The housing market has fluctuated and changed drastically over the past few years. This is why it is important for an association board to be proactive when a unit owner is facing mortgage foreclosure proceedings.  Being proactive includes initiating a collection action immediately after the account becomes delinquent and filing an Answer and Appearance to the mortgage foreclosure complaint in order to preserve the Association’s lien as part of the judgment of foreclosure and sale.

Our Tressler HOA Law attorneys have handled mortgage foreclosure actions on behalf of condominium and homeowners association clients in various stages of foreclosure throughout all of Northern Illinois for many years. We are well-informed and remain up-to-date with any changes in the mortgage foreclosure processes and procedures.

The effect of foreclosure on associations

Most owners purchased their property through the use of a mortgage. If an owner stops making mortgage payments, the owner’s mortgage lender will commence foreclosure proceedings to recover the property.  Once the lender has complied with all legal requirements under Illinois mortgage foreclosure laws (which typically takes anywhere from 7 to 18 months- sometimes longer!) the mortgage lender is entitled to sell the property at a judicial sale to recover its balance owed. Tressler LLP has seen an increase in judicial sales where third-party purchasers are attending the auction, bidding on the property and paying more for the property than what is owed to the mortgage lender. When a property sells for more than what is owed to the mortgage lender, a surplus of funds is created and those funds are available for recovery by any party who has a legal interest in the property- including the owner and any judgment creditors who may have recorded a judgment lien against the property.

The key to an association having priority recovery over any other creditor (including the owner!) is to ensure that the Association’s lien is preserved by filing an Answer, Appearance and the Association’s attorney making sure that the Association’s lien is included in the judgment of foreclosure and sale.  If all of these steps are followed and a surplus is created, the association is able to file a motion seeking that the Foreclosure Court turnover the surplus funds (to the extent that the Association is owed money) and hopefully make the association’s account “whole”.

Once the Court approves the judicial sale, the mortgage foreclosure action is considered final and closed.  Collecting a surplus falls outside the purview of the mortgage foreclosure action and only those parties who participated in the foreclosure proceedings are entitled to participate.  We have attempted, unsuccessfully, to seek recovery of surplus funds for association clients who, for various reasons, opt not to participate in the foreclosure proceedings at the beginning of the process.  In those instances, each of our association clients had no choice but to write-off several thousand dollars as “uncollectable bad debt” as the Court was unable to legally “undo” the default entered against the Association so that the Association could participate (after the fact) and seek recovery from the surplus funds.

The lesson to be learned– as property prices are rising and as it is becoming more common for third-party purchasers to bid on the properties at the judicial sale (as opposed to the lender being the successful bidder) an association should be proactive in the early stages of the foreclosure process and participate in the foreclosure action to preserve the association’s lien.

The total cost of collecting a surplus is nominal compared to the amount of money the association is collecting from the surplus.  Please reach out to one of Tressler’s HOA Law attorneys to further discuss your association’s ability to participate in the recovery of surplus funds created by a judicial sale of the property.

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