FHA Condo Approval Specialist: Fannie Mae Revises Policy of 6-Month Condo Priority Lien

Fannie Mae Revises Policy of 6-Month Condo Priority Lien

Fannie Mae Revises Policy of 6-Month Condo Priority Lien

fannie mae update 6 month priority lienOn 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.

fannie mae 6 month priority lienAre 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

The Condominium Project Approval Team at ReadySetLoan is dedicated to helping condominium projects across the nation to obtain their approvals with FHA and the VA or become recertified with FHA.  We have assisted nearly 200 condominiums and we can help your association.

 

ReadySetLoan is an active member of the Connecticut and New England chapters of the Community Associations Institute (CAI) and is a frequent contributor to Common Interest Magazine as an expert in FHA/VA condominium project approvals.

 

Please contact us with any questions regarding FHA or VA condominium project approvals.  You can email me at askeric@readysetloan.com or call me at 404-433-4565. I will be happy to answer any of your questions.

 


FHA/VA Condo Approval Specialist

404-433-4565 Cell Phone

860-644-3772 Fax Phone

eric.boucher@readysetloan.com
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Comment balloon 30 commentsReadySetLoan Condo Approval Team • March 03 2014 04:53AM

Comments

Thanks for sharing this useful information I know the folks can and will use it to their advantage, all the best for a great week. 

Posted by Charles Stallions, 800-309-3414 - Pensacola, Pace or Gulf Breeze, Fl. (Charles Stallions Real Estate Services ) over 4 years ago

Well this is standard op in IL that's for sure. Nothing happens or gets paid before that association. It also includes attorney's fees to collect the debt also BTW. This is great for helping the assn. get back at least something.

 

Posted by Lyn Sims, Schaumburg IL Real Estate (RE/MAX Suburban) over 4 years ago

Eric, Lenders can't be happy with this.  They have the biggest risk and the HOA with far less risk gets paid first, something wrong with that picture.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) over 4 years ago

Just so I understand this. Does this affect Fannie Mae-owned homes only since Fannie Mae participates in secondary market and not in direct lending?

Posted by Maria Gilda Racelis, Home Ownership is w/in Reach. We Make it Happen! (Home Buyers Realty, LLC-Manchester, Bolton. Vernon,Ellington) over 4 years ago

Our L.A. HOAs will not be happy about it( only 6 months?!)

Thanks for heads up. I didn't know about this new lien limit.

Posted by Inna Ivchenko, Realtor® • Green • GRI • HAFA • PSC Calabasas CA (Barcode Properties) over 4 years ago

Eric - excellent post. The downside in Florida, that this works whether they don't even have a recorded lien. It is by Statutes, wo whether it is recorded or not has no bearing.

However, for people bidding at the auction, it means everything, because the buyers of properties at foreclosure auctions are then liable to the full amount of delinquent COA fees, and they often do not even know that there is delinquency as it very often there is no recorded lien.

We sometimes figure this (as associations often refuse to give this information) and then let the Lender have it, because they would pay 1% of the original mortgage balance (have never seen a case where 12 months owrth of COA was less). Better buy it as REO

Posted by Jon Zolsky, Daytona Beach, FL, Buy Daytona condos for heavenly good prices (Daytona Condo Realty, 386-405-4408) over 4 years ago

Eric: Excellent information. I assume this does not include other liens HOA levies on an owner? They do this in Hawaii at the drop of a hat. 

Posted by Hella M. Rothwell, Broker/Realtor®, Rothwell Realty Inc. CA#01968433 Carmel-by-the-Sea over 4 years ago

It is becoming more and more difficult for folks to use an FHA loan to purchase a condo.  In So. NH there are very few associations that are renewing their FHA approvals so buyers should start today to save for a 5% downpayment.

Posted by Joan Whitebook, Consumer Focused Real Estate Services (BHG The Masiello Group) over 4 years ago

Eric, great post and valuable information. Wasn't aware of priority lien for condos - however had a bit of idea about it.

Posted by Praful Thakkar, Andover, MA: Andover Luxury Homes For Sale (LAER Realty Partners) over 4 years ago

Thanks for this update ! It may help the HOA's/Condo Assoc. with their yrly planning.

Posted by Michael J. Perry, Lancaster, PA Relo Specialist (KW Elite ) over 4 years ago

Thank you for the update. Very useful information.

Posted by Anna Hatridge, Missouri Realtor with Goodson Realty (Goodson Realty) over 4 years ago

Thank you Charles.  I am glad that you found the content valuable.

Would you believe, Lyn, that not every state has an HOA priority lien?

George, I only know of two states that were grandfathered in: CT and FL.  NV had enacted similar legislation but it contained an exception for Fannie Mae loans so this revision left no mark there.

Maria, Fannie Mae is on the secondary market and most conventional loans are sold to Fannie Mae (it has a larger market share than Freddie Mac).  When a lender underwrites a conventional loan, it uses Fannie's guidelines if it intends to sell the loan to Fannie.  So to answer your question, this impacts any conventional loan in a common interest community that is to be sold to Fannie Mae on the secondary market.

No doubt, Inna.  I am in many HOA groups on LinkedIn and there have been many angry posts about this.  CAI in DC is lobbying to make a change to this 6 month limit.

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) over 4 years ago

Thank you for the kudos, Jon.  You are one of the foremost leading experts on condominiums here and your appreciation of the article is my honor.  What you describe seems to be a craps shoot at auctions and I am not surprised investors give way to the lenders to mop up the mess.

Thank you Hella.  Fannie's language states "6 months of regular common expense assessments" which would imply other HOA-imposed assessments would not be included.  I haven't read anything that said Fannie would allow other assessments.

That's a shame, Joan.  There are still plenty of FHA loans being done in CT.

Priority liens are an interesting animal, Praful.  I know property managers who use the threat of foreclosure to collect delinquent HOA fees from first mortgage lenders.

Michael, this will definitely help in budget planning.

Thank you for reading, Anna.

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) over 4 years ago

Eric, very good update. thanks

Posted by Ron Aguilar, Mortgage & Real Estate Advisor since 1995 (Continental Mortgage) over 4 years ago

THANKS for your informative post! 

Posted by Dora Griffin, NMLS 6380 (D A Griffin Financial.LLC) over 4 years ago

Thank you for keeping us updated and breaking it down they way you did.  I'm currently on a Condo HOA Board and have a meeting next week.  I will sound very smart thanks to you Eric.

Posted by Christopher Campa, Northern VA Realtor (LONG & FOSTER REAL ESTATE) over 4 years ago
Thank you for the information. I haven't heard of this here in Washington State but will ask one of the loan company's about. Thanks again
Posted by Zoe Horlick over 4 years ago

This will force HOA's to act quick in order to avoid loosing money on the Foreclosure.  I think this is a mistake.

Posted by Gene Riemenschneider, Turning Houses into Homes (Home Point Real Estate) over 4 years ago

Great info, hopefully this will help out a lot of communities here in Florida. I see quite a bit of home vacant in the foreclosure process for months to years.

Posted by Eva Aliaga, Boca Raton & Delray Beach: SE Florida Real Estate (Keller Williams Realty Boca Raton IdealFloridaLiving.com) over 4 years ago

I'm puzzled why Gene, #18 thinks this opportunity is a mistake? Why wouldn't anyone take an opportunity to protect their assets?

Posted by Kimo Jarrett, Pro Lifestyle Solutions (WikiWiki Realty) over 4 years ago

Thanks for the update.  Sounds like a good idea, "Super Lien - Priority Lien.  Prior to this update they probably didn't recoup any money on foreclosed properties.  It was not only a loss felt by the HOA, but in some cases, it was felt by the other homeowners too.

Posted by Sharon Sanchez, Your Number "1" Source For Real Estate. (Ace Home Realty) over 4 years ago

Thank you very much Ron.

Dora, it's my pleasure!

Glad to be of service, Christopher.  Please contact me if you have any questions!

Zoe, I don't believe that Washington State is one of the excepted states and Fannie will limit the priority lien to 6 months.

Gene, it will be quite a loss for HOA's who are owed years of delinquent common charges and can only recoup 6 months of them

I hope it does as well, Eva

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) over 4 years ago

Hi Kimo, I think that Gene's concern is with the HOA losing thousands by only being able to recoup 6 months of delinquent fees.  Of course the lender and Fannie Mae wish to protect their investments, but so do the HOAs.

Hi Sharon, the problem was that the HOA was able to collect more than 6 months which eats into the money the lenders/Fannie Mae would see as a result of the foreclosure.

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) over 4 years ago

Who spend all that time thinking up these rules with endless conditions and exceptions?

Posted by Jeff Jensen (The Federal Savings Bank/Lending in 50 states) over 4 years ago

Hi Jeff, apparently people with more time on their hands than you or me.

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) over 4 years ago

Thanks for the update.  Nobody wins in a foreclosure so sad.

Posted by Michele Webler -Farm and Ranch Specialist, Serving North Idaho and E. Wa (Idaho Real Homes LLC) over 4 years ago

Thanks for sharing the update I always think that there is too much thought put into these things. It is a lot simplier to solve than what the government can do. 

Posted by Charles Stallions, 800-309-3414 - Pensacola, Pace or Gulf Breeze, Fl. (Charles Stallions Real Estate Services ) over 4 years ago

How can you find out if there is a 6 month priority lien? Do you need to contact title? A lawyer? I'm not finding anything on basic court records.

This is exactly what I'm running into right now when buying foreclosure homes.

Posted by Sarah over 3 years ago

Sarah - only a handful of states have this protection for homeowners associations.  What state are you in?  You can email me directly with questions if you like.

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) over 3 years ago

Anything that eases restrictions and increases homeownership without raising the risk of future foreclosures sounds good to me.

Posted by Dave Halpern, Louisville Short Sale Expert (Keller Williams Realty Louisville East (502) 664-7827) about 1 year ago

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