Handling Mortgage Foreclosures

As an attorney that does assessment collection work, I often have questions from association managers and board members regarding the consequences of mortgage foreclosures for their association. Some of the more common issues are discussed here.

The first question that often is asked is whether the association can collect past assessments from the foreclosure purchaser. Most of the times, the answer is "no". This is because of the lien subordination clauses found in almost every set of association covenants. To "subordinate" a lien is to make it inferior to another lien. Assessment liens are almost universally subordinated to mortgages in covenants. This is done so that mortgage companies will lend money to prospective buyers, knowing that if the buyer does not pay, then the mortgage company will be first in line to take the collateral (i.e., the lot in the subdivision, or the unit in the condominium). When a superior lien is foreclosed, the foreclosure wipes out inferior liens, including those for assessments. Note that some covenants subordinate assessment liens to all mortgages, while others subordinate assessment liens only to "first mortgages". If a foreclosure of another lien occurs, then whether the assessment lien is wiped out depends on two things: (1) what the subordination clause says in terms of what liens the assessment lien is inferior to, and (2) what kind of lien was foreclosed (for example, first mortgage, home equity, judgment or mechanic's lien). If a foreclosure of another lien does wipe out the assessment lien, then the foreclosure buyer does not owe anything for assessments levied prior to the foreclosure, not even pro-rated assessments for the remainder of the year during which the foreclosure occurred.

Another common question is who is responsible for the condition of the property or for assessments levied following a mortgage foreclosure. The answer is that the owner of the property is responsible. Even if the new owner is a bank, the United States Department of Veteran's Affairs, or another type of institution, they have the same obligation every other owner does to pay post-foreclosure assessments, to mow the grass, to fix the fence and in general to keep up the property. They also have the same rights as other owners to notice prior to enforcement action, whether it be forced mowing, fines or suspension of common area usage rights.

If a foreclosure occurs then there should be a deed filed in the county deed records transferring the ownership to the new owner. Sometimes buyers delay recording their deed until long after closing. Once the deed is filed, then the obligations of ownership "relate back" (in other words, extend backward in time) to the date the new owner was deeded the property. Consider the date of the change of ownership to be the date of the sale, not the date the deed was recorded.

How can you tell if a foreclosure has occurred? Most of the time the answer is in the deed to the new owner. Foreclosure deeds are often labeled "trustee's deed" or "substitute trustee's deed". Another clue is mention in the deed of Section 51.002, Texas Property Code (the Texas mortgage foreclosure statute) or an auction on the first Tuesday of a month following the expiration of at least twenty-one days.

In these difficult economic times more foreclosures are bound to occur. If they happen in your association check your documents and get a copy of the foreclosure deed. A review of both should give you an understanding of what rights and duties affect your association.

by Tom Newton, Jr., NRC Board Member