Pacific Association Collections - PAC
Banks Refusal to Foreclose on Unit
Banks are required to pay HOA assessments after they acquire ownership of a unit. This explains why some banks delay foreclosing on a unit. With a defaulting borrower, a bank loses mortgage income. If the bank forecloses, it not only loses income, it must also pay regular and special assessments to the HOA. As a result, many banks delay foreclosing or leave it to the HOA to foreclose. This leaves the delinquent owner in possession of the property and the association without assessment income. HOA boards have several options for collecting delinquent assessments.
One of the options is to foreclose on the delinquent owner, either non-judicially or judicially. One of the following will own the property:
- Third-Party Buyer. If the HOA forecloses and a third party buys the unit, the new owner starts paying the HOA assessments as each assessment is levied but is not liable for the prior owner's unpaid assessments.
- Association as Buyer. If no one buys the unit, at the foreclosure sale, the association takes ownership subject to the delinquent owner's gO-day redemption rights and subject to any first mortgage that may be of record. Once the HOA has ownership, it can either pay the mortgage or refuse to pay the mortgage and allow the lender to foreclose on the unit.
When an HOA as a junior lien holder forecloses, the senior lien holder recovers nothing from the sale proceeds. However, the senior lien remains of record and the association acquires title to the unit subject to the senior lien.
If there are no bidders at the foreclosure sale, the HOA acquires ownership of the property. At that time, the HOA can:
- Retain Ownership. This requires making payments on any outstanding senior liens, HOA assessments, insurance, as well as real estate taxes. This allows the association to put a renter in the property. Whether this is a viable option or not depends on the economics involved.
- Sell the Property. The feasibility of selling the property will depend on whether there is any equity in the property since any senior liens must be satisfied.
- Transfer to Bank. The HOA can transfer ownership to the senior lien-holder by means of a deed in lieu of foreclosure if the bank agrees. Whether the bank will accept the deed depends on the bank's policy. Some banks will not accept a deed because of possible title insurance concerns. They prefer to foreclose on the property.
- Allow Bank Foreclosure. Another option is to hold the property but not pay any money to the senior lien holder and permit them to foreclose on the property. If the unit remains vacant until the bank forecloses, the HOA continues to lose the assessment income it would normally receive from an assessment paying owner. If the HOA rents the property without making payments to the bank, it risks an action for rent skimming.
Rent Skimming. If the HOA acquires ownership of an owner's unit and does not pay the bank, the bank may still fail or refuse to take action. Some banks are delaying foreclosures because they don't want the property on their books nor do they want to pay the HOA's monthly regular and special assessments. If that happens, some HOA's rent the unit in order to supplement the HOA's income until such time as the bank forecloses or takes a deed in lieu of foreclosure. Boards should be aware that this may violate Civil Code §890, otherwise known as "rent skimming" which could result in liability for actual damages, attorneys' fees and costs. There is disagreement in the legal community whether this statute applies to HOA's under the circumstances described. Consequently boards may want to consult legal counsel before selecting this course of action.
If an HOA acquires ownership and the bank subsequently forecloses, the foreclosure will not negatively impact the HONs credit. The bank's loan is in the prior owner's name and the bank is foreclosing on the prior owner's mortgage, not the HOA's.
Pacific Association Collections