Condo Media - April 2011 - 20

RHODE ISLAND N e w s

by Frank A. Lombardi, Esq.

R e g i o n a l

Will Other States Follow?
Rhode Island Priority Lien Strengthens Associations and Lending

C A I

he Maine Legislative Action Committee (MELAC) has filed a bill that includes a provision that would give condominium associations in that state a limited priority lien for assessments. A priority lien bill has been previously filed in Maine and with strong opposition from banks and credit unions, legislators have in the past voted not to pass the bill. Since the Rhode Island Legislative Action Committee (RILAC) was successful in securing passage of a priority lien bill two years ago and since our law office does a fair amount of assessment collection work, I would like to make a few observations regarding the positive impact the priority lien has had in Rhode Island.

Working Together
While I have experienced an increase in collection activity, which I attribute to the priority lien in Rhode Island, that increase has not necessarily led to more condominium mortgage foreclosures. In fact, since the bills passage, both associations and lenders have been more diligent and efficient in monitoring the delinquency rates. From the association’s point of view, the collections that come in are for unit owners that are two or three months behind. I generally write demand letters to the unit owners and their lenders within a time period short enough to give the bank an opportunity to intervene on their mortgagor’s behalf, by either paying the delinquency under the negative escrow provisions of their mortgage or by pressuring the unit owner to bring their assessment account current. Before the priority lien was enacted, I would get ledgers for 12 to 18 months from associations, which would make it

more difficult to enlist the assistance of the banks to cover the arrearage so as to avoid foreclosure. I find this is no longer the case and banks are working more closely with our office to get the arrearage issues cleared up. In addition, lenders have been quicker to send requests for updates on our collection efforts. Before the priority lien, lenders would not contact us until just before we were about to foreclose. Now, we are an integral part of their loan modification or work out process. FHA and Fannie Mae delinquency guidelines also have helped in the collection of assessments and reduced the need for banks to get involved in the super lien process. Since certification of associations under both of these agencies requires that not more than 10 percent of the unit owners are more than 60 days in arrears, associations, and those managing or representing them, have taken every step available to keep the delinquency rate low.

Impact on Lending
Lenders often argue that they will stop lending if the super lien is passed in their state. I have not experienced a drop off in refinancing or acquisition loans due to the Rhode Island super lien. Banks are not factoring the super lien into their decision about whether to lend, but instead are looking at the overall fiscal health of the community. And having little or no delinquencies ensures that fiscal health. Since delinquency assessment collection is up, delinquencies are down and banks are more comfortable lending. Banks may say they need the certainty that they can lend without having to worry about an associations priority lien, but what they really mean is that

they don’t want a third party affecting their decision-making regarding foreclosure. If a bank has decided to foreclose, it is often not a question of if the bank will foreclose, but of when. The priority lien just makes the bank think about doing it a lot quicker and speeds up the process of either working out the loan on a short sale, modifying it or foreclosing it. Before the Rhode Island priority lien, it could be months, if not years, before the bank did something and during that time, the association advanced funds to keep the unit’s structure in good shape, which in turn, assisted in maximizing the amount it received at a foreclosure auction. Now, the association can move to foreclose, and give the banks plenty of notice that they need to pull the trigger on foreclosure. They can either pay the priority lien amount, pay in excess of the priority lien to stop the foreclosure or begin their own foreclosure process. Most importantly, while some lenders take the “us vs. them” approach, experience suggests that both parties need one another. There would be no condo associations without lenders financing the creation and sustaining of the units, but there also would be no market for condominium loans without the associations managing and sustaining the equity in those mortgaged units — and the costs inherent in doing that are assessments which the priority lien in Rhode Island and in 14 other states is designed to protect. CM Frank A. Lombardi, Esq., is a partner in the law firm Goodman, Shapiro and Lombardi LLC. Co-chair of RILAC, he is also a member of the Rhode Island Regional Committee.

CONDO MEDIA • APRIL 2011

Condo Media - April 2011

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