FHFA Takes Aim At "Super-Priority Liens"

The FHFA statement is filled with incorrect statements and conclusions. The truth is that they were conned into issuing it by lenders/servicers who failed to meet their contractual obligations with FNMA and who now are desperately seeking a scapegoat so they (the servicers) do not have to pay for their mistakes.

1) It is important that this summary begins with a reminder that one of the main reasons that FNMA is in conservatorship is because lenders and servicers (hereinafter collectively referred to as “Banks”) were systematically sloppy, incompetent and dishonest.
2) PACE liens and HOA liens are quite different and should not be lumped in the same conversation.
3) HOA liens are perfected against property when the Declaration of the HOA is recorded. This usually occurs when the developer is about to construct the community. This means the HOA lien is always in place before a residential loan lien by a lender, often by several years.
4) FNMA and the Uniform Law Commission agreed on an HOA lien policy in 1977 and all related documents issued by FNMA since that time reflect this agreement.
5) The HOA lien is prior in time to the lien of the lender. Prior means prior. Lenders know this before they make a loan.
6) There is no such thing as a 1st lien residential loan. Mortgage is a category of liens. Taxes are another category of liens and are generally superior to mortgage liens. A 1st mortgage is the first of mortgages but not the first of any and all liens. It is quite possible for a 1st mortgage to be in 5th or 6th lien position.
7) The lender is very aware of the existence of the (prior) HOA lien when it makes the residential loan. This is evidence by language in the loan documents, including the PUD rider.
8) Servicing guides for FNMA, the FHA and HUD make it very clear that the Bank must properly manage the HOA lien.
9) When an HOA decides to foreclose against a property, it notices all subordinate lien holders including the Bank, provided that the Bank has recorded its interest, as it should have.
10) When the Bank receives notice of the HOA foreclosure it can protect its security interest in many ways, but preferably by paying to the HOA an amount equal to 6 or 9 months of assessments. In the case of FNMA, the amount is 6 months. The HOA’s need this small amount of money so that they can continue to maintain the community in which the collateral of the Bank is located.
11) THIS IS WHERE THE PROBLEM STARTS. Banks have systematically refused to pay the priority lien amount and/or ignored and mis-managed the HOA foreclosures. Banks are trying to force HOA’s to pay for the maintenance of their collateral. This is inexcusable considering that Banks knew about the prior HOA lien when they made the loan, they were noticed of the pending foreclosure and they have been instructed by the GSE’s to properly manage HOA liens.
12) So, when the Banks suddenly realize that their security interest has been extinguished by the HOA foreclosure, they try to sell the loan to FNMA or make a claim for FHA insurance.
13) MIS-MANAGED LOANS SHOULD NEVER REACH FNMA and the FHA. FNMA and the FHA should not trade their money for loans which have been willfully and knowingly managed in a manner which clearly violates established rules. Doing so only encourages the Banks to create and dump more toxic assets onto FNMA, the Conservator and the FHA.

Thanks to both Randy and Bill for your knowledge and expertise. The Banks must be held accountable not the taxpayers.