Beating Out the Bank — For Now

New York State’s moratorium on foreclosures ended Aug. 31, but there was a lot of confusion during that moratorium on the part of condo boards. What was the misconception?

A lot of condo boards were being advised that this moratorium applied not just to foreclosures of lenders but also to condominium and homeowners association boards. And in fact that wasn’t the case. There were a number of condominiums and homeowners associations that, as a result of believing that they could not foreclose, did nothing and actually got hurt.

So this was a missed opportunity?

It was a huge missed opportunity because one of the benefits of the moratorium was that it enabled condominiums and homeowners associations to advance their foreclosure actions while the banks weren’t doing anything. As we know, a first-mortgage lender has priority over a condominium or a homeowners association. So the board could actually be cut off if a first-mortgage lender foreclosed. But when lenders are completely stopped, it enables the condominium or homeowners association to go through the process and beat the bank. And that opens up a number of opportunities. If nobody bids at the auction during the foreclosure sale, the board could become the owner of the property, then rent the unit. If an investor bids at the auction and either rents the unit or lives in it, then the board gets paid its money. So there are huge advantages to pressing forward on foreclosure actions. We actually had a second-mortgage holder that paid our community association every penny of arrears, interest and legal fees because we got to the foreclosure sale part of the process, and if they didn’t pay us, they would have been cut off.

When trying to collect arrears, foreclosure is one option; a money judgment is another. Which do you advise boards to pursue?

Say you’re owed $20,000 for common charges through Sept. 1, 2021, and you get a money judgment. Guess what? That judgment gets in line with any other judgment. You can rest assured that if they’re not paying the condominium and they’re not paying the lender, they’re likely not paying a lot of other people. And many people remain in their homes because, again, there were so many different moratoriums that everybody began to get a little bit confused. So they were able to just stay in their apartments and not pay anybody. Most boards think that a judgment is going to get them paid when the person sells. But if the unit-owner gets foreclosed by the lender, the board’s not getting paid when the person sells.

So you’re coming down pretty strongly in favor of foreclosure over a money judgment.

Absolutely.

As the year draws to a close, what can we expect with foreclosures?

There is some pending legislation that is seeking to extend the moratorium. Whether that passes or has passed by the time this gets put out remains to be seen. But there are also some rules that have been put in place for Fannie Mae and Freddie Mac loans from the lenders that give those lenders more of an ability to enter into some streamlined modifications with borrowers, what’s called a forbearance agreement. It would either stop a foreclosure action by a lender or prevent them from starting one. So the lenders are still moving very, very, very slowly, and this window that exists for advancing and beating out the bank is still there. 

And by the way, even before the pandemic, we’ve demonstrated to our clients that foreclosing is the best option, for a couple of reasons. First, if you have the ability to foreclose and people realize they could lose their home, they oftentimes will pay. Second, if you do nothing, you’re just kicking the can down the road. Even though you have to pay some legal fees, most governing documents permit the board to recover those fees — and you’re much better off advancing to the point of foreclosure, where you open up the door of those options and hopefully get either a renter or a new unit-owner in there and start collecting your common charges and assessments.

So even with the uncertainty that’s in the air, there is still a window for condo boards to proceed with foreclosure proceedings?

Yes, and boards should always be foreclosing. There are some exceptions, of course. If a bank is way ahead of the condominium and they’re about to finish their foreclosure action, then you might want to think otherwise. But in most cases, all things being equal, moving as fast as you can to collect arrears through the foreclosure process is the best approach. We have demonstrated to many boards that being slow and hesitant in the process costs them more. We have shown them time and time again that when the matters are handled properly and they’re handled expeditiously through the system, that overall the condominiums and homeowners associations are winners.

How would you sum up the lesson here?

Big lesson: You’ve got to have the right person for the job. If you had a heart condition, you wouldn’t look for a podiatrist. And you probably wouldn’t look for the cheapest cardiologist. The same thing applies here. This is something that requires expertise. You should always look for the best attorney who can handle the job, not the cheapest attorney.

FROM THE COURTS 

April 19, 2021

Baxter St. Condo. v. LPS Baxter Holding Co., 2021 NY Slip Op 31461(U) (N.Y. Sup. Ct. 2021)

A condominium association, which had passed a $150,000 special assessment to repair lobby air conditioning, the roof membrane, terrace railings, and other portions of the common elements, filed a foreclosure suit against the owner of four commercial units who failed to pay the assessment. The commercial unit owners claimed that the repairs did not benefit its units.