Legislation has been proposed in the current session of the Maryland General Assembly that would provide some relief to condominiums and homeowners associations in the event of a foreclosure. House Bill 842, known as the Residential Association Sustainability Act of 2010, provides that a specified portion of a lien on a condominium unit or lot in a homeowners association, would, in certain circumstances, have a priority over any future first mortgage or deed of trust recorded after October 1, 2010. This is intended to assist condominiums and homeowners associations who have been left with unpaid assessments, despite having obtained a lien on the property, where the proceeds of a foreclosure sale are exhausted by the outstanding mortgage debt.
As I discussed in a recent post, the wave of foreclosures arising from the recession has significantly affected condominiums, as well as homeowners associations, in their ability to collect delinquent assessments. When a mortgage lender forecloses, even when an association has pursued and established a lien on the property, the mortgage loan has priority. And, as a result of plunging real estate values, the proceeds of a foreclosure sale are most often sufficient to satisfy both the mortgage loan balance and any other liens. The condominium or association lien is then extinguished by the foreclosure sale, and the condominium or homeowners association is left with a deficit arising from the uncollectable unpaid assessments.
The proposed legislation would add new language to Section 11-110 of the Maryland Condominium Act, to provide that, in the event of a foreclosure under a mortgage or deed of trust, up to six (6) months of unpaid assessments would have a priority over any claim of the holder of the mortgage or deed of trust. However, under the initial version of the bill, this priority would only be applicable in the event of a mortgage or deed of trust recorded against the unit after October 1, 2010. This would include, in addition to the unpaid assessments, late fees, interest, and attorney’s fees associated with the condominium having established a lien, provided that they were levied in accordance with the provisions of the condominium’s governing documents.
The bill would also amend Section 11B-117 of the Maryland Homeowners Association Act, to provide the level of relief to homeowners associations with respect to delinquent assessment liens. Again, six (6) months of assessment would have a priority over claims under a mortgage or deed of trust, but only those recorded after October 1, 2010. As with the condominium version, the lien priority would include properly established late fees, interest, and attorney’s fees.
The significant deficiency in this legislation is its limited applicability. It will provide relief to condominiums and homeowners associations only as to future mortgages or deeds of trust recorded after October 1, 2010. No presently recorded loans would be affected. As a result, in the event of a foreclosure on any exiting mortgage or deed of trust, along with any recorded before October 1, 2010, condominiums and homeowners associations will still be precluded from collecting on assessment liens where the proceeds of the foreclosure sale are exhausted by mortgage loan.
Those interested in following this legislation may refer to the following link: