A Tale of Two Mortgages

Foreclosures Up

Attorney Stephen M. Hladik, on behalf of the Legal League and American Legal and Financial Network (ALFN), has filed a Brief of Amicus Curiae in the Superior Court of Pennsylvania Eastern District in the case of Reverse Mortgage Funding LLC v. Foxfield at Naaman’s Creek Homeowners Association, Mohamed Ahmadat and Raechelle Eventoff.

The Background

The case of Reverse Mortgage Funding LLC v. Foxfield at Naaman’s Creek Homeowners Association, Mohamed Ahmadat and Raechelle Eventoff was commenced by a homeowners’ association (HOA) due to delinquent HOA assessments. The HOA initiated a foreclosure action under its HOA liens that proceeded to a Sheriff’s Sale of the property. After the sale occurred, the HOA took the legal position that the HOA’s Sheriff’s Sale divested the first mortgage from the property, and the Trial Court agreed.

Note that the industry has fought this issue on numerous fronts nationwide, with most battles being waged in the state of Nevada, but this was the first decision of its kind rendered in the state of Pennsylvania. According to Hladik, in the trial judge’s reading of the applicable statutes, only purchase money mortgages are saved from divestiture, and any mortgage sitting in the first lien position as a result of a refinance would not be saved from divestiture in an HOA foreclosure sale.

The Amicus Curiae filed on behalf of the Legal League and ALFN questions whether the Trial Court erred in finding that a “first” mortgage on a property could be divested by the foreclosure and Judicial Sheriff’s Sale for a judgment on unpaid condominium assessments incurred after the recording of subject mortgage.

MortgagePoint had a chance to discuss the case with Hladik, a Principal in the law firm of Hladik, Onorato & Federman LLP, also serves as Chair of Legal League, a professional association of financial services law firms uniquely positioned to drive progress in the mortgage servicing industry.

Hladik’s Insights

How did the Trial Court’s ruling adversely impact the lending market for first mortgages?

Hladik: There are major implications for the mortgage industry if this decision were to be upheld. The Trial Court ruled that only purchase money mortgages survive HOA Sheriff’s Sales. If that legal conclusion is affirmed, then any mortgage in the first lien position as a result of a refinance could be subject to losing its mortgage if an HOA foreclosed. This would be a major change in the law as it is understood, and this will compel lenders to pay delinquent HOA liens or face divestiture.

Can you explain a “judicial sale” of real estate? What is the responsibility of the buyer and seller involved, and what rights do they have?

Hladik: A “judicial sale” is a sale under the direction of the courts. These are sales that result from mortgage foreclosures, executions of money judgments on real estate, judicial tax sales, or HOAs. Traditionally, judicial sales are “buyer beware,” as the buyer is forewarned to check their own title to ensure they are getting a marketable title.

How does this case differ from your typical foreclosure sale?

Hladik: A foreclosure sale is the judicial execution on a property resulting from entry of a judgment in mortgage foreclosure. HOAs can foreclose their liens for assessments, but the underlying procedural practice is very different from a foreclosure, until it comes to the setting and handling of the sale itself. An HOA sale or a foreclosure sale are conducted by a sheriff, and they follow the same rules at that point.

How does the ruling in this case impact the foreclosure space?

Hladik: The direct impact is on holders of first mortgage liens that can lose their liens as a result of an HOA foreclosure sale. There is not much impact on the mortgage foreclosure space, but foreclosure attorneys will have to be especially mindful in reviewing title searches during foreclosures to check whether there are any open HOA foreclosures or scheduled sales that could impact the lender’s mortgage.

Do “first mortgage” rules change state-by-state, or is there a uniform ruling on the definition of a “first mortgage?”

Hladik: The legal term of art “first mortgage” is generally understood around the country to mean the first mortgage lien on a property. It is interesting in this case how the Trial Court took the term “first mortgage” to mean the “initial” mortgage on a property (i.e., a purchase money mortgage).

What do you and the teams from Legal League and ALFN hope to achieve by filing this Brief of Amicus Curiae?

Hladik: The efforts and advocacy of the Legal League and ALFN are important for the mortgage servicing industry. Key appellate cases like this could have a considerable impact on the mortgage lending industry. As such, it is important to get the voice of the industry in front of the Appellate Court and to help explain some of the intricacies of mortgage and title law that come into play. It is our hope that these efforts lead to a reversal of the Trial Court, and a clear articulation that a foreclosure sale conducted by an HOA cannot divest a first mortgage lien.

Any final comments?

Hladik: We genuinely appreciate the efforts of the Advisory Council of the Legal League and the Amicus Briefs Committee of the ALFN for their work in producing and editing this brief on this legal issue. It takes a great commitment of time to produce these Amicus Briefs, and we appreciate how members from both organizations donated their time to this important case.

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Eric C. Peck

MortgagePoint Managing Digital Editor Eric C. Peck has 25-plus years’ experience covering the mortgage industry. He graduated from the New York Institute of Technology, where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career in New York City with Videography Magazine before landing in the mortgage finance space. Peck has edited three published books, and has served as Copy Editor for Entrepreneur.com.
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