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Fannie Mae Revises Policy of 6-Month Condo Priority Lien

By
Mortgage and Lending with ReadySetLoan Condo Team LLC

Fannie Mae Revises Policy of 6-Month Condo Priority Lien

fannie mae update 6 month priority lienOn January 14, 2014, Fannie Mae had announced that the maximum priority lien held by condominiums and planned communities (PUDs) may be no more than 6 months.  More recently, however, it revised this policy to allow states who had enacted legislation allowing a greater priority than 6 months to be “grandfathered in” if the legislation preceded Fannie’s announcement on January 14, 2014.

That was a mouthful, wasn’t it?  Let me break it down…

What is a “priority lien”?

A unique feature of condominiums and planned communities is that the homeowner’s association (HOA) can have a priority lien over any mortgages that encumber a unit.  Also called “super liens”, these liens allow the HOA’s common charges to the unit owner (also commonly referred to as monthly “association dues”) to take priority over a first mortgage lien.

When a unit is foreclosed, the liens are paid in their order of priority.  This means that out of the funds collected as a result of the foreclosure, the HOA would get paid before any money is disbursed to the first mortgage lender, any subsequent mortgage lenders or any other entity that has placed a lien on the home.

[This does NOT include liens placed by the IRS or the federal, state or local government.  ALL of these governmental entities take priority over non-governmental entities.]

This also allows an HOA to initiate a foreclosure action if a unit owner fails to pay his/her monthly common charges.  In fact, a lender runs the risk of being “foreclosed out” if the HOA begins a foreclosure and there is no equity left over to pay the lender.  Often, the lender will pay the delinquent common charges and add them to the unit owner’s mortgage loan amount.

The existence of priority liens and the protection that the liens offer vary greatly from state-to-state.

Why limit the priority lien to 6 months?

Foreclosure actions can take a year or longer to complete.  During this time, it is highly unlikely that the unit owner would be paying the common charges.  This would mean that the HOA is owed months, if not years of uncollected common charges.  Because the HOA runs on a budget based on certain expectations of income, one or more of these situations could pose a serious financial threat to the HOA.

On the other hand, Fannie Mae and the lenders are already running the risk of losing money by acquiring the home through foreclosure.  If the HOA is allowed to collect years of unpaid common charges, Fannie and the lender are out even more money.

This announcement by Fannie now limits the number of months that an HOA can collect to 6 months of common charges.

fannie mae 6 month priority lienAre there any exceptions?

Yes, there are exceptions and one of them is in my state of Connecticut.  Fannie Mae has said that if a state has enacted legislation prior to 1/14/14 that allows an HOA to collect more than 6 months of unpaid common charges, these states will be grandfathered in and allowed to exceed the statutory 6 months.

During the last legislative session in 2013, the Connecticut General Assembly amended Conn. Gen. Stat. §47-258(b) to allow HOAs to collect up to 9 months of unpaid common charges by means of the priority lien.

Florida is the other state that had enacted legislation to this effect prior to 1/14/14.  Its statute states that the HOA can collect the lesser of (a) any unpaid common charges and other common periodic assessments that occurred within the previous 12 months before the transfer of title took place or (b) 1% of the original mortgage debt.  Thus, in Florida, the priority lien could allow the HOA to collect up to 12 months of unpaid common charges.

When Fannie issued this announcement, there was a question as to whether or not Fannie would allow mortgages in common interest communities in Connecticut and Florida due to these priority liens.  The recent revision clarifies that Fannie will lend in these states provided that the state statutes were amended to exceed 6 months prior to Fannie’s announcement on 1/14/14.

This is great news for HOAs in Connecticut and Florida.  Unpaid common charges can wreak havoc on a condominium’s financial situation which creates strain on all of the unit owners in the community.  I know that an extra 3 or 6 months doesn’t amount to a huge sum of money, but it is something and when an association is struggling, every little bit can help.

Top image courtesy of stuartmiles/freedigitalphotos.net

Bottom image courtesy of masterisolatedimages/freedigitalphotos.net

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The Condominium Project Approval Team at ReadySetLoan is dedicated to helping condominium projects across the nation to obtain their approvals with FHA and the VA or become recertified with FHA.  We have assisted nearly 200 condominiums and we can help your association.

 

ReadySetLoan is an active member of the Connecticut and New England chapters of the Community Associations Institute (CAI) and is a frequent contributor to Common Interest Magazine as an expert in FHA/VA condominium project approvals.

 

Please contact us with any questions regarding FHA or VA condominium project approvals.  You can email me at askeric@readysetloan.com or call me at 404-433-4565. I will be happy to answer any of your questions.

 


FHA/VA Condo Approval Specialist

404-433-4565 Cell Phone

860-644-3772 Fax Phone

eric.boucher@readysetloan.com
ready set loan condo team

 

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 Check out our article in Common Interest magazine on page 19!

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Comments (30)

Anna Hatridge
R Gilliam Real Estate LLC - Farmington, MO
Missouri Realtor with R Gilliam Real Estate LLC

Thank you for the update. Very useful information.

Mar 03, 2014 09:48 PM
ReadySetLoan Team
ReadySetLoan Condo Team LLC - South Windsor, CT
Residential, Commercial & Condo Financing Experts

Thank you Charles.  I am glad that you found the content valuable.

Would you believe, Lyn, that not every state has an HOA priority lien?

George, I only know of two states that were grandfathered in: CT and FL.  NV had enacted similar legislation but it contained an exception for Fannie Mae loans so this revision left no mark there.

Maria, Fannie Mae is on the secondary market and most conventional loans are sold to Fannie Mae (it has a larger market share than Freddie Mac).  When a lender underwrites a conventional loan, it uses Fannie's guidelines if it intends to sell the loan to Fannie.  So to answer your question, this impacts any conventional loan in a common interest community that is to be sold to Fannie Mae on the secondary market.

No doubt, Inna.  I am in many HOA groups on LinkedIn and there have been many angry posts about this.  CAI in DC is lobbying to make a change to this 6 month limit.

Mar 03, 2014 10:02 PM
ReadySetLoan Team
ReadySetLoan Condo Team LLC - South Windsor, CT
Residential, Commercial & Condo Financing Experts

Thank you for the kudos, Jon.  You are one of the foremost leading experts on condominiums here and your appreciation of the article is my honor.  What you describe seems to be a craps shoot at auctions and I am not surprised investors give way to the lenders to mop up the mess.

Thank you Hella.  Fannie's language states "6 months of regular common expense assessments" which would imply other HOA-imposed assessments would not be included.  I haven't read anything that said Fannie would allow other assessments.

That's a shame, Joan.  There are still plenty of FHA loans being done in CT.

Priority liens are an interesting animal, Praful.  I know property managers who use the threat of foreclosure to collect delinquent HOA fees from first mortgage lenders.

Michael, this will definitely help in budget planning.

Thank you for reading, Anna.

Mar 03, 2014 10:15 PM
Ron Aguilar
Gateway Mortgage Group - Saint George, UT
Mortgage & Real Estate Advisor since 1995

Eric, very good update. thanks

Mar 03, 2014 11:46 PM
Dora Griffin
D A Griffin Financial.LLC - Fort Thomas, KY
NMLS 6380

THANKS for your informative post! 

Mar 04, 2014 12:04 AM
Christopher Campa
LONG & FOSTER REAL ESTATE - Gainesville, VA
Northern VA Realtor

Thank you for keeping us updated and breaking it down they way you did.  I'm currently on a Condo HOA Board and have a meeting next week.  I will sound very smart thanks to you Eric.

Mar 04, 2014 12:48 AM
Anonymous
Zoe Horlick
Thank you for the information. I haven't heard of this here in Washington State but will ask one of the loan company's about. Thanks again
Mar 04, 2014 12:59 AM
#17
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

This will force HOA's to act quick in order to avoid loosing money on the Foreclosure.  I think this is a mistake.

Mar 04, 2014 01:31 AM
Eva Aliaga
Partnership Realty Inc - Boca Raton, FL
Boca Raton & Delray Beach: SE Florida Real Estate

Great info, hopefully this will help out a lot of communities here in Florida. I see quite a bit of home vacant in the foreclosure process for months to years.

Mar 04, 2014 01:54 AM
Kimo Jarrett
Cyber Properties - Huntington Beach, CA
Pro Lifestyle Solutions

I'm puzzled why Gene, #18 thinks this opportunity is a mistake? Why wouldn't anyone take an opportunity to protect their assets?

Mar 04, 2014 02:32 AM
Sharon Sanchez
Ace Home Realty - Carson, CA
Your Number "1" Source For Real Estate.

Thanks for the update.  Sounds like a good idea, "Super Lien - Priority Lien.  Prior to this update they probably didn't recoup any money on foreclosed properties.  It was not only a loss felt by the HOA, but in some cases, it was felt by the other homeowners too.

Mar 04, 2014 02:51 AM
ReadySetLoan Team
ReadySetLoan Condo Team LLC - South Windsor, CT
Residential, Commercial & Condo Financing Experts

Thank you very much Ron.

Dora, it's my pleasure!

Glad to be of service, Christopher.  Please contact me if you have any questions!

Zoe, I don't believe that Washington State is one of the excepted states and Fannie will limit the priority lien to 6 months.

Gene, it will be quite a loss for HOA's who are owed years of delinquent common charges and can only recoup 6 months of them

I hope it does as well, Eva

Mar 04, 2014 03:22 AM
ReadySetLoan Team
ReadySetLoan Condo Team LLC - South Windsor, CT
Residential, Commercial & Condo Financing Experts

Hi Kimo, I think that Gene's concern is with the HOA losing thousands by only being able to recoup 6 months of delinquent fees.  Of course the lender and Fannie Mae wish to protect their investments, but so do the HOAs.

Hi Sharon, the problem was that the HOA was able to collect more than 6 months which eats into the money the lenders/Fannie Mae would see as a result of the foreclosure.

Mar 04, 2014 03:26 AM
Jeff Jensen
The Federal Savings Bank/Lending in 50 states - Greenwich, CT

Who spend all that time thinking up these rules with endless conditions and exceptions?

Mar 04, 2014 06:56 AM
ReadySetLoan Team
ReadySetLoan Condo Team LLC - South Windsor, CT
Residential, Commercial & Condo Financing Experts

Hi Jeff, apparently people with more time on their hands than you or me.

Mar 04, 2014 08:17 PM
Michele Webler -Farm and Ranch Specialist
Idaho Real Homes LLC - Rathdrum, ID
Serving North Idaho and E. Wa

Thanks for the update.  Nobody wins in a foreclosure so sad.

Mar 04, 2014 10:46 PM
Charles Stallions
Charles Stallions Real Estate Services - Pensacola, FL
850-476-4494 - Pensacola, Pace or Gulf Breeze, Fl.

Thanks for sharing the update I always think that there is too much thought put into these things. It is a lot simplier to solve than what the government can do. 

Mar 29, 2014 01:21 AM
Anonymous
Sarah

How can you find out if there is a 6 month priority lien? Do you need to contact title? A lawyer? I'm not finding anything on basic court records.

This is exactly what I'm running into right now when buying foreclosure homes.

Jun 04, 2015 09:35 AM
#28
ReadySetLoan Team
ReadySetLoan Condo Team LLC - South Windsor, CT
Residential, Commercial & Condo Financing Experts

Sarah - only a handful of states have this protection for homeowners associations.  What state are you in?  You can email me directly with questions if you like.

Jun 04, 2015 10:28 PM
Dave Halpern
Dave Halpern Real Estate Agent, Inc., Louisville, KY (502) 664-7827 - Louisville, KY
Louisville Short Sale Expert

Anything that eases restrictions and increases homeownership without raising the risk of future foreclosures sounds good to me.

Aug 02, 2017 07:02 AM