Junior Lien Bill Introduced in the Colorado Senate - Round II for Community Associations

On January 31, 2011, Senate Bill 11-122 (“SB 122”) was introduced in the Colorado Senate. Sponsored by Senator Lundberg for the second year in a row, the intent of the legislation is to obtain the highest bid possible on property at a public trustee foreclosure sale. The philosophy behind the bill is to get the price bid up high enough at the sale to have excess proceeds available to be distributed to the individual who loses his or her home in foreclosure. All good intentions aside, SB 122 attacks the lien rights of homeowner associations in Colorado.  

This bill gives the highest bidder at a public trustee foreclosure sale – known as the Certificate of Purchase Holder (“CP Holder”) – the right (but not the obligation) to pay off junior lienors. In the event the CP Holder pays off a junior lienor, which include  homeowner associations, the right of redemption associated with that particular junior lien would be extinguished. In other words, that junior lienor would lose the right to redeem the property.

In these tough economic times, community associations are struggling with assessment delinquencies. When a public trustee foreclosure is commenced, an association is often only successful in collecting what is known as the superlien – which roughly amounts to six months of assessments. Unfortunately individuals who lose their homes in public trustee foreclosures typically have not paid their assessments for upwards of a year, leaving homeowners who do pay to subsidize these losses through assessment increases or special assessments.

 

A saving grace under these unfortunate circumstances has been the ability of associations to assign their junior lien rights to investors. Investors, who want to obtain the redemption rights of an association, pay the association the full amount of the homeowner’s delinquency for the association’s right to redeem. In these cases, the association is not forced to settle for payment of the superlien and write-off the remaining delinquency as uncollectable debt. 

 

In short, SB 122 penalizes paying homeowners by eliminating all incentive for investors to purchase the junior lien rights of associations. Since CP Holders know that investors intend to redeem the property, they will make it a practice to routinely pay off investors who hold an association’s right to redeem. Obviously there will be no incentive for investors to go through the process and expense of purchasing an association’s lien rights. As a result, responsible homeowners will get stuck paying the delinquency balance.

   

Due to the inequities outlined above and other procedural issues with the bill, SB 122 is a top priority for community associations in Colorado. We will continue to provide you with timely updates on the bill. We will also publish Calls to Action from CAI’s Colorado Legislative Action Committee as they become necessary.