The argument about condominium super liens has been characterized as a battle between condominium associations, who support super liens, and bankers, who oppose it. But that description isn't entirely accurate.
Many large national banks do, indeed, oppose the super lien and, supported by the Federal Housing Finance Agency, are working hard to eliminate it. But many community banks don't share their view. We believe the history of the super lien demonstrates clearly that it has worked well for all the stakeholders and continues to work well for them. And we are convinced that efforts to challenge the super lien are ignoring the history of condominiums and condominium lending and threatening the future of both.
That's why my bank, and four others, submitted an amicus brief siding with condominium associations in a recent Massachusetts case, Drummer Boy v. Britton,challenging the authority of condominiums to issue successive "rolling" priority liens to collect delinquent owners' payments ahead of the first mortgage lender. Super lien critics, including the FHFA, weighed in on the other side in this case, which the Massachusetts Supreme Judicial Court decided in favor of condominiums.
Massachusetts is one of 23 states that have enacted super lien laws over the past 30 years. The mortgage lending industry was fully engaged in the development of the priority lien concept — a point that has been lost in the current debate. Many of the arguments cited here in favor of the super lien were advanced by lenders themselves during those formative discussions.
When Massachusetts enacted its statute in 1993, lawmakers were confronting what they described at the time as a "serious public emergency" resulting from a severe economic downturn that had caused many condominium owners to fall behind on their mortgage payments and the payment of common area fees to their homeowner associations. Because outstanding mortgages often exceeded increasingly depressed property values, lenders frequently delayed foreclosure actions, waiting for the market to recover, but leaving in place owners who were not paying their share of the common area fees on which associations rely to maintain the property and provide essential services to owners.
When the banks finally foreclosed on underwater mortgages, condominium associations, standing behind them in the priority line, frequently left the foreclosure sales empty-handed, unable to collect the delinquent payments they were owed. This triggered a devastating chain reaction: To generate the revenue needed to operate their communities, boards turned to other owners to fill delinquency gaps.
Many owners couldn't afford the increased assessments and so fell behind themselves; others, seeing essential services and property values in their communities decline, stopped paying their common area fees, as well, so services and values declined even more. This created the "public emergency" that led the state Legislature to enact the super lien, ensuring that associations would be able to collect six months of unpaid assessments (plus legal costs and collection expenses) ahead of the first mortgage lender.
Fast forward to the recession that brought the nation's economy to its knees almost a decade ago: Massachusetts condominiums emerged from that downturn with their finances intact, essential maintenance performed, services to owners uninterrupted, and no hint of the "public emergency" that had threatened so many community associations in the past. The condominium super lien, enhanced by rolling liens, is entirely responsible for the difference.
It was the authority to issue successive "rolling liens" to capture delinquent payments that accumulated while foreclosures were pending that was at issue in Drummer Boy and resolved in favor of condominium associations. But the arguments we cited in the amicus brief supporting rolling liens apply to the super lien on which they are based.
The super lien ensures the uninterrupted cash flow associations need to properly maintain their property and preserve its value. This doesn't just protect individual owners; it also protects the collateral securing the first mortgage loans on their units. First mortgage lenders have as much of an interest as owners in preserving condominium values.
The bankers' argument that the condominium priority lien discourages condominium lending is without foundation. There is no evidence that condominium lending has suffered in Massachusetts since the super lien was enacted; on the contrary, lending to condominium owners and condominium associations has thrived.
Because community associations own no property, the income derived from common area fees is the only collateral they can offer to secure a loan. Before the passage of Massachusetts' super lien statute, banks would not usually approve loans to condominium associations, because there was no assurance that the associations would be able to collect the fees securing the loans. The super lien provided that assurance. As we note in the amicus brief, without the priority lien, "association loans would not exist [in Massachusetts] as they have for more than 20 years."
The argument that the super lien will completely erase a lender's security interest ignores the multiple procedural safeguards the super lien statute creates to prevent that outcome.
If lenders request notification (and they should), associations must inform them if an owner becomes delinquent in association fees by more than 60 days; associations must provide another 30 days' notice to the lender before filing a lien enforcement action.
Lenders that want to preserve their security interest can do so easily by paying the delinquent amount and agreeing to pay common fees going forward, until the lender forecloses; or they can allow the association to foreclose (which associations can often do more quickly than lenders), attend the foreclosure sale to ensure bids are high enough to cover the outstanding mortgage, and collect the balance remaining from the foreclosure sale proceeds after the association's priority lien has been satisfied.
The super lien will erase a lender's security interest only if the lender fails to take steps to safeguard its position. As the SJC noted in its Drummer Boy decision, "It is well within the control of a first mortgagee to avert the establishment of [priority liens] in the first instance, "by paying delinquent fees and dealing expeditiously with borrowers who are unable to meet their obligations to the association and the lender." Recognizing this, community banks, like mine, have used the priority lien and rolling liens to our advantage — not as a threat to our interests but as a mechanism for protecting them.
The condominium priority lien benefits everyone — condominium associations, condominium owners, and the lenders financing their mortgages. The proof is found in the pre-super lien past and the post-super lien present.
Wesley Blair is senior vice president of Brookline Bank, a community bank headquartered in Boston.