|Condominium--Association Super Priority Lien|
7546 of document(s) retrieved
OLR Research Report
February 4, 1998 98-R-0183
FROM: George Coppolo, Senior Attorney
RE: Condominium—Association Super Priority Lien
You asked whether any states give condominium associations more than a six months priority lien for unpaid common changes when the unit is foreclosed on. You also asked whether the secondary mortgage market (Freddie Mac and Fannie Mae) will purchase mortgages or condominiums which have super priority liens of more than six months.
Connecticut has a statutory lien for condominium association assessments (CGS § 47-258). The lien attaches once the declaration is recorded on the land records. The lien has priority over every other lien except taxes and other government assessments, first and second mortgages, and liens recorded on the land records before the declaration was recorded. The lien in an amount equal to six months of assessments plus foreclosure costs and attorney's fees has priority even over first and second mortgages. Thus, it is often referred to as a super priority lien. The lien can be foreclosed in the same way a mortgage can.
Based on our discussions with Attorney William Breetz, a condominium law expert; Attorney Mary Pfaff of the Federal Home Loan Mortgage Corporation (Freddie Mac); Anna Chandler, a loan servicing representative of Freddie Mac; Attorney Joyce Cianci of Fannie Mae; and Becky Vental of the Community Association Institute of Fairfax, Virginia it appears that no state gives condominium associations more than a six-month super priority lien for unpaid common charges.
Mary Pfaff also advised us that Freddie Mac guidelines require the seller and servicer of the mortgages to certify that any first mortgagee that obtains title to a condominium unit by foreclosure will not be liable for more than six months of the unit's common charges. Thus, a law giving the association more than six months in a foreclosure would be unacceptable to Freddie Mac. Attorney
Joyce Cianci advised us that Fannie Mae has a similar requirement. Thus, it would not purchase mortgages on condominium units where the association had a super priority lien of more than six months.
In 1991, Rhode Island enacted a law giving condominium associations a five-year super lien for unpaid common charges that took priority over first mortgage holders. The following year, it repealed the law reducing the lien priority period to six months. According to an article provided to use by Freddie Mac, the legislature repealed the law because it virtually put a halt to financing of first mortgage loans for condominium units. Lenders reacted this way, at least on part, because of the clear implication that Freddie Mac and Fannie Mae would not purchase them, thus there would be no secondary market for the lenders to sell the mortgages to.
Following is a summary of our super priority condominium lien law and a brief discussion of Freddie Mac and Fannie Mae. We took the material concerning Freddie Mac and Fannie Mae directly from their home pages on the internet.
CONNECTICUT LIEN LAW
A condominium association has a statutory lien on a unit for any assessment it levied against that unit or fine it imposed against the unit owner. Recording of the declaration constitutes record notice, and perfection of the lien. The association is not required to record any other lien claim. If an assessment is payable in installments, the full amount of the assessment is a lien from the time the first installment becomes due.
Unless the condominium declaration provides otherwise, the following fees, charges, late charges, and fines, are also enforceable as an assessment:
1. payments, fees, or charges the association imposes for the use, rental, or operation of common elements, and for services provided to unit owners;
2. charges and interest for late payment of assessments;
3. reasonable fines the association levies for violating the declaration or the association's bylaws, rules, and regulations; and
4. reasonable charges for preparing and recording amendments to the declaration, resale certificates, or statements of unpaid assessments.
Priority Status of Lien
This lien has priority over all other liens and encumbrances on a unit except (1) those recorded prior to the recording of the declaration; (2) liens for real estate taxes and other governmental assessments or charges; and (3) first or second mortgages recorded before the assessment became delinquent, except for an amount equal to common expense assessments that would have become due during the six months immediately preceding an action to enforce the lien on the first or second mortgage. This six month priority lien over previously recorded first or second mortgages also includes the association's costs and attorney's fees it incurs to enforce its lien.
This statutory lien for condominium association assessments departs from the common law rule of first in time equals first in right. The statutory priority scheme delineates which liens take priority over this lien and the extent to which the assessment lien takes priority over first and second mortgages. This scheme establishes the order in which the lienholders are paid from the available equity in the real estate when the court orders the property sold (Dime Savings Branch of New York, FSB v. Muranelli, 39 Conn. App. 736 (1995)).
This priority arrangement controls whether it is the association that institutes the foreclosure or it is another lien holder, such as a first or second mortgage holder.
Important Court Cases
Condominium associations have tried to expand the reach of their lien over first and second mortgages. In one case, the trial court ordered a foreclosing mortgage holder to make payments to the condominium association in lieu of common charges during the pendency of the foreclosure action. But the Appellate Court held that the trial court order is unauthorized by law and reversed the trial court ruling. The Appellate Court concluded that the effect of the trial court order was to give the association a priority lien for more than an amount equal to six months assessments and thus violated the statutory scheme established in CGS § 47-258 (Dime Savings Bank of New York, FSB v. Muranelli, 39 Conn. App. 736 (1995)). Similarly, the Supreme Court rejected the argument that the law gives associations a priority lien for common expense assessments that accrue during the pendency of a foreclosure action that the association instituted (Hudson House Condominium Assn. , Inc. v. Brooks, 223 Conn. 610 (1992)).
But our courts have likewise resisted efforts by mortgage holders to decrease the scope of the super priority lien as it relates to first or second mortgage holders. A trial court had concluded that the association's priority lien did not include attorney's fees and costs. The Supreme Court overturned this ruling holding that CGS § 47-258 creates a super priority lien for attorney's fees, title examination fees, and other costs associated with foreclosing the association's statutory assessment lien (Hudson House Condominium Assn. , Inc. v. Brooks, 223 Conn. 610 (1992)). Thus, these costs plus an amount equal to six months assessments have priority over first and second mortgages.
Duration Of Lien
The assessment lien is extinguished unless proceedings to enforce it are begun within two years after the full amount of the assessments became due. But, if the unit owner files for bankruptcy, the time for instituting proceedings to enforce the lien is tolled until 30 days after the automatic stay of proceedings under the Bankruptcy Code is lifted.
Foreclosure Purchaser's Rights
If a first or second mortgage holder forecloses on a unit, the purchaser at the foreclosure sale is not liable for any unpaid assessments against the unit that became due before to the sale, other than the super priority amount equal to six months assessments. Any unpaid assessments not satisfied from the proceeds of the sale become common expenses collectible from all the unit owners, including the purchaser.
Unpaid Dues. Any first mortgagee who obtains title to a condominium unit pursuant to the
remedies in the mortgage or through foreclosure will not be liable for more than six months of the unit's unpaid regularly budgeted dues or charges accrued before the acquisition of the title to the nit by the mortgagee. If the condominium association's lien priority includes costs of collecting unpaid dues, the seller/servicer will be liable for any fees or costs related to the collection of the unpaid dues.
Fannie Mae is a private corporation, federally chartered to provide financial products and services that increase the availability and affordability of housing for low-, moderate-, and middle-income Americans.
Fannie Mae has $ 366 billion in assets and an additional $ 674 billion in mortgage-backed securities outstanding. The company is one of the largest insurers of debt after the U. S. Treasury. Traded on the New York Stock Exchange (FNM), Fannie Mae has approximately 240,000 shareholders, and is part of the Standard & Poor's 500 Index.
Since its inception in 1938, Fannie Mae has provided a constant source of mortgage funds for home buyers by investing in mortgages from institutions that originate them, such as savings and loans, mortgage companies, and commercial banks.
Fannie Mae has two major lines of business: portfolio investment and mortgage-backed securities. The company buys residential mortgages for its investment portfolio and earns a spread between the yield on portfolio investments and the cost of debt funding those investments. Fannie Mae also receives pools of mortgage loans from lenders and exchanges them for mortgage-backed securities, which the company guarantees. A “guaranty fee” paid to Fannie Mae assures the timely payment of monthly principal and interest to investors in these securities.
Today, more than 12 million American families live in homes Fannie Mae has helped finance. In 1996, Fannie Mae purchased or guaranteed $ 218 billion of home mortgages from over 1,500 mortgage lenders.
HOW FANNIE MAE EARNS MONEY
Fannie Mae's major sources of income come from its mortgage portfolio investments, guaranty fees on its mortgage-backed securities (MBS), and income from financial and information services such as the issuance of Real Estate Mortgage Investment Conduits (REIMICs).
Mortgage Portfolio Investments
Fannie Mae purchases mortgages throughout the United States from its nationwide network of Fannie Mae-approved mortgage lending institutions. In 1993, Fannie Mae purchased over $ 90 billion in mortgage loans for its portfolio, increasing its gross mortgage portfolio investments outstanding to over $ 200 billion The corporation derives income from the difference, or spread, between the yield on the mortgage loans and the borrowing costs to fund the investment. The corporation funds these purchases by issuing debt in the domestic and international capital markets.
MBS Guarantee Fees
Lending institutions have the option of assembling groups, or pools, of mortgage loans to be guaranteed and issued as securities. Instead of purchasing these pools from approved lenders for its portfolio, Fannie Mae issues securities backed by these pools. Fannie Mae provides a 100% guaranty of timely payment of interest and principal to the purchaser of the MBS. In 1993, Fannie Mae issued $ 221 billion of such securities and, at the end of 1993, was earning annual guaranty fees of $ 1 billion on nearly $ 500 billion of MBS outstanding.
REMIC Issuance and Fees
A smaller but nevertheless significant segment of Fannie Mae income is derived from the issuance and fee income of REMICs, multiple-class mortgage cash flow securities backed by residential mortgage loans, which generally have been pooled together in MBS trusts.
Freddie Mac is a stockholder-owned corporation chartered by Congress to increase the supply of money that mortgage lenders, such as commercial banks, mortgage bankers, savings institutions and credit unions, can make available to homebuyers and multi-family investors.
Freddie Mac's purposes are to:
● Make mortgage funds available whenever and wherever Americans need them by linking the worldwide capital markets to the U. S. mortgage markets;
● Provide a continuous, reliable and low-cost flow of mortgage capital to finance housing for the nation's homebuyers and renters; and
● Bring the benefits of the market—to a wide and diverse range of Americans and communities across the nation
Freddie Mac conducts its business by buying investment-quality mortgages—mortgages meeting the company's underwriting and product standards—from lenders, packaging the mortgages into securities and selling the securities—guaranteed by Freddie Mac—to investors, such as insurance companies and pension funds. Mortgage lenders use the proceeds from selling loans to Freddie Mac to fund new mortgages, constantly replenishing the global pool of funds available for lending to homebuyers and apartment owners. Just as stock and bond markets have put investor capital to work for corporations, the secondary mortgage market puts private investor capital to work for homebuyers and apartment owners, providing a continuous flow of affordable funds for home financing.
WHAT IS THE SECONDARY MORTGAGE MARKET?
If you think of America's mortgage lenders as retail stores where people go to get mortgages, the secondary mortgage market is their supplier. Freddie Mac, one of the biggest buyers of home mortgages in the United States, is considered a secondary market conduit between mortgage lenders and investors.
Lenders look to Freddie Mac and other secondary market conduits for the funds they need to meet consumer demand for home mortgages and multi-family housing. About half of all new single-family mortgages originated today are sold to secondary market conduits. By “linking” mortgage lenders with security investors, Freddie Mac keeps the supply of money for housing widely available and at a lower cost.
DOES FREDDIE MAC MAKE LOANS?
No. Freddie Mac's charter prohibits it from originating mortgage loans. As a result, Freddie Mac does not make loans directly to homebuyers. After borrowers close on their mortgage loans, Freddie Mac buys those mortgages from lenders who are approved to do business with the corporation. This process enables lenders to make more home mortgage loans to other borrowers.
DOES FREDDIE MAC HAVE ANY DIRECT IMPACT ON CONSUMERS?
While Freddie Mac does not lend money directly to considers the mortgages it buys from lenders across the country who must meet the company's underwriting and specific program standards to produce investment-quality mortgages. These guidelines help lenders decide whether a borrower has sufficient ability and the willingness to repay the mortgage in a timely manner, and that a property is of sufficient value to support the return of the investment should the borrower default on the mortgage payments.
Lenders who follow Freddie Mac's guidelines in originating mortgages help ensure that borrowers are sufficiently prepared for the long-term financial obligations of homeownership and that they can afford to get and keep the homes they buy. Freddie Mac conducts ongoing research to determine the continuing validity of its guidelines, working with lenders to give them the benefit of that research in new and innovative tools to help produce investment quality mortgages. Maintaining that quality is one of the company's primary goals, helping to sustain viable neighborhoods and a desirable quality of life for all America's homebuyers and renters.