By Aaron L. Gordon, Tampa
Gordon is corporate general counsel for LM Funding, LLC, a financial services company that manages the receivables of community associations throughout the United States.
Monday, April 28, 2014
With a recent ruling by Florida’s 5th District Court of Appeals, Florida’s community associations scored a big victory which will provide them with financial relief during the fragile real estate recovery.
This ruling marks a turning point in community associations’ ongoing battle against foreclosing lien holders who continually seek protection — as first mortgagees — from the Safe Harbor guidelines. In the event of a foreclosure, by the first mortgage holder, these associations are entitled to a minimal payment of delinquent assessments of just 12 months or 1 percent of the mortgage amount, whichever is less.
It’s no secret that there has been an abuse of the Safe Harbor rule by mortgagees in Florida. In the muddled court system, financial institutions have been wrongly claiming first mortgagee status, thereby preventing associations from collecting more than the minimum due. Imagine a scenario where a mortgagee assigned away all of the rights to the mortgage, and then demanded that the association recognize it as a first mortgagee and demanded a Safe Harbor payoff letter.
That’s exactly what happened in this case — Bermuda Dunes Private Residences vs. Bank of America. With a systematic process, Bank of America sold the loan to another mortgagee and then after foreclosure it claimed first mortgagee status, when its new role had been solely to service the loan. We can only assume that Bank of America and other financial institutions have used this strategy to limit payments to many other associations.
In a stern ruling, the court stated: “It is necessarily the entity having rights and obligations under the mortgage at the time of foreclosure, whether as a first mortgagee or as a successor assignee, that is the key factor.” Tampa-based Business Law Group, a firm specializing in condominium law, made compelling arguments that will provide millions of dollars to associations throughout Florida.
This ruling has laid a clear path for community associations in Florida to attack opaque and nonexistent chains of mortgage ownership. It is not uncommon in this state for a trustee of a trust to foreclose and for Fannie Mae or Freddie Mac to take title to a unit at the foreclosure sale as a “secret” owner of the mortgage. While that practice is still viable, community associations no longer have to submit to demands to produce Safe Harbor payoffs without evidence that the owner is the first mortgagee or its successor. In other words, the onus of proving “first mortgagee” status is now on the financial institution. If it can’t be verified, then the association can take steps to collect the full amount of delinquent assessments.
Aggressive associations can expect much greater payoffs. The default rule in Florida is that a unit owner, no matter how its title is acquired, is jointly and severally liable for all past-due assessments. If a bank, Fannie Mae or Freddie Mac cannot prove they are entitled to the narrow exception of limited liability through Safe Harbor, presumably by pointing to a validly executed assignment of mortgage, then it, a financial institution with very deep pockets, is jointly and severally liable with the previous unit owner for all past-due assessments.
Our legislators inserted Safe Harbor language into our state’s statutes years ago because they wanted to incentivize lenders to make loans, which allow Floridians to become homeowners. Financial institutions have pushed this law to its limit and then beyond. The judiciary in the Florida seems to have had enough of these abuses and with this ruling has taken the first of many steps necessary to rein in the legacy problems of Florida’s housing crisis.
With this important hurdle, there is more work to do. Homeowners, board members, residents, managers and citizens should closely watch and support Florida House Bill 871 and its companion, Senate Bill 1462. These two bills, if passed, will further act to help Florida’s housing recovery. The highlights of the bills will be an increase the amounts that banks or financial institutions have to pay to Florida’s community associations in the event they foreclose, and will also allow your community association to recover past-due assessments from the bank even if your community opts to foreclose and rent out a unit.
Currently your association has to make a choice, either foreclose and rent or wait and fight with the bank or a third party once they take title. If either of these bills pass, your association will not have to make an either/or choice; it can elect to do both. The increased Safe Harbor along with the inclusion of a cost and legal fee provision will give community associations the long-needed leverage they need over holders of senior mortgages, mortgages that have long been abusing the foreclosure process and forcing other homeowners to maintain their collateral.