This blog post is part III in a series of posts discussing why community associations cannot afford to ignore lender foreclosure actions. The underlying theme of this series is that associations have a financial interest and lien rights in their properties and by ignoring lender foreclosure actions, associations are ignoring their own financial interests and main sources of revenue.  Part I explained that associations have the statutory power to expedite the foreclosure process when lenders are delaying and also illustrated that by implementing a consistent policy for appearing in lender foreclosure actions and expediting the legal proceedings, associations can save tens of thousands of dollars over the years.  Part II addressed the unclaimed revenue in the form of foreclosure sale proceeds that associations fail to capitalize on due to not appearing in lender foreclosure actions. This blog post will discuss the advantage associations have in determining, during the foreclosure action, whether the lender is entitled to safe harbor protection or whether the foreclosing entity owes the full amount of unpaid assessments and other charges to the association.

Most associations are familiar with Section 718.116(1)(b)1, Florida Statutes, which limits the liability of certain lenders for the prior unpaid assessments. This is known as the lender’s “safe harbor protection.” Specifically, once a property has been foreclosed and title is obtained by the first mortgagee, the safe harbor protection limits the liability for the unpaid assessments to the lesser of either one percent of the original mortgage debt or the prior 12 months unpaid assessments. Fla. Stat. § 718.116(1)(b)1.

Once lenders obtain the certificate of title, they are usually quick to request an estoppel certificate from the association while demanding that they only owe the safe harbor amount.  The associations that fail to appear in the underlying foreclosure action often capitulate to a lender’s demand of safe harbor protection and automatically accept the lower amount, which is frequently pennies on the dollar of the total outstanding balance owed. This is often done without even a thought of challenging the lender’s lower demand or investigating as to whether the safe harbor even applies.

There are strict statutory requirements that a lender must meet to be entitled to safe harbor protection. There are times when those requirements are not met and the lender is responsible for paying the total outstanding assessment balance. Those situations can be identified through appearing in the foreclosure action. However, if an association fails to appear it is very unlikely that it will identify those situations correctly. To illustrate, the safe harbor protection only applies to the first mortgagee or to its successors or assigneesId. (Emphasis added.) By appearing in the underlying foreclosure action, the association’s attorney can determine whether there are proper assignments of the mortgage and/or proper assignments of the lender’s judgment bid at the foreclosure sale. If assignments do not exist or are improperly executed, then safe harbor protection may not apply and the entity that is issued the certificate of title would be responsible for all outstanding amounts owed to the association.

Unfortunately, there are plenty of examples where associations concede that the purchaser is entitled to safe harbor protection without doing any research to confirm whether that is accurate. That mistake can cost an association thousands of dollars on any given foreclosure action. That same mistake can quickly multiply to tens of thousands of dollars when considering all foreclosure actions that go ignored by a large association.

There is another compelling reason for not ignoring lender foreclosure actions and that concerns the amounts owed by the lender. Lenders are now seeking to have the foreclosure court adjudicate the amount of unpaid assessments it will ultimately owe to the association once the certificate of title is entered and to have that amount included on its final judgment of foreclosure. Of course, lenders will argue that they owe only the safe harbor amount and if an association is unable to challenge a lender’s assertion because it failed to appear in the action, the lender will likely obtain a final judgment stating it owes only the safe harbor amount when it may not be entitled to that protection. A policy of always appearing in lender foreclosure actions to accurately determine how much is owed to the association will pay off in the long run by identifying those times when the purchaser is not entitled to safe harbor protection. Stay tuned for Part IV in this series, which will discuss when lenders fail to pay assessments after the issuance of the certificate of title.