Mortgaged property in shared interest communities always pose a big threat to lenders. As per the rules, property owners need to pay periodically to their associations towards community maintenance. If existing owners fail to clear the dues, then under state super lien laws, lenders become liable for the unpaid dues. Over the years, distressed shared communities have made complete use of the law to shift the responsibility for unpaid due to lenders. Given that delinquent mortgages and unpaid dues go hand-in-hand, lenders are beginning to have more than their share of trouble.
Why Super Lien Laws are Complicated
Super lien laws are complex because they do not provide answers to a host of issues. These questions pertain to tenability of fees, interest, penalties in an assessment lien; lien priority issues in case of recurring delinquencies; the lender’s interest in foreclosing super lien; and legality of amending an declaration to make it applicable retrospectively. Similarly, super liens fail to address the pressing question of whether attorney’s fees can be included in the super lien. Answers to these questions have not been settled by statute and so have led to growing ambiguity. Further, the lien priority amount varies from state-to-state and different states interpret these issues in different ways, thereby adding to the complexity of the issue.
The Fallout of the Law
The impact of super lien law on the mortgage industry has been severe. Lenders are now wary of extending credit options to homebuyers in shared-communities. Given that a sizeable section of the American population, particularly senior citizens, believe in investing only in shared communities, this trend may deal a body blow to the real estate industry. The other possibility is that it might increase loan prices for people willing to invest in those communities. If either of these trends grow into a norm, it may well slow down, if not stop communities from coming up.
Looking for a Solution
Super liens are here to stay and mortgage lenders will continue to face greater liability for clearing unpaid dues. A change in approach can possibly help the industry mitigate its losses. A possible solution lies in fixing claims above a fixed dollar amount or above a stipulated number of months. Another possible solution can be escrowing the super lien amount at loan closing. Likewise, borrowers paying dues in escrow accounts held by lenders can help both associations and lenders find an amicable solution to the problem.
The time is ripe for the government to take proactive steps to minimize the effect of super lien priority. Until then, home associations and lenders will have to battle their cause out in courts.