May 3, 2013
by Devin Buckland
Director of Closing Services and Compliance
Barrett Daffin Frappier Turner & Engel, LLP
USFN Member (Texas)
The Texas legislature passed a law that focuses on the homeowners associations’ (HOA) management of communities, as well as provides new payment alternatives for homeowners with delinquent HOA assessments. That new law, which became effective last year on January 1, 2012, focuses its attention on four different sections: payment plans for delinquent homeowners, priority of payments, utilization of third party collections, and new foreclosure requirements under Texas Rule of Civil Procedure 736, if the HOA dedicatory instruments, more commonly known as declarations, contain an express power of sale. The alternative payment plan and foreclosure requirements pose potential risk and priority issues for mortgage servicers.
Payment Plans (Texas Residential Property Owners Protection Act, Sec. 209.0062)
Any HOA with 14 or more lots must adopt alternative payment plan guidelines for every delinquent homeowner. The homeowner is able to make partial payments without accruing any additional monetary interest or penalties, with a minimum term of three months up to a maximum of 18 months from the date of the homeowner’s initial request. The payment plan is filed in the real property records. The issues that exist are determined by the declarations of the HOA.
- If the HOA assessments are subordinate, the lender’s lien will not be in jeopardy.
- If the declarations state that the assessments are superior, the lender’s lien would be subordinate and have the potential risk of being extinguished. If the homeowner stops paying on the alternative payment plan, judicial foreclosure actions will put the lender at an even more immediate risk.
Priority of Payments (Sec. 209.0063)
Payments received by the HOA from the homeowner must be applied in the following order: delinquent assessments, current assessments, attorneys’ fees or third party collection costs associated with collection of assessments or any other charges relating to the order of foreclosure, fines, and any other amounts owed to the association. If the homeowner has entered into an alternative payment plan and is in default of that agreement, the association is not required to follow the priority rules. In the event that the homeowner defaults, the HOA could then pursue foreclosure action and ultimately take back the property. The funds received from the homeowners could then be applied for any costs incurred by the association in its collection efforts and foreclosure costs.
Third Party Collections (Sec. 209.0064)
The homeowner is not liable for the fees of a collection agency retained by the HOA, unless the HOA has provided written notice to the homeowner by certified mail. The notice must specify all delinquency and total reinstatement amounts, describe options to the homeowner to avoid having the account turned over to a collection agency, and provide at least 30 days for the owner to cure the delinquency before any further collection activity is taken. The HOA is prohibited from selling or transferring any interest in its accounts receivable for a purpose other than as collateral for a loan.
Judicial Foreclosure Required (Sec. 209.0092)
An HOA is unable to foreclose on a property under an assessment lien unless it first obtains a court order under Texas Rule of Civil Procedure 736 if its dedicatory instrument contains a power of sale; otherwise, the HOA must judicially foreclose under Texas Rule of Civil Procedure 309. Expedited foreclosure is not required if the owner of the property that is subject to foreclosure agrees in writing at the time the foreclosure is sought to waive expedited foreclosure. A waiver may not be required as a condition of the transfer of title to real property.
If an HOA with a power of sale seeks to foreclose a superior HOA lien by obtaining a Rule 736 order and then nonjudicially forecloses its assessment lien, the HOA is not required to make any holder of an inferior lien of record a party to a Rule 736 proceeding. However, the HOA must send a notice of the foreclosure sale as required by Tex. Property Code § 51.002(b) to any inferior lienholder at the lienholder’s address contained in the deed records. The inferior lienholder then has 61 days after it receives the foreclosure sale notice to cure the HOA lender default. (Tex. Prop. Code § 209.0091)
If the HOA assessment lien is subordinate to a superior lien that is recorded in the land title records and the HOA forecloses, the lender’s lien will remain intact; however, the borrower would no longer be the owner of the property. That circumstance would constitute a non-monetary default under most Texas deeds of trust. If the mortgage is in default and the HOA is pursuing foreclosure, lenders should be cautious before engaging in loss mitigation activities with the borrower who may no longer be the owner of the property. NOTE: Texas Property Code § 209.010 requires the HOA to provide written notice of the date and time an HOA foreclosure took place to all lienholders of record, who can then redeem the property under Texas Property Code § 209.011.
Over time, the relationship between HOAs and mortgage servicers should improve with the changes through HUD on Clarification Regarding Title Approval at Conveyance, to be issued later this year. If the mortgage servicer is faced with subordinate or superior HOA foreclosure actions, the remedies can vary from monetary losses to costly litigation. Mortgage servicers will continue to be faced with the difficulties inherent in identifying HOAs and their management companies and the lengthy and costly task of protecting their lien priority and ownership interests.
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