In this economy, it is certainly not unusual for a homeowner to fall into a situation in which it is not possible to make ends meet. When this occurs, some bills do not get paid on time, or even at all. This can include housing expenses such as homeowner’s dues and mortgage payments. There is also some amount of assignment and transferring of deeds of trust to real estate among lenders and “packagers” of so-called mortgage backed securities, and apparently sometimes lines of communication among these parties are weak. When a condominium unit is involved, there are some legal quirks that present risks for lenders and opportunities for investors.

A recent case involved a condominium owner who fell behind in payment of the assessments to the condominium association for common expenses. The owner also had a loan secured by a deed of trust against the condominium unit. Under Washington law there is a statutory lien against any condominium unit in favor of the condominium association to secure the payment of assessments. The condominium association filed a lawsuit against the owner to foreclose its lien and obtain payment of the delinquent assessments, which totaled approximately $10,202. The association recorded a lis pendens which is a document that gives notice to the world that there are claims involving the title to real estate, and served the lawsuit on the holder of the deed of trust, which was the so-called Mortgage Electronic Registration System, or MERS. MERS generally is involved in deeds of trust that have been transferred from the original lender in the course of “packaging” multiple loans for purposes of marketing them as investments. The condominium owner did not respond to the lawsuit and the association obtained a default judgment against the owner for the $10,202 in back assessments. Neither did MERS respond to the lawsuit.

A few months later, the association had the condominium unit sold at a sheriff’s sale and an investor purchased the unit for the $10,202 amount of the default judgment plus $100. In the meantime MERS had assigned its interest in the deed of trust to Deutsche Bank and appointed a successor trustee for the deed of trust. The investor who purchased the unit notified the successor trustee about the sheriff’s sale and asked about the lender’s intentions concerning the property, but received no response.

During this time the condominium owner also became delinquent on her mortgage payments. The loan servicer for Deutsche Bank began foreclosure proceedings on the deed of trust and apparently as a result of a title search in connection with this intended foreclosure learned for the first time about the sheriff’s sale. The loan servicer, GMAC, intervened in the condominium association’s foreclosure proceeding and tried to have the default set aside or alternatively tried to redeem the property. Redemption is when someone who is legally entitled to do so pays the delinquent debt and is allowed to set aside a foreclosure.

The court decided that GMAC’s lien was subordinate to the condominium association’s lien and was therefore wiped out by the association’s foreclosure. The court refused to set aside the default judgment and then considered GMAC’s request to redeem the property. The quirk in the law is that ordinarily priority of liens is based on the date of recording, and since the deed of trust was recorded before the condo owner became delinquent in her assessments one would expect that the condo association’s lien would not be able to eliminate the deed of trust. Our state’s law says that condo association liens for common expenses have a “super priority” over previously recorded liens. And this super priority produces the twist in the case here.

In an interesting turn of events, the court held that GMAC was not allowed to redeem the property by paying the amount of the default judgment because only subordinate liens that are subsequent in time to a condo association’s lien have the right of redemption. The very fact that the deed of trust was recorded before the assessments became delinquent defeated the lender’s right of redemption in this case. The court considered GMAC’s argument that this outcome produced a windfall for the investor and a loan deficiency for the former condominium owner and “punished” the lender but the court was unmoved. The court determined that the legislature had spoken clearly and this was the intended outcome in such a situation. Of course, if the lender had paid attention to the notice it received about the foreclosure lawsuit it could easily have paid the delinquent assessments and avoided having its deed of trust eliminated.

So a lucky investor obtained a condo unit for $10,302, plainly a small fraction of its true value, because an owner ran into financial difficulties and the lender slept on its rights. Sometimes luck can produce a very profitable outcome.

The foregoing is intended for education and may not be considered as legal advice.