How valuable is the “Mortgage Terminator” legal tactic for your HOA?

Many of you may have questions about what has now become one of the most talked about Sun-Sentinel articles regarding condominium law in some time. The article by reporter Daniel Vasquez discussed a new legal tactic with the catchy title “Mortgage Terminator” and concerned a Pompano Beach condominium community that was able to obtain title to a property free and clear of the existing mortgage.

The Palm Aire Gardens Condominium Association was awarded title free and clear of a $184,400 mortgage held by Wells Fargo. The current value of the 2-bedroom unit is $32,500.

While the result sounds wonderful and like something every association should be pursuing, there are a few key facts that were not revealed in the article. First, how much in attorneys’ fees was spent to obtain this unusual result and how many times was this tactic tried unsuccessfully for other communities where the association was left with nothing but a larger legal bill?

In the case referenced in the article, the bank decided to walk away from a unit that was worth about $150,000 less than what was owed on the mortgage after a series of events and legal filings that fell into place just right. In other words, the Association risked attorney’s fees to try and obtain an unusual result, and got lucky in the reported case, which actually ended in settlement. The likelihood that this result will be duplicated on a widespread basis remains to be seen.

In the few cases seen so far where a mortgage has been “wiped out”, that result was obtained by the bank voluntarily walking away and NOT because a judge ordered this relief. In the cases we’ve seen thus far, banks have agreed to walk away only in instances where the property involved had an extremely low value and had been abandoned for some time. In one case, it appears there was so much damage to the property and the value of the unit was so low that the bank did not want to become involved in repair and reconstruction. In another, it appears the bank ignored court orders entered against it, and made a business decision to simply “walk away” from another low valued unit rather than fight. We have yet to see a case where this result was actually obtained by court order in a contested case. Generally speaking, to obtain a similar result to the Palm Aire Gardens case seems to require the home or unit to be worth $50,000 or less, the property to have been abandoned for a significant period of time or significantly damaged, the lender to ignore its mortgage foreclosure, and then decide to voluntarily walk away.

For situations that do not meet this criteria (and even for those that do), the same result cannot be guaranteed and there is the not-so-small matter of attorney’s fees to employ this tactic in court to convince a judge to actually terminate a mortgage when heretofore it has only happened because the banks have agreed to such termination voluntarily. If you swing 100 times, you’re bound to hit the ball at least once or twice! If you file an action enough times, eventually you will get a default, or the stars will align, or the bank will throw in the towel and you will have a big story on your hands. For those communities where the right set of circumstances are in place on a particular property, this strategy might work. However, whether or not this strategy will work across the board remains highly suspect for all the reasons set forth herein.

Not surprisingly, things always seem a little rosier in theory than in reality. Those of us who work for associations must keep trying to help our communities weather the current economic storm by employing strategies that make sense after taking into account each association’s particular set of circumstances and doing a cost/benefit analysis.

Donna DiMaggio Berger