Fannie Mae Revises Policy of 6-Month Condo Priority Lien
On January 14, 2014, Fannie Mae had announced that the maximum priority lien held by condominiums and planned communities (PUDs) may be no more than 6 months. More recently, however, it revised this policy to allow states who had enacted legislation allowing a greater priority than 6 months to be “grandfathered in” if the legislation preceded Fannie’s announcement on January 14, 2014.
That was a mouthful, wasn’t it? Let me break it down…
What is a “priority lien”?
A unique feature of condominiums and planned communities is that the homeowner’s association (HOA) can have a priority lien over any mortgages that encumber a unit. Also called “super liens”, these liens allow the HOA’s common charges to the unit owner (also commonly referred to as monthly “association dues”) to take priority over a first mortgage lien.
When a unit is foreclosed, the liens are paid in their order of priority. This means that out of the funds collected as a result of the foreclosure, the HOA would get paid before any money is disbursed to the first mortgage lender, any subsequent mortgage lenders or any other entity that has placed a lien on the home.
[This does NOT include liens placed by the IRS or the federal, state or local government. ALL of these governmental entities take priority over non-governmental entities.]
This also allows an HOA to initiate a foreclosure action if a unit owner fails to pay his/her monthly common charges. In fact, a lender runs the risk of being “foreclosed out” if the HOA begins a foreclosure and there is no equity left over to pay the lender. Often, the lender will pay the delinquent common charges and add them to the unit owner’s mortgage loan amount.
The existence of priority liens and the protection that the liens offer vary greatly from state-to-state.
Why limit the priority lien to 6 months?
Foreclosure actions can take a year or longer to complete. During this time, it is highly unlikely that the unit owner would be paying the common charges. This would mean that the HOA is owed months, if not years of uncollected common charges. Because the HOA runs on a budget based on certain expectations of income, one or more of these situations could pose a serious financial threat to the HOA.
On the other hand, Fannie Mae and the lenders are already running the risk of losing money by acquiring the home through foreclosure. If the HOA is allowed to collect years of unpaid common charges, Fannie and the lender are out even more money.
This announcement by Fannie now limits the number of months that an HOA can collect to 6 months of common charges.
Are there any exceptions?
Yes, there are exceptions and one of them is in my state of Connecticut. Fannie Mae has said that if a state has enacted legislation prior to 1/14/14 that allows an HOA to collect more than 6 months of unpaid common charges, these states will be grandfathered in and allowed to exceed the statutory 6 months.
During the last legislative session in 2013, the Connecticut General Assembly amended Conn. Gen. Stat. §47-258(b) to allow HOAs to collect up to 9 months of unpaid common charges by means of the priority lien.
Florida is the other state that had enacted legislation to this effect prior to 1/14/14. Its statute states that the HOA can collect the lesser of (a) any unpaid common charges and other common periodic assessments that occurred within the previous 12 months before the transfer of title took place or (b) 1% of the original mortgage debt. Thus, in Florida, the priority lien could allow the HOA to collect up to 12 months of unpaid common charges.
When Fannie issued this announcement, there was a question as to whether or not Fannie would allow mortgages in common interest communities in Connecticut and Florida due to these priority liens. The recent revision clarifies that Fannie will lend in these states provided that the state statutes were amended to exceed 6 months prior to Fannie’s announcement on 1/14/14.
This is great news for HOAs in Connecticut and Florida. Unpaid common charges can wreak havoc on a condominium’s financial situation which creates strain on all of the unit owners in the community. I know that an extra 3 or 6 months doesn’t amount to a huge sum of money, but it is something and when an association is struggling, every little bit can help.
Top image courtesy of stuartmiles/freedigitalphotos.net
Bottom image courtesy of masterisolatedimages/freedigitalphotos.net
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Check out our article in Common Interest magazine on page 19!