(originally published in Fall 2000)
Hands up everyone who purchased their home outright with a sack full of money. Assuming you are not Bill Gates, chances are you have not raised your hand. The fact is, most people have to borrow the vast majority of the purchase price for their homes from one of a variety of lending institutions. In doing so, the new homeowner essentially enters into a “trust” relationship with the lender whereby the lender acting as the trust “beneficiary” lends money to the “trustor” borrower and designates a foreclosure service to act as “trustee.” This greement is memorialized by recording a “deed of trust” with the county recorder in which the property is located. As of the recording date of the deed, the lender becomes the “senior beneficiary” whose rights are senior to all subsequent lienholders. This long standing legal maxim is known as “first in time, first in right.” When a homeowners association subsequently records its delinquent assessment lien, it becomes a “junior” lienholder whose protected interest in the property is subject to any and all encumbrances recorded prior in time to the lien. In the event the borrower defaults on the mortgage payments required pursuant to the terms of the deed of trust, the trustee foreclosure service is then authorized to proceed with foreclosure on behalf of the lender beneficiary of that deed. The trustee initiates this action via a non-judicial foreclosure which is simply a foreclosure performed by recording various documents [Notice of Default and Election to Sell and Notice of Sale] with the county recorder, as opposed to a foreclosure performed through the courts.
We are often asked what effect the senior beneficiary’s foreclosure has on an association’s lien. Simply put, the lien is eliminated by the senior’s action and as such, cannot be the basis for a foreclosure action by the association. Upon completing their foreclosure, the senior beneficiary takes title to the property, typically through a Trustee’s Deed Upon Sale, and becomes the record owner as of the recording date of that deed. The lenders also become responsible for the homeowners assessments arising after that recording date and may be billed accordingly. It should be emphasized that the senior beneficiary is under no obligation to cure any delinquent amount owing to a junior lienholder by the now former homeowner.
Recognizing the ability of a senior beneficiary to eliminate a homeowner association lien through foreclosure, California law provides that homeowners associations are provided with an alternative remedy in the form of a lawsuit to obtain a personal money judgment. The lawsuit is filed for the amount owing to the homeowners association up to the date of the senior’s foreclosure.
Does this mean it is futile for an association to record a lien and initiate a non-judicial foreclosure action? No. The foregoing analysis involves a situation often described as an “involuntary” transfer of title. In other words, the homeowner being foreclosed on has no choice in the matter. A lien does, however, protect an association’s interest from a “voluntary” transfer of title such as where a homeowner puts their home on the market in an attempt to sell it. In such cases the lien must be satisfied before title to the subject property can be transferred. This is typically done through escrow whereby payment in the amount of the lien is remitted in exchange for a release of that lien. Additionally, recording the lien may also benefit the homeowners association in the event the owner files bankruptcy prior to foreclosure.
Proceeding to the next stage of the non-judicial foreclosure action i.e. recording a Notice of Default and Election to Sell can also be a very effective collection measure in situations where the homeowners are current with their payments to the senior beneficiary and are therefore not facing any foreclosure action. In such situations, the associationÕs ability to foreclose on the subject property and take title to same [albeit subject to the senior beneficiary’s interest] is often sufficient to motivate the homeowner to address the problem and initiate a resolution.
Simply stated, it is often not an effort in futility to record those homeowner association liens for delinquent assessments.