Benjamin Franklin once said, “By failing to prepare, you prepare to fail.” Servicers can face significant obstacles in preservation of their rights vis a vis assessments by homeowners’ associations and condo associations (a “property association”). The most important action servicers can take in addressing this issue, not surprisingly, is foresight and preparation by putting procedures and guidelines in place to address if and when assessments should be paid before the property association foreclosure process begins. The first step is understanding the various state laws that govern the rights and priorities of property association assessments.

Property associations are generally entitled to a lien against the individual lots in the community for unpaid assessments. Although assessments are not typically very high, because they continue to accrue periodically and because the lien can include considerable collection costs, the property association’s lien can become substantial if not addressed for a significant period of time. Many states have enacted statutes specifically addressing the priority of a property association’s lien as it relates to the lien of a first mortgagee. Virtually all state statutes on this topic provide that some portion, but not all, of a property association’s lien will have priority over a first mortgagee. The specific application of these statutes, however, has been a topic of current debate around the country, and the unsettled status of the law has led servicers to question the appropriate course of action in the face of delinquent assessment liens on their collateral.

Although a thorough plan should address state-specific issues in greater detail, there are two preliminary questions that must be answered before a servicer can even begin to assess the appropriate strategy when assessments become delinquent. The first: whether the state where the collateral is located allows non-judicial foreclosure, or whether foreclosures are limited to judicial actions. The second: whether the state is a super-priority or a safe harbor state. Some states employ what is referred to as a “super-priority” system. Under this super-priority system, the property association has at least some limited rights to foreclose on a first mortgagee, even where the lien of the property association may be minuscule in comparison to the lien of the first mortgagee. Super-priority states present the most danger to servicers and lenders, as properly conducted property association foreclosure sales in some super-priority states can lead to complete extinguishment of the first lien interest. In a safe harbor state, property associations may not foreclose on a first lien, but a certain limited portion of the property association’s lien will, in essence, survive a foreclosure by the first mortgagee. Each system presents a different set of considerations for servicers, which must be further developed based on the specific contours of each state’s statutes.