This blog post is part V in a series of posts discussing why community associations cannot afford to ignore lender foreclosure actions. Part I explained that associations have the statutory power to expedite the foreclosure process when lenders are delaying and 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 when not appearing in lender foreclosure actions. Part III demonstrated that appearing in lender foreclosure actions allows associations to better determine if the foreclosing entity is entitled to Safe Harbor protection or not, and Part IV discussed ensuring the lender immediately begins paying assessments after taking title, including when it is worth pursuing the prior homeowner for the remaining unpaid assessment balance. This fifth and final post in the series explains when an association should initiate its own foreclosure action depending upon the status of the lender’s action.
When lenders initiate foreclosure actions, they name and serve the governing associations as defendants due to their financial interests and lien rights. Once served, associations often incorrectly assume the bank has the situation under control and the resulting foreclosure will soon be a done deal. Because of that assumption, many associations fail to appear in these actions, and that decision could be a costly one if a foreclosure judgment is never entered, causing the property to remain vacant. What follows are various commonly-occurring scenarios in lender foreclosure actions that can result in the loss of thousands of dollars in missed revenue for associations that fail to appear and are unware of what is happening.
- The lender and homeowner reach a modification or settlement: Many foreclosure actions get dismissed due to the owner and lender reaching a settlement or modification of the underlying mortgage. The dismissal could be the result of the owner’s sudden ability to remove the mortgage from default status, meaning the lender gets paid. Yet if the association fails to appear in the action, it will be unaware of this circumstance, resulting in the lender getting paid while the obligation owed to the association goes ignored. If the association does not appear to assert its own rights no one will do it for it. The usual outcome from this scenario is the foreclosure is dismissed, the lender is paid, the owner remains in the property and the association’s budget is still suffering.
- The homeowner files for bankruptcy: Lenders often have an excess of foreclosure actions occurring simultaneously. When one owner files for bankruptcy, causing a stay of the foreclosure action, lenders often place that action on the “back burner,” choosing to shift focus to its active foreclosures. This sometimes leads to those foreclosure actions sitting dormant for years. By appearing in the lender’s foreclosure action and being apprised of this situation, an association is in the position to quickly decide what course of action is in its best interest. Instead of letting the lender’s action and the property sit idle, the association’s best course of action may be to move for relief from the court in the owner’s bankruptcy action in order to initiate its own foreclosure action against the property.
- The lender lacks the documents necessary to foreclose: During the lender foreclosure action, it may surface that the bank has no standing to continue its action due to a faulty assignment of mortgage or being unable to produce the original note and mortgage documents. This will lead to the action being dismissed or to a lengthy period of inactivity while the bank searches for documents. Rather than continue waiting on the lender and losing ongoing assessment revenue, an association could initiate its own foreclosure action in this situation. But an association that fails to appear will be unaware the bank is unable to move forward, causing the action to sit dormant for months or years.
- The owner has a valid defense against the lender: There are times when owners have valid defenses against lenders, which can lead to a prolonged litigation battle lasting several years or the lender’s action being dismissed. For example, the lender may not have applied the owner’s payments correctly or it failed to properly follow the necessary conditions contained within the loan documents prior to filing suit. By appearing in the lender foreclosure action, an association would learn of this circumstance immediately. The owner’s defenses against the lender would not apply to the association, which may present a great opportunity for the association to quickly push forward its own foreclosure action.
Even when the above-mentioned scenarios occur, some may be skeptical of an association bringing its own foreclosure action when the lender is trying to foreclose. Lender foreclosure actions can often take two years to conclude even when there are no difficult challenges. When there are challenges, such as those listed above, that will only prolong the action. By immediately identifying those situations where a prolonged lender foreclosure action is likely, an association can take swift action to push forward its own foreclosure action, gain title to the property and rent it out while it waits on the lender to resolve its issues. This rental income will often more than satisfy the delinquent assessments. With a competent attorney, an association’s foreclosure action could be completed within six months or less. These assertive actions are what allows associations to recover missed revenue, maximize their budgets and keep their future monthly assessments low for all responsible property owners within the community.