Lien Priorities: The Defects of Limiting the 'Super Priority' for Common Interest Communities
29 Pages Posted: 5 May 2011 Last revised: 8 Sep 2011
Date Written: May 3, 2011
The current foreclosure crisis sweeping the country has had a particularly detrimental effect on common interest communities. These entities – which include condominiums, co-ops, and homeowner associations – require a consistent flow of monthly maintenance payments from unit owners in order to adequately maintain common areas and meet community fiscal responsibilities. When individual unit owners suffer financial setbacks and are strapped for funds, unit owners simultaneously default on payments to mortgage lenders as well as to the common interest community.
To resolve the question of lien priorities in foreclosure proceedings, the majority of states have a passed a “super-priority” statute in which the common interest community recovers six months back maintenance fees and the mortgage lenders retains priority on the remainder of the unit’s value. While this statutory framework worked well during periods of rapid real estate turnover, the real estate crisis has derailed the process to the detriment of the common interest community. Delinquent maintenance payments and foreclosure actions have skyrocketed, slowing the pace at which lenders can foreclosure. Units sit uninhabited for years on end without maintenance paying owners. Moreover, once a lender fails to foreclose within six months, the maxed-out community priority gives the lender no incentive to expedite proceedings. Lacking the tools to foreclose or collect the maintenance payments on its own, and hemmed in by a six-month super-priority, associations across the country are at the breaking point.
This Note proposes to eliminate the six-month cap in an attempt to rebalance the equities and skew the economic incentives in a manner that motivates lenders to foreclose rapidly. Because lenders can better protect against delinquent unit owners, and can better bear the burden of a junior lien, the proposal is fair and sensible. More importantly, however, the proposal is a substantial step in the direction of stabilizing property values and ensuring the financial health of associations, which is critical to moving beyond the current housing crisis and its related economic ripple effects.
Keywords: common interest communities, condominiums, liens, lien priority, super priority, foreclosure
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