We often receive questions concerning whether an assessment lien imposed by the subject property’s homeowner’s association (“HOA”) is superior to the lender’s mortgage. Many HOAs in Texas either expressly subordinate their assessment liens to some or all types of first-lien mortgages in the Declaration of Conditions, Covenants, and Restrictions (the “Declaration” or the “CCRs”) that created the HOA.
Where the Declaration does not expressly subordinate the assessment lien to a lender’s mortgage, we generally recommend the lender obtain a subordination agreement from the HOA. This is often necessary for home equity loans, as many Declarations were recorded prior to the 1997 constitutional amendments allowing for home equity lending on homesteads.
However, there are some HOAs in Texas that refuse to subordinate their assessment lien and insist it remain in first position with priority over the lender’s mortgage. In those cases where the HOA’s assessment lien is superior to a lender’s lien, Texas law nevertheless provides certain protections to junior lienholders.
First, an HOA must provide all junior lienholders with notice of the delinquent assessment liens and give the junior lienholder 61 days to cure the delinquency before the HOA can commence foreclosure. This notice and time period provides a junior lienholder with the opportunity to pay any delinquent assessments in order to cure the default and protect the junior lien.
Second, a lienholder has a 180 day right of redemption after foreclosure of a superior HOA lien. Should a junior lienholder fail to pay the delinquent assessments prior to foreclosure, the lienholder has a limited opportunity post-foreclosure to redeem the property, which may be advantageous in scenarios where the foreclosure sale did not realize sufficient proceeds to fully pay off the amount owed to the lender.
Ultimately it is a business decision for a lender to make the loan when the HOA assessment lien will have priority over the lender’s lien. Many lenders appear comfortable lending in such subdivisions, as our clients’ questions often involve refinances of a loan made by a depository or mortgage bank. We also believe that the statutory notice requirement and right to redeem offer a diligent lender suitable protection against any potential loss due to delinquent assessments and the foreclosure of a superior HOA lien.
HOA Assessment Liens Have Priority Over a Lien Filed After the Date the Declaration Was Recorded
Many subdivisions in Texas have a mandatory HOA with power to impose assessments secured by a lien against the lots within the subdivision. The assessment lien is commonly established in a subdivision’s Declaration. Because the Declaration will have been recorded prior to the lender’s mortgage on a single lot, as a matter of law the assessment lien will be given higher priority than the lender’s mortgage lien.
Therefore, if the assessment lien is foreclosed upon, the foreclosure could cut off the rights of a lender whose lien is junior to the assessment lien.
Many HOA Expressly Subordinate to Purchase Money Mortgages via Declaration or Subordination Agreement
However, many Declarations contain a provision that expressly subordinates the HOA’s assessment lien to a purchase money lien, a refinance of that lien, or a lien for the construction of improvements upon a lot. Such provisions often state: “All liens securing the Assessments and any renewals and extensions thereof are subordinate and inferior to first lien/purchase money mortgages and any renewal and extensions thereof.” That said, most HOAs do not expressly subordinate to liens that are securing Texas home equity loans.
If the Declaration does not expressly state that liens for delinquent assessments will be subordinate to mortgages, then the lender will likely want to have all potential assessments liens expressly subordinated via a written agreement signed by the HOA. A typical subordination agreement will subordinate all liens arising from a default or breach by the borrower to all mortgage liens, including home equity liens.
The Texas Property Code Requires HOAs to Provide Notice and Right of Redemption to Lienholders
Unfortunately for lenders, some HOAs refuse to agree to subordinate their assessment lien. Even so, a lender can proceed without a subordination agreement should it make the business decision to accept the risk. In Texas, the HOA is legally required provide the lender with 60 days’ notice of the borrower’s delinquency on paying assessments.
Section 209.0091(a) of the Texas Property Code requires the HOA meet the following requirements before it may foreclose on an assessment lien:
(1) provide written notice of the total amount of the delinquency giving rise to the foreclosure to any other holder of a lien of record on the property whose lien is inferior or subordinate to the association’s lien and is evidenced by a deed of trust; and
(2) provide the recipient of the notice an opportunity to cure the delinquency before the 61st day after the date the recipient receives the notice.
This notice must be sent by certified mail, return receipt requested, to the address for the lienholder shown in the deed records of the subject property.
Please note that an issue with the 61-day notice is that the lender must be prepared to recognize the notice when it is received and should know how to respond to the notification in order to protect its rights: by paying the delinquent assessments before the lapse of the 61-day period.
To overcome the recognition and response issue associated with the 61-day notice, it is best practice for the lender to indicate in the loan file that a lien from the HOA would be superior to the lender’s mortgage lien because the HOA has not agreed to subordinate, and that the lender will receive a 61-day notice from the HOA in the event of delinquent assessments with the right for the lender to pay the delinquent assessments before any foreclosure action.
In addition to the 61-day notice, Section 209.010 of Texas Property Code requires the HOA to send a written notice to each lienholder of record no later than the 30th day after the date of the foreclosure sale. The notice must include the date and time that the foreclosure sale occurred, and inform the lienholder of its right to redeem the property.
Additionally, Section 209.011 states that the owner of the subject property, or a lienholder of record, may redeem the property from any purchaser at a sale foreclosing a property owner’s HOA assessment lien no later than the 180th day after the date the HOA mails the above-mentioned written notice of the sale to the owner and lienholder. The lienholder’s right of redemption serves as a “safety net” for the lender in the event that the assessment lien is foreclosed upon.
Lenders Should be Mindful of Representations Made About Lien Priority When Choosing to Proceed Without Express Subordination of Assessment Liens
Lenders should also consider what representations and warranties are made about lien priority to secondary market purchasers when the HOA does not expressly subordinate its assessment liens, as the lender’s lien would technically be inferior to the HOA assessment lien.
This is ultimately a business decision for the lender, but we believe that the 61-day statutory notice coupled with implemented recognition and response procedures and the statutory Right of Redemption is a reasonable solution to this issue.
If you have further questions about priority of HOA assessment liens to mortgages, please reach out to one of our attorneys at: http://www.mortgagelaw.com/people.