Q: At what point after a mortgage foreclosure does a bank become responsible for the payment of delinquent HOA dues? We have a home in our development where the bank has foreclosed, the previous owners have moved out, and there is a “for sale” sign on the property. The previous owners were billed in January for the 2015 dues, but the dues have not been paid. My understanding is that the bank is responsible for payment of the dues from the date it takes possession of the house.
A: During the height of the recent recession, the mortgage-lending industry experienced a staggering number of mortgage defaults and foreclosures. Leaving aside whether those lenders were partly at fault for the crisis, let’s focus on if and when a mortgage lender is responsible for payment of HOA assessments.
In general, the personal liability for the payment of HOA assessments will not pass from one owner to the next. This is true for arm’s length sales between a buyer and seller, as well as “forced sales,” such as foreclosures. But as we wrote about in this column a few weeks ago, there is an important difference between the debt that is owed and the HOA’s lien rights.
In the typical arm’s length sale from a seller to a buyer where there are unpaid HOA assessments, the new owner is not personally liable for the prior owner’s unpaid assessments. In other words, the new owner can’t be sued personally for the debt. However, the home he purchased remains subject to a lien by the HOA for the full amount of the unpaid assessments, whether they accrued before or after the sale.
When a mortgage lender forecloses, the result is a little different. Whoever buys at the foreclosure sale of a first mortgage gets title to the property free and clear of any unsatisfied debt or liens against the property. This includes unpaid HOA assessments.
Though they have gotten much better as the economy and real estate market have recovered, mortgage lenders were often taking many months or even years to foreclose on homes in default, even homes that the owners had abandoned. This left the HOA with a loss of assessment revenue (in addition to the eyesore of abandoned homes), until such time as the mortgage lender chose to file and complete its foreclosure.
We observed many cases where the lender initiated its foreclosure but then repeatedly postponed it, leaving HOAs with substantial assessment deficits in their budgets. Some people mistakenly believe that a mortgage lender is responsible for payment of the HOA assessments if the owner doesn’t pay, but that’s not the case. Nor is the lender responsible for paying past-due assessments after it completes the foreclosure.
One tactic we saw frequently was when a lender would do everything necessary to complete its foreclosure except for the very final step—the recording of the deed transferring title back to the lender. The lender would then list the property for sale even though it didn’t technically own the home.
The deed to the lender would not be recorded until immediately before the closing on the sale of the home to a new owner. By not recording the deed to the lender until the last possible minute, a lender could avoid having to pay HOA assessments and the HOA had no avenue to recover those funds. The debt simply had to be written off.
In 2013, a new law became effective in North Carolina that made it more difficult for mortgage lenders to escape payment of HOA assessments on homes on which they had foreclosed. The law basically says that whoever buys property at a mortgage foreclosure sale becomes liable for payment of HOA assessments beginning 10 days after the sale, whether or not a foreclosure deed is actually recorded.
So in your case, a brief title search would reveal whether a foreclosure sale was held, and if so, the identity of the high bidder. The high bidder at the foreclosure sale, whether the foreclosing lender or a new owner, would be responsible for payment of HOA dues beginning 10 days after the date of the foreclosure sale.