Some states give certain liens a special status: super liens! Whoever records a super lien gets their money back first — they jump in front of the prior recorded liens on the property. Sometimes, homeowners’ associations have this super power. If so, they can override the famous “first in time, first in right” rule for liens.
Homeowners usually don’t think too much about lien priority. But mortgage companies do. And people who invest in mortgage notes, considering them first-priority liens, absolutely do. Lien priority is a factor they check before investing in debt in a given state.
Let’s take a look at liens, super liens, and how mortgage companies and mortgage investors react to them.
Normally, How Do Liens Get Recorded on Home Titles?
A mortgage that a home buyer gets is called a first mortgage. It’s recorded in the county where the property exists, and becomes the first lien.
If the owner takes out other home loans later on, then a second lien goes on the title, and so forth.
Being first matters. The priority of a lien dictates which lender (lien holder) gets paid first if the home value gets liquidated in a foreclosure. Second or third lien holders are “junior” to the first lien holder and rarely get fully repaid.
Another type of lien is the kind a homeowners’ association puts on the title when a unit owner owes the association dues or fines, and doesn’t pay up.
What Are Homeowners’ Association (HOA) Super Liens?
Many of today’s home properties — houses and condos alike — have homeowners’ associations (HOAs). These associations have rules, and fines for breaking those rules. They also charge regular fees, and sometimes they charge the unit owners with special assessments.
Unit owners must pay the HOA fees, assessments, and any fines in a timely manner. If they don’t, their associations will record liens on their titles.
Most states are not super-lien states for condo properties. This means the HOA liens are junior liens. So the association is out of luck if the mortgage lender with superior lien status forecloses a unit.
But close to half of all U.S. states change the game. These states have legislated to give HOAs “super-lien” powers. Super lien states promote HOA interests, deliberately positioning the associations in front of the mortgage lenders.
Why Would States Give Homeowners’ Associations Special Status?
When unit owners miss HOA payments or ignore fines, the services and upkeep for the whole community can be strained. It severe cases, communities can suffer neglect and start to decline in value. This happened a lot during the housing crisis of 2007-2010.
States that allow super lien status for HOAs create these provisions to help associations protect their real estate values. So, the public policy focuses on shoring up the financial health of neighborhoods.
The Community Association Institute (CAI) presses heavily for super liens. CAI says super-priority status for HOA liens makes association properties more appealing. This is because it helps all the other unit owners preserve their home equity despite particular unit owners who fall behind on their payments.
In Colorado, Tennessee, and some other states, HOAs use super-priority liens to claw back six months of unpaid fees that they assessed before a foreclosure. In a few states, like Florida and Connecticut, HOAs recover nine months’ worth. But recent federal policy issued by Fannie Mae could rule out new state laws prioritizing HOAs for more than six months’ worth of back dues. In any case, when a first-mortgage lender forecloses on a unit in HOA super lien states, the HOA takes what it is owed (up to six months, generally) from the foreclosure sale proceeds. So, first the HOA gets theirs. Then the mortgage lender gets paid. And, finally, the foreclosed unit’s owner gets any remaining funds.
Sometimes, Mortgage Companies Pay Off HOA Super Liens for a Unit Owner’s Unpaid Dues. Why?
Sometimes, it’s the HOA that forecloses on a unit. Say the association builds up hefty liens on a unit owner’s title. At a certain point, the HOA will recoup its costs by initiating foreclosure.
Then, the mortgage lender will get notice of the HOA’s decision to begin the foreclosure process.
If the unit is in a super-lien state, the mortgage lender has a peculiar problem. It will lose its first-priority status to the HOA. So, the company may opt to pay off the lien for the late payments the unit owner owes the HOA. This keeps the HOA lien from overriding the mortgage.
But the mortgage lender isn’t giving away free money, of course. The amount of payoff will be added to the unit owner’s mortgage.
So, if a unit owner defaults on HOA dues and does not repay the association, the mortgage lender could potentially be the one coming after that debt. This is how a foreclosure that began as the HOA’s action could actually turn into a mortgage foreclosure.
How Do Lien Holders and Investors Avert Risk in HOA Super Lien States?
Investors and loan servicers should take steps to find out when past-due fees and fines turn into HOA liens on properties in their portfolios. As explained above, mortgage companies can lose their first-priority lien status in states where HOA liens elbow them out. Potential investors should consider whether a property is in a super lien state as part of a risk assessment.
CoreLogic is one firm that offers an HOA Super Lien Check to flag properties with homeowners’ associations in HOA super-priority lien states. The firm advises investors if and when new liens are filed or foreclosures are initiated.
Black Knight Data and Analytics offers a similar service. Black Knight’s HOA Lien Pro “helps mortgage servicers and investors to identify the potential risk of HOA super liens on properties.” When HOAs record past-due debt, Black Knight alerts the mortgage servicer to resolve the charges, in order to preserve the mortgage loan’s superior lien status.
Questions About Super Liens and Your Real Estate?
We hope this brief introduction to super liens adds to our readers’ general knowledge about an evolving area of real estate law. Some states have quite recently equipped their HOAs with super lien powers. A buyer can check the association’s governing documents for information on the HOA’s lien process. A buyer can additionally search for “super lien” and the state in which they’re buying a home if they wish to review current lien laws.
Please be aware that lien priority in a foreclosure is a complicated question. Mortgage industry professionals should be alert to situations in which HOA foreclosures impact mortgage liens even in non-super-lien states.
For case-specific information, readers should consult a law firm in the state where the property is located. Of course, we recommend finding a lawyer who’s faster than a locomotive, and able to leap tall buildings in a single bound.
Supporting References
Condo Manager USA via CondoManagerUSA.com: Should You Be Aware of an HOA Super Lien? (citing Colo. Rev. Stat. § 38-33.3-316 and Nev. Rev. Stat. § 116.3116).
Deardorff, Rath & Pichon, LLC via Lakeside Title Company: Maryland – Lien Priority and Super Liens (Jan. 19, 2022).
And as linked.
Photo credits: Vicki Yde and Andrea Davis, via Pexels.