Northeastern States See Recent Changes in Lien Status Priority and Legislation
Regulators, lenders and servicers must keep a keen eye on developments.
By Ralph Stebenne
Recent legislative enactments and judicial rulings have lenders and their servicers paying close attention to unpaid homeowner and condominium assessments.
New Jersey and New York have introduced newly crafted legislation that will require increasing surveillance and expenses in the servicing of loans from these Eastern Seaboard states. The District of Columbia has issued a recent judicial ruling that may allow an association’s lien to have priority over a mortgagee’s first lien.
What’s Happening in New York?
New York passed Bill A1800, an additional chapter to their Vacant Property Registration Act. This additional legislation demands extreme diligence in the servicing of at-risk borrowers.
Bill A1800 puts added stress on servicers and their vendors to determine if a property is vacant in a timeframe that many servicers will find impossible to meet. The bill also carries extreme liabilities if followed to the letter of the law. To wit, a seven-day contact period to determine vacancy sets in motion a call for a series of drastic responses, including rekeying, winterizing, and boarding up doors and windows, where applicable.
Condominiums and co-ops can be extremely difficult to contact and gaining entrance can be impossible.
These issues alone are alarming, but what looks to be a last-second addition to the bill, Section K, states that the servicer “… pay homeowners’ association or cooperative fees as needed to maintain the property.” Servicers and lenders may be required to pay all fees as they come due before foreclosure in order to “maintain” the asset.
This is a vague requirement and will likely need to be further legislated. Codification of this law will put even more liability on the lender and servicer, as it is evident what direction these laws are taking.
And in New Jersey . . .
New Jersey has broadened the super priority umbrella to include all associations and has extended the lien timeline to five years with proper filing of paperwork. New Jersey had instituted a six-month lookback for condominium associations, which has now been extended to include all associations. Bill A5002/S3414 also includes a renewable priority lien that can be carried back for five years.
This bill overrides existing association governing documents. Servicers and their default servicing teams will have to pay close attention to all foreclosure and lien notification documents to accurately total liabilities that are now incurred in association foreclosures in the state of New Jersey.
DC Developments
The District of Columbia’s Court of Appeals issued opinion No. 16-CV-977 in September 2018. Here they reviewed the decision on LIU vs U.S. Bank Nat’l Ass’n, 179 A.3d 871, which concerned a foreclosure sale initiated by the association for unpaid dues and other fees.
The association’s Notice of Foreclosure Sale advertised the sale of the unit subject to the first deed of trust. The sale took place in January 2013, with the successful bidder buying the unit for $11,000.
In January 2015, Capital One filed to foreclose the unit, to which the buyer counterclaimed to quiet title. The initial trial court required the buyer to abide by the foreclosure sale agreement: that the purchase was subject to the original mortgage.
The Court of Appeals reviewed the case and vacated the decision, forcing the buyer to abide by the initial agreement. The case was remanded to be reheard by the lower court, with the future decision reviewable by the Court of Appeals. It is the Court of Appeals’ opinion that the association’s enforcement of its super priority lien by foreclosure resulted in the “extinguishment” of the first mortgage, an outcome we had not seen in the District of Columbia.
Several states have given lien priority to associations’ claims, allowing the foreclosure of the first lien, and the District of Columbia may be the next to join that group. It will be imperative for servicers to begin reviewing their portfolios and their District of Columbia loans for accuracy and completeness. This case, as well as developments in other legislative and judicial proceedings, needs to be carefully monitored. Servicing and foreclosure strategies need to be altered to meet these new developments. It is evident that there is a push to add more states to the super lien group and to expand the powers of associations.
