I was asked recently about a foreclosure action by a homeowner’s association. The person had received a letter from their homeowner’s association saying they were filling a lien against her, and that she would be facing homeowner’s association foreclosure, because of unpaid dues.

She was already facing foreclosure from her bank and was confused about what was going on. She thought that only banks could foreclose.

So… here’s the deal. Homeowner’s associations incur expenses on behalf of the homeowner. The expenses could be from any number of things; like insurance, maintenance of the exterior, swimming pool maintenance, grounds keeping, parking lot upkeep, and so on.

If the homeowner doesn’t pay, the association has no other recourse than to file a lien against their property. If collection efforts on the lien fail to get resolved, the next step is for the association to foreclose on the property.

But the reality is this. . .

If the bank has already started foreclosure proceedings, it would be a waste of time and money for the association to actually begin additional foreclosure proceedings. The association would be at the end of the line in the “pecking order”, for priority in receiving a payoff from foreclosure.

The way that works is this; any loans or liens (except for unpaid taxes), that are junior to the loan that is foreclosing, would be wiped out when the mortgage holder foreclosed.

For example, if a property had the following loans and liens against it:

First Mortgage – $118,000
Second Mortgage – $25,000
Third Mortgage – $5,000
Mechanic’s Lien – $2,500
Property Taxes – $1,058

If the second mortgage holder foreclosed on the property, and a successful bid was made at auction, the winning bidder would have to take over the first mortgage because it is in a senior position to the second mortgage.

But, the third mortgage and the mechanic’s lien are junior to the second mortgage and would be wiped out by the foreclosure. Even though the tax lien is the most junior lien, property tax liens cannot be wiped out by foreclosure. So the winning bidder would be obligated for the past due taxes as well.

So what does all this mean to the lady asking the question? It means that the homeowner’s association is bluffing and hoping that she’ll pay the bill.