4/28/11: Maryland Enacts Weak Relief for Community Associations
By: Benny L. Kass
If you live in a Maryland condominium or homeowner association, the Maryland legislature has just provided you a modicum of protection. For first trust mortgages recorded after October 1, 2011, if the homeowner is delinquent on his association fees when a lender forecloses, the lender will have to pay the association not more than $1,200 of the delinquency.
When a lender forecloses on a home in a community association, without such legislation there is no way that the association can practically recoup any delinquency the homeowner owes to the association. Although that delinquency can be a lien against the home, it is erased by the foreclosure. Suing the delinquent homeowner is often a wasted exercise; there may be no money available to collect even if the association gets a money judgment from the courts.
Over the years, many states have recognized that this is unfair to the rest of the association members. Community associations rely on - and depend on - the fees collected from homeowners in order to survive.
For example, in the District of Columbia, if an institutional lender forecloses, it must pay the association up to six months of the delinquent assessments. Virginia has no such super-assessment priority laws. But 15 other states have enacted laws which provide a priority of 6 months or more. Delaware adopted a six month priority law in 2008; Florida extended its priority lien from 6 months to 12 months last year.
For many years, community association leaders - such as the Community Association Institute (CAI) - have been actively trying to get such a priority lien law in Maryland. But the bankers (and other financial institutions) have a strong lobby and vigorously opposed any such infringement on their right to foreclose. Finally, in the waning hours of the 2011 Maryland legislative session, a compromise measure was enacted.
The new law gives community associations a 4 month priority lien over any first mortgage recorded after October 1, 2011. However, that is capped at $1200, which may be considerably less than the delinquency. Furthermore, while other state laws include such items as late fees, legal fees, and special assessments in the computation of the delinquency, in Maryland the amount of the delinquency can only be based on the actual, unpaid regular assessment.
According to Hugh Lewis, a community association attorney in Bellingham, Washington, "Maryland's new law runs counter to the evolving trend. Freddie and Fannie accept project documents which give an association's lien a superpriority over the lien of the first mortgage of up to 6 months. Holding the superpriority to 4 months and capping that at $1200 is regressive."
But Maryland attorneys who actively lobbied for this legislation are pleased to have gotten this far, after so many frustrating years of being rejected by the legislature. According to Tom Schild, a community association attorney in Rockville, "would we have preferred 6 months plus late fees, interest and collection costs? Yes. Was it achievable in light of local/state politics? No."
Foreclosures hurt community associations in their pocketbook. At least, some financial assistance will now be available in Maryland, but only for future loans that may be foreclosed upon. The new law will not practically become useful for a long time. Lenders are now very cautious and conservative in deciding whether to make loans to borrowers. Credit scores must be fairly high and down payments larger than in the past. Perhaps that will, in the long run, reduce the huge number of foreclosures that homeowners have been experiencing. According to RealtyTrac, (www.realtytrac.com/statistics/Maryland) an organization that tracks nationwide foreclosures, in March alone of this year there were 2,150 new foreclosure filings in the State of Maryland. (www.realtytrac.com/statistics/maryland).