The “Mortgage Terminator”–A New Tactic in Fighting Banks, or Marketing Speak? [Updated]

This week Daniel Vasquez, a consumer and condominium reporter for the Sun Sentinel and Miami Herald whom I often refer to, wrote an article about a “new legal tactic” colorfully called the “Mortgage Terminator” which allows associations to void primary mortgages held by banks.  Now, right at the outset, you have to be a bit suspicious–lawyers don’t normally name their legal tactics.  And in this case, the law firm that brought these “Mortgage Terminator” actions, the Association Law Group, apparently issued a press release announcing their new tactic.  As a matter of pure marketing, it seems like a great move.  The firm has garnered a dozen or more articles in major publications since early this year that tout their new strategy.  However, none of the articles go into any depth about the tactic itself, or whether it’s likely to be successful long term, so I thought I’d look at the issue from a legal point of view.

I want to start by saying very clearly that I have no ill will towards the Association Law Group.  They are being creative, which is something you generally like to see from a lawyer.  I don’t know the firm, and I have no reason to believe that they’re not totally competent lawyers who care about their clients and want what’s best for those associations.  I do believe, however, that it is very, very unlikely that these “forced foreclosure” judgements will sustain appellate review, and it’s important for condo and homeowner’s associations to understand why.

The articles written about the “Mortgage Terminator” have been extremely thin on specifics, and it takes a little digging to find out exactly what has been argued in these cases.  Put simply, the MT strategy appears to be an extension, or even simply a rebranding, of the “reverse foreclosure” tactic touted by the ALG early this year.  Basically, an association that has foreclosed on a unit for non-payment of maintenance asks a judge to apply an equitable “move it or lose it” order against the bank that owns the primary mortgage on their unit.  When the bank fails or refuses to take title to the unit and begin paying condominium assessments, the judge orders that the primary mortgage interest is extinguished and the condominium or HOA owns the unit free and clear.  Pretty nifty!

The problem is that, assuming that these judgments will be challenged by the banks, they are not going to survive appeal.  There is very good appellate case law that’s right on point.  If you’ve read New Neighborhoods you remember that there’s a heirarchy of laws and precedents that must be followed, and trial courts are the lowest rung of the judicial ladder.  Decisions made by appeals courts (including a state supreme court) always control, and these courts have the power to reverse bad decisions made by the lower courts.

Courts operate on two levels–law and equity.  Law comes into play when there is a specific law or statute on point that governs a particular situation.  Equity is used when there is no law on point, but basic fairness dictates that a particular outcome is appropriate.  The important thing to remember, though, is that law always takes precedence over equity.  A judge cannot grant equitable relief if there are laws on point that govern the situation at hand.

In December of last year the Third District Court of Appeal in Florida issued a decision that lays out the remedies available to shared ownership communities when a bank fails to take title to a unit, and those remedies do not include vacating the mortgage.  In U.S. Bank National Association v. Tadmore the trial judge had ordered the bank owning a primary mortgage to foreclose within 30 days or begin paying monthly maintenance fees to the association.  The court of appeals reversed this decision, despite the fact that the bank had delayed their foreclosure due to a combination of its own negligence and simply complications of the case.  In reversing, the court noted that the bank was not contractually obligated to pay maintenance, nor was it required to pay maintenance under FS 718.116(1)(b), the Florida “safe harbor” provision.  So the court stated first that no legitimate claim had been made to require payment, and there was no apparent basis for such a claim in any event.  Further, the court pointed out that “the law is that a first mortgagee may be required to pay condominium maintenance fees after it acquires title and then only in a limited amount.  Since equity follows the law, it cannot be utilized to impose this obligation without limitation before title is passed.”  The court then cites numerous examples of other Florida cases that point out that “If an issue is clearly governed by established legal rules, equity may not interfere and disregard the controlling legal principles.”

Admittedly, this is not an identical situation, but the same legal principles apply.  Courts are not allowed to simply grant relief against parties who are otherwise following their legal responsibilities.  The right of primary mortgagees to foreclose on their loans is well established in the law and cannot be usurped by a judge.  It’s a property right.  A judge cannot “force” a bank to foreclose on a lien, and he or she cannot force a bank to take title in any different manner than is specified by statute, or it is in effect an illegal “taking” of the property.  Mortgagors are allowed to CHOOSE whether to foreclose on their liens, and this right is absolute.  It may be bad for condos and HOAs, but that’s just the way the law works.  The fact that an aggressive and well-intentioned law firm has been able to convince a number of trial judges to grant them equitable relief against banks does not in any way make those judgements legitimate.  I have no idea if the banks in question will appeal those rulings, but if they do it is my opinion that their victory is pretty darned certain.  What the Association Law Group has done, while creative, goes squarely against very well established appellate precedent.

So why does it matter?   What’s the downside of proceeding with one of these “Mortgage Terminator” cases?  Well, ultimately, someone is going to appeal one of these decisions, and the SOC involved is going to have to decide whether to defend against the appeal.  And appellate trials can be extremely expensive.  Six figures, at least.  So it’s not just a question of getting the original judgment–you’ve got to be prepared to go all the way.

And here’s another point to consider.  Let’s assume that your association takes over a unit in a “Mortgage Terminator” action.  Before it can be sold or rented, it will need to be fixed up.  Many of these units have been abandoned, or even worse, stripped by the original owners.  So the association is going to have to invest significant money into the unit to make it marketable.  But when the bank appeals, and inevitably wins a reversal, the association will get nothing for its troubles.

Unless the ALG is fronting these cases on their own dime (which seems unlikely), some association somewhere is going to pour a lot of money into what I believe is a losing battle.  But hey, everyone gets to spend their money how they choose, and if someone is looking to fight this fight, more power to them.  I certainly hope, however, that it won’t be my own association.

As an advocate of condo associations and HOAs, I would love it if boards could take non-foreclosing banks to task and force them to poop or get off the pot.  But as a matter of law and precedent, I unfortunately think it’s unlikely that this tactic will have long-term relevance.  In the meantime, it’s costing associations money.  At some point the party is going to end, and some people will wonder what it was all about.  Well, no need to wonder, I’ve laid it all out above.

[Update:  According to further research, it appears that these actions aren't even judicial decisions.  In every case that's been dug up and examined, the bank VOLUNTARILY abandoned the property involved by stipulating to dismiss the action with prejudice, or by simply ignoring the complaint.  I have yet to see evidence of a case where a judge actually vacated a bank's mortgage interest in favor of a secondary lien holder (like an SOC association).  Honestly, the idea that a judge would ever vacate a superior lien interest is ridiculous as a matter of property law.  I doubt that it will ever happen.]

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