If you are a member of CAI or receive CAI bulletins, no doubt you received word earlier this year that in a case arising in King County, Washington, the court put the lien interests of a community association ahead of the secured lender's lien. The case is known as Summerhill Village Homeowners Association v. Roughley. Ms. Roughley became delinquent in her assessment payments, and the Summerhill Village HOA brought an action to foreclose its assessment lien. Roughley did not object and the property was sold.
In the meantime, Roughley also became delinquent in her mortgage payments. The lender intervened in the HOA's foreclosure action to establish priority of its lien (which took the form of a deed of trust). The court held that the lender was out of luck, and that the HOA's foreclosure extinguished the lender's deed of trust.
Don't we all wish this were the law in California? How many HOAs here have pursued collections only to have the assessment lien wiped out and no practical way to recover thousands of dollars in unpaid assessments and costs of collection?
Washington's Condominium Act expressly allows for HOA liens to take priority over bank liens. In California, this “super-priority” for HOAs is non-existent, and not likely to materialize any time soon. In Washington, the law is that assessments which cover “common expenses” take super-priority over all prior liens, including a bank's deed of trust. The Washington law provides for other super-priority features too legalistic to explain here. The upshot is that the legislature in the state of Washington “gets it” when it comes to community associations: HOA's are dependent upon assessments to maintain basic quality of life and property value levels; as investors taking a security interest in the homes which constitute a community association, banks derive benefit from the maintenance of those basic levels of quality of life and property values; so therefore, HOAs should not always be the odd man out when it comes to collecting delinquent assessments, facing a squeeze from foreclosing banks at one end and the bankruptcy courts which relieve delinquent owners of their obligations at the other. In Washington, unlike in California, an HOA can recover unpaid assessments by foreclosing ahead of a bank and wiping out the bank's lien, and in doing so avoid rent-skimming problems and the threat of losing the property when the bank eventually deigns to foreclose. This also means an HOA can negotiate more forcefully with a delinquent homeowner to pay up.
But then … to take advantage of the super-priority law for community associations, you would have to live in Washington, where it rains more than three times as much as in California (at least if you compare annual rainfall averages in San Diego and Seattle). I think I would rather lobby legislators in Sacramento to enact protections for HOAs than re-locate to the beautiful, but cold and damp, pacific northwest.