The question of statutory and consensual liens that permit HOAs to foreclose on a homeowner for debts, often less than 10% of the home value, has always been very disturbing to me. I view it as legalized extortion that constitutes a cruel and unusual punishment as a result of the excessive and draconian loss of all the homeowner’s equity. Especially since the HOA has not advanced any hard cash as do the banks and mortgage companies, where foreclosure can reasonably be accepted as a valid mechanism to protect of the lender. The HOA is more in the position of a municipality where a resident has failed to pay his taxes, but who has certain alternatives to an immediate wipe-out of his home.
I also view this foreclosure right as discriminatory against homeowners who have paid their mortgage and assessments for many, many years, and who have built up substantial equity. This high equity value makes it more feasible that an HOA foreclosure would indeed return cash to the HOA. Since the HOA lien is inferior to the mortgage, it can only hope to collect if there is cash in excess of the mortgage that gets paid off first. And, if there is substantial debt, the HOA does not dare use foreclosure in order to collect delinquent assessments, because it would have to pay off the mortgage or assume the mortgage at the sheriff’s sale. Even the astute HOA attorneys from CAI have belatedly admitted that this is how the procedure works. Unless, of course, there’s no need to pay the mortgage company.
So, it came as quite as a surprise when I became aware of an incident where an HOA was able to acquire a condo unit this past September 2009 for as little as $15,000 in the nice town of Fountain Hills, AZ. (See Maricopa Superior Court, CV2007-021000). Leaving aside the question as to why an HOA would acquire real property in its own name, I was intrigued by the most likely condition that the HOA somehow got around an outstanding mortgage. I could not believe that an HOA would assume or payoff an existing mortgage. Of course, I realized the small possibility that there was no outstanding mortgage. My research of the county clerk’s public records showed a $160,000 mortgage dating back only to 2005, and that the mortgage company loan was “extinguished” by the HOA foreclosure. The lender, for some reason, did not bid at the sheriff’s sale and the HOA took possession for the debt owed it, amounting to some $15,000. Not a bad deal! Not good for the mortgage company, however.
How could this happen, I pondered. Did the lender not care anymore? Perhaps I missed a satisfaction of loan — that the loan was paid off prior to the sheriff’s sale? No, I couldn’t find any such release, and the homeowner was in and out of trustee sales for the past 2 years, indicating that he had no funds to pay the mortgage off. However, I did find a release of a prior loan just one month prior to the recording of the second loan of $160,000. Why didn’t the HOA attorneys uncover this new mortgage that I uncovered within a few hours? Further puzzling was the fact that the attorney had filed a lis pendens (notice of an impending action affecting the unit) in 2007 that recognized two smaller $8,000 loans, both of which were paid off prior to the sale, but missed the whooping $160,000 mortgage. How could that be? My conclusion was that the mortgage company was not notified of the HOA foreclosure. Or, did I miss something?
I was quite disturbed by this finding since the HOA attorneys of record were well known CAI member attorneys from the Ekmark & Ekmark law firm. Further disturbing was the fact that these same attorneys were involved in the 2004 HOA foreclosure that had come to my attention where, once again, the HOA seemed to get around an outstanding mortgage. (See Maricopa Superior Court, CV2003-00394). In this earlier instance, a $96,000 mortgage was not addressed (the deed digits ending in “033”), but a smaller mortgage, made the same day by the same mortgage company, in the lesser amount of some $8,000, was addressed (the deed digits ending in “034”). The mortgage company had acknowledged to the court that it had assigned this particular mortgage to another company, but had not recorded it, and declared that it had no interest in the foreclosure property. But, there was no mention of the larger mortgage deed, “033”, in the “no interest” statement to the court, nor was there any “no interest” or satisfaction statement from the assigned mortgage company for the smaller mortgage. Yet, the court granted the sheriff’s sale and the HOA acquired the property for some $8,000 — there was no mortgage company bid at the sheriff’s sale. Did I miss something again?
It follows from the above that it is possible for a homeowner to escape his mortgage debt by allowing the HOA to foreclose on his home. He is then in a position to make some deal to reoccupy or re-purchase the home from the HOA for an amount owed the HOA, plus, perhaps, some little “extra”. Or, the HOA could sell it a nice profit. Not a bad deal at all!
Caution: Both court foreclosure orders state:
The Court reserves jurisdiction to hear, decide and determine any claim for post-judgment attorney’s fees and costs and any other matters that may properly come before the Court.