Foreclosing On An "Underwater" Unit
In these times of declining real estate values, more and more homes are "underwater," meaning that more is owed to the holder of the first deed of trust than the property is worth. Sometimes owners simply stop paying the mortgage walk away from the property as a consequence and the holder of the first deed of trust forecloses. However, what happens if an owner keeps paying their mortgage but stops paying his assessments. What is an Association to do?
In an appropriate case an association can file a lien and thereafter foreclose on it. In the case of a foreclosure, the money that is received typically goes to pay any overdue taxes, the costs of the sale, and the first deed of trust before any money is paid toward the overdue assessments owed to the Association.
If the property is underwater, this means the Association gets nothing to apply to the overdue assessment for its trouble in conducting the foreclosure. However, this does not necessarily mean that a foreclosure is not in the Association's best interests where the current owner simply will not or can not pay assessments. In an extreme case, an Association may want to foreclose simply to get a new owner into the property, hopefully one who will pay assessments on an ongoing basis.
However, there is a 2003 Virginia Supreme Court case that suggests that an Association cannot foreclose unless the sale will bring enough to satisfy the first deed of trust, at least if the foreclosure is done using the "non-judicial foreclosure" provisions of the Condominium Act. Does this mean the Association is powerless to do anything about the non-payment of assessments, other than sue and try to enforce the owner's personal liability? Is a condominium lien useless when the unit is underwater?
This question hopefully will be answered by the Virginia Supreme Court in a case called Watergate at Landmark Condominium Owners Association v. Story. Mr. Story's unit reportedly is worth only $185,000, but he owes more than $300,000 on his first mortgage and $40,000 to the Association in overdue assessments. The Association wants to foreclose so that a new owner can be placed in the unit. However, the holder of the first deed of trust has no interest in foreclosing in its own right because Mr. Story is remaining current on his mortgage.
This case has the potential to have a huge impact on Associations, and you should check back to this space, where we will report the results as soon as they are available.