Oregon Foreclosure Update

Oregon community associations enjoy statutory lien rights when owners fail to pay assessments. When a delinquent owner is insolvent and unemployed, an association’s best chance to recover unpaid assessments may be to enforce its lien rights against the property in a judicial foreclosure action. Although foreclosure is usually not the first option, it is a useful tool in certain circumstances to enhance an association’s cash flow.

Oregon requires judicial foreclosure of an association lien. In a judicial foreclosure, a lawsuit is filed against the owner and all junior lienholders. The owner and junior lienholders have a chance to challenge the foreclosure action, and if necessary, a trial on disputed issues could ensue. When the association prevails, the court will issue a judgment foreclosing the interests of the owner and all junior lienholders and instruct the sheriff to enforce the judgment by execution and sale of the property. The sheriff must publish notice of the sale once a week for four successive weeks.

There are several possible outcomes of a foreclosure sale. The association sets the minimum bid equal to the judgment amount, which includes all assessments, costs, and attorney fees through the date of the judgment. Anyone with cash may bid on the property. The association should attend the sale and be prepared to bid in order to ensure fees and costs incurred after the judgment but before the sale will be paid through the sale proceeds. If a third party purchases the property, the association’s judgment and any supplemental judgment(s) will be paid and satisfied through the proceeds of the sale. Any remaining proceeds will be distributed to junior lienholders in order of priority, and excess funds, if available, will be distributed to the owner. If no third party purchases the property, the association will receive a certificate of sale and will take title to the property.

The foreclosure process generally takes about eight months from the beginning of the foreclosure through the sale. The process will take longer when the association’s rights are disputed. There is also a six month statutory redemption period following the sale during which the owner or any junior lienholder may redeem the property by paying the sale amount plus any costs paid by the association, including taxes. During this six month period, the purchaser is liable for assessments. If the association takes the property, the property will remain unmarketable for six months with nobody paying assessments. Following the six month redemption period, the sheriff will issue a deed to the new owner.

A foreclosure only affects the rights of the owner and all junior lienholders. Senior lien rights are completely unaffected by a foreclosure. Mortgages and tax liens are usually senior to association liens. Oregon condominium associations, however, can sometimes jump priority over a mortgage when the lender fails to timely foreclose. Unless the association has priority over a mortgage, the mortgage will remain after the foreclosure, and the purchaser will be on the hook for the entire mortgage amount. In the current economy, many properties are in a state of negative equity, or are “under water,” which means the amount of the outstanding loan exceeds the value of the property. The key point here is that foreclosure is not recommended when a senior first mortgage exceeds or comes close to exceeding the value of the property.

VF Law’s Cash Flow Enhancement arrangement allows associations to avoid having to pay costs and fees upfront to collect past-due assessments. We pursue most judicial foreclosures under our standard CFE program. In some circumstances, however, particularly when the foreclosure is likely to be contested, VF will require the association to pay hourly, outside of our standard CFE program. Your VF attorney will carefully consider potential risks and inform you before we begin foreclosure whether or not VF will pursue the foreclosure under the CFE agreement.

In conclusion, there are many things board members should consider when deciding whether foreclosure is a good option. The following four questions are a good place to start:

1. Is there a first mortgage or any tax liens that are senior to the association’s lien?
2. Is the owner or any junior lienholder likely to challenge the association’s foreclosure?
3. Is the amount owed to the association high enough to necessitate foreclosure?
4. Are there any other options available to collect the delinquent assessments without having to foreclose?

Although a judicial foreclosure is usually not the first option to recover a delinquent assessment balance, in today’s economy, an owner’s real property is often the only available asset from which the association may satisfy a delinquent balance. The association should always seek the advice of a knowledgeable attorney before commencing a foreclosure action. We invite all board members and community managers to contact us whenever they have questions about their association’s right to enforce liens through a foreclosure.