Struggling HOAs Use "Reverse Foreclosure" To Mitigate Problems Due To Foot-Dragging Lenders Reluctant To Foreclose On Underwater Condos

Lexology reports on a court ruling that came out earlier this year in Florida on the use of so-called "reverse foreclosures" by condominium and homeowners' associations to stick foot-dragging, foreclosing lending institutions with the title to unwanted underwater units. By doing so, the HOAs put those lenders on the hook for the periodic maintenance payments due to the HOAs that they (the lenders) were looking to avoid paying by failing to vigorously prosecute their foreclosure actions in court:

• In a recent ground-breaking state court decision in Florida, a state particularly hard hit by residential mortgage foreclosures, one court has upheld the HOA’s right to recoup these past due assessments and costs from the lender, despite the fact that the lender has yet to take back title to the delinquent property. In HSBC Bank USA, et al. vs. Keys Gate Community Association, Inc., A Florida Non Profit Corporation, et al., the homeowners’ association successfully introduced a new procedure, dubbed a “reverse foreclosure.”

• In Keys Gate Community Association, the homeowners’ association filed and foreclosed its own claim of lien on the delinquent property and acquired title to the property through its own foreclosure sale in April 2007. However, the home-owners’ association could not sell the property because of the lender’s senior priority mortgage. In June 2007, the lender filed its foreclosure against the delinquent property. Yet, two and a half years later, the lender had not completed the foreclosure process. As a last resort to move the case forward, the homeowners’ association set for hearing a summary judgment motion against itself, and asked the court to issue partial summary judgment in favor of the lender and to immediately grant the lender’s request to take title to the unit as stated in the lender’s foreclosure complaint. As part of this procedure, the association waived its rights to the property, and as the current unit owner, waived its rights to a public sale.

• The court granted the homeowners’ association’s motion, and directed the Clerk of Court to issue a certificate of title immediately transferring ownership of the property to the lender, thus triggering the lender’s requirement to pay its share of past due assessments, legal fees, court costs and all assessments going forward.

• It is important to point out that the reverse foreclosure procedure can only be filed after a home-owner is out of the picture and the home is legally the property of the homeowner’s association.

• The use of this new legal strategy saved the Keys Gate Community Association a minimum of eight months or more of bad debt write-offs. Furthermore, given the current logjam of foreclosure cases pending in many state courts. clerks of court have enthusiastically endorsed this new procedure as an effective means of reducing their backlogs. Until the financial crisis subsides and the housing market regains steam, undoubtedly many homeowners’ associations will increasingly use this procedure in their quest to force lenders to take title to financially upside down properties much faster than the lender may have anticipated.

Source: Some lenders may soon be forced to follow through with residential foreclosures. (subscription required; for non-subscribers, TRY HERE - then click link for the story).

For another post on attacking foot-dragging lenders reluctant to foreclose on underwater condos and homes in a homeowners' association, where they are challenged to either take title to the financially upside down unit or release their mortgage, see Foot-Dragging Mortgage Lender Yields To HOA Demand; Abandons Foreclosure On Unwanted Collateral, Releases Security Interest In Condo Unit.