This Bubble Will Burst

3 thoughts on “This Bubble Will Burst”

1. robert April 19, 2014 at 3:50 pm

   The typical HOA has a super-priority lien on all homes within its borders. That means that when the homeowner gets a few hundred bucks behind on his mortgage, the HOA can grab that property and auction it off at the nearest courthouse for a few thousand bucks. The HOA gets paid, the mortgage company does not. And that means the mortgage company gets screwed out of the entire value of its loan.

   Uh, no.

   The home owner who has been divested of his property is still obligated to pay the mortgage. *

   The mortgage company can also exercise its first lien rights, and foreclose on the H.O.A. corporation. However, mortage companies usually take months (sometimes over a year) to foreclose on a home owner, while an H.O.A. corporation can do so within weeks, often without oversight by a court.

   This lag has resulted in H.O.A. corporations creating a new business model — quickly foreclosing on home owners for trivial amounts and reasons, and then renting the property until the mortgage holder forecloses on it. ** One H.O.A. attorney has justified this by saying that “It’s called capitalism. It’s the free market”. ***

   — notes —

   * This varies from state to state, but see for example the Deer Path Woods incident in Pennsylvania, Madison Oaks and the Oasis condos in Florida.

   Conservatives and libertarians are in favor of “full recourse mortgages” — holding the home owner personally liable if the property is foreclosed upon for less than the balance of the mortgage (based on my readings of conservative and libertarian blogs, especially since the housing crisis). Evan McKenzie has written (emphasis added):

   Mike Konczal demolishes the right-wing think tank Cato Institute for their unique brand of free-market capitalism: “I like this form of libertarianism, where policy is simply the things that defend the power and hierarchy of creditors, the rich and the elite, much better than the normal ‘gee whiz markets are cool’ kind. There’s almost a Nietzschean zeal for the wonk world to first and foremost accept creditors as a master class to whom all policy bends.”

   In this piece, Konczal is taking apart Cato’s bank-friendly, consumer-hostile prescriptions for the housing market. Predictably, Cato wants to rush all the foreclosures to conclusion, never mind the fraudulent or nonexistent proof, and the banks should get deficiency judgments against people who strategically default. Public policy needs to be concerned about moral hazard you see…unless it is the banks who have the moral problems.

   ** According to Colorado H.O.A. law firm HindmanSanchez P.C. (emphasis added):

   Typically, when an association decides to foreclose on its assessment lien the first mortgage holder is the only party with a superior lien. If the association is successful and obtains title to the property after the foreclosure process, the original note and deed of trust remain valid. However, as the association has not signed the promissory note, the personal obligation to pay the mortgage remains with the original homeowner. Unlike the promissory note, the deed of trust is an encumbrance on the property. As first mortgage holders typically have a superior lien position to an association’s lien, the deed of trust will continue to encumber the property even after the association’s foreclosure is complete.

   After an association takes ownership of a unit through a foreclosure, it is usually left with two options. The association can pay the first mortgage holder to prevent the filing of a foreclosure action by the bank. Another option is for the association not to pay the first mortgage holder and simply allow the property to fall into foreclosure again. One creative solution some associations are using is to not pay the first mortgage and rent the unit until the mortgage holder obtains title to the property through foreclosure. Remember this process typically takes three to six months, if not longer, so the lease can be for a three month term and then continue on a month-to-month basis.

   The goal of any association that is initiating a foreclosure action is not to obtain the property. Rather, associations should look to mitigate the loss they are suffering from the delinquent homeowner by taking steps to either push the homeowner to pay or create a situation where a new party is responsible for the assessments. For this reason, many associations don’t mind taking ownership of a unit and allowing the bank to foreclose – at least that way, a new party becomes responsible for the assessment.

   *** Robert Tankel, Florida attorney # 341,551, and member of the Community Associations Institute, quoted in

   “Real Estate Investors Beat The Banks To Profit On Foreclosure“. Tampa Bay Times. June 25, 2011. see also

   “Pinellas Lawyer Takes Foreclosure Fights To Ethical Edge” Tampa Bay Times. July 01,2011.

   Tankel was doing so much business that he had to increase his staff from 3 to 16 (see also here). That’s a 433% increase! Tankel is what Republicans call a Job Creator™.

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   1. Ward Lucas Post authorApril 19, 2014 at 11:03 pm

      Well, Robert, once again you’ve caught me. You are a heck-of-a-lot closer to what really goes on with these crashed mortgages than I am. I do trust your research.

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2. tom dee April 21, 2014 at 10:02 pm

   One last love note on how dangerous the HOA happens to be. If they grab your home and sell it… the mortgage is still due. If you walk away from that debt the IRS will consider the mortgage at full value and it will be considered as regular income. You will receive a huge tax bill and possibly a huge IRS fine because it will take a couple years and you by law have to declare income the year received. You will not win in a fight with the IRS. The have have thousands of cases just like yours. Hopefully the public will start to understand the danger of HOA life and start demanding these HOAs obey the law just as everyone else has to do. The housing market cannot really recover with the present horror which is brought by the evils of the HOA system. Remember, the HOA was created to protect the developer. It has nothing to due with protecting the homeowner.

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