars, looking to get a huge bargain on an expensive house. In those times, either the Sheriff or I would tell them that they would still be stuck with a great big first mortgage. Today, many counties use on-line bidding for Sheriff’s Sales. And without the Sheriff or me there to warn them, I am seeing more people unwittingly buying Units at foreclosure sales that are subject to mortgages.