Archive for January, 2010

Foreclosures and Non-Paying Owners Creating Perfect Storm in Condos, Co-Ops and HOAs

Monday, January 25th, 2010

This recently published Op-Ed was written by myself and my father. Hopefully our representatives in government respond to the problem before the damage is too great to cure.

The worst housing crisis and economic crash since the Great Depression have created a dangerous financial storm that threatens to destroy thousands of Shared Ownership Communities (condos, co-ops and HOAs) throughout the United States. The danger is quiet, but staggering—over 60,000,000 Americans live in SOCs, or almost 20 percent of the population.

SOCs rely on maintenance payments from owners to pay for a host of municipal-type services provided to residents, including landscape maintenance, security, infrastructure improvements and even social services. But many owners, hit hard by the financial crisis, have chosen not to make these maintenance payments, pushing the responsibility for this “bad debt” onto their neighbors. As a result, maintenance costs in some neighborhoods have doubled or even tripled, forcing a small, hard-hit cadre of well meaning residents to cover the costs of operating an entire community.

This problem is being exponentially worsened by lax federal and state rules regulating bank foreclosures, which allow banks to sit on potential foreclosures, and even actual judgments, for years, during which time they have no obligation to help cover the costs of maintaining the community. And in many states, even once a foreclosure is finalized the bank is only responsible to pay a tiny fraction of past due assessments, again requiring other, more responsible neighbors to write off the debt and cover the difference. Court efforts to compel banks to expedite their foreclosures have largely failed, with most courts claiming they have no power to make such requirements.

Like their larger municipal cousins, shared ownership communities require funds to operate a host of essential life services, and these costs are often fixed, regardless of whether one or many owners choose not to pay their bill. As a result SOCs (and the community volunteers that serve on their boards) are scrambling to find ways to compel owners to pay their share of the common expenses. In desperation, many have investigated extreme solutions such as cutting off delinquent owners’ electricity or water, or preventing them from parking in the community, though many of these potentially effective motivations are blocked by state laws and court rulings.

Based on their total lack of movement on these issues, federal and state governments appear blissfully ignorant of the danger that this “SOC storm” presents to all citizens. The collapse of shared ownership communities, which currently provide a large percentage of common municipal services, will place a potentially insurmountable strain on the ability of state and local governments to provide these services to the millions of Americans who have been paying privately through their SOCs. As community associations dissolve their empty and abandoned homes will become large blights on even higher income municipalities, atrophying the property tax base and putting the government in further financial difficulty. It is critical that our legislators take immediate actions to prevent this collapse, beginning with tying bank bailouts to mandatory funding of assessments on units for which lenders hold mortgages, even while foreclosure proceedings are ongoing. Similarly, restructured mortgages should mandate that unit owners bring their assessments current to be eligible. To help heal the damage, small business loans should be made available to community associations suffering financial stress. And finally laws must be passed that give associations the authority to deny non-essential services, such as cable television, Internet and telephone services to non-paying owners, along with the right to restrict access to recreational and social amenities. Without this relief, scores of the nations SOCs will become blighted neighborhoods, hampering economic recovery for the entire nation.

To Foreclose, or not To Forclose–That is Always the Question for SOC Boards!

Tuesday, January 19th, 2010

In the current difficult financial market, every single shared ownership community is facing a common problem–owners who fail to pay their maintenance. Maintenance in SOCs is largely a fixed cost, and when one owner doesn’t pay, that cost is passed on to the other owners in the form of even more maintenance. It’s a constant, vicious cycle.

To combat this, state governments have generally given associations an extremely powerful “stick” to use to encourage payment–the risk of foreclosure. If a unit owner does not pay their maintenance, an association may generally place a lien on the unit (a notice to potential buyers that there is a debt due that must be made whole before the unit can be sold), and then after time has passed the association may foreclose on that lien–force a sale of the property, sometimes to the association itself.

However, the decision of whether or not to foreclose on a recalcitrant unit owner is not a simple one, especially in the past 5 years. When an association forecloses on a lien, that foreclosure is subject to any superior liens–ie, a first mortgage. That is, even if a condo or HOA forecloses on a unit, if the bank that provided the primary mortgage calls in their loan the association must turn over the property, or the value of the loan. Now, in a good market, when first mortgages are only for 70% or 80% of the value of the property, that decision is fairly simple–the association can resell the property for market value, pay off the bank, and even make a small profit. But today, that procedure has gotten turned on its head. Because of bad lending practices many loans were made on properties for nearly 100% of their then-market value, and after the crash those properties have become leveraged for far more than they are worth. Not only does this affect borrowers and banks, it affects shared ownership communities. Boards can no longer simply vote to foreclose on every unit where maintenance is unpaid. For example, let’s assume a unit in a property is worth $500,000 in the current market. However, that unit was bought for $750,000, and mortgaged for $700,000. Now assume that the owner has stopped paying maintenance (they may also not be paying their mortgage payments, which we’ll get to in a moment). If the board were to foreclose on the unit to collect, they would eventually own a property worth $500,000 at market, but they would never be able to repay the bank loan! As a result, when the bank comes calling, the association would lose the property, having paid the costs of foreclosure for nothing. Certainly, not a sustainable situation for any SOC, and not a good way to collect on debt.

Complicating this issue is the fact that recalcitrant owners are often not paying their mortgages, either, and the primary banks may file their own foreclosure proceedings. Now, if the banks were actually foreclosing, that would be fine–the bank would eventually own the property, and they would be responsible for maintenance payments just like any other owner. But what is currently happening, all around the country, is that banks are sitting on foreclosures, even foreclosure judgments, simply so that they do not have to pay maintenance to condo and HOA associations. If the bank has a judgment of foreclosure, and the association files their own foreclosure, the bank would simply effect the judgment and force the association to pay off the mortgage or turn over the property. It’s a no-win situation for SOC boards throughout the United States.

So what’s an association to do? Some difficult choices must be made. One strategy is to foreclose on every unit that is not paying maintenance, no matter the lending situation, to establish a precedent that encourages owners not to ignore their maintenance. This strategy, however, can get quite costly if foreclosures are high and if a large percentage of units have been improperly leveraged. Another strategy is to foreclose as early as possible, whenever possible, and try to rent out the units to recover as much maintenance as possible before the bank has a chance to file their own foreclosure. This strategy sometimes works well, as banks typically can take up to 2 years to push a foreclosure through the court system (mostly due to universal bank disinterest). A third strategy is to decide every foreclosure on a case-by-case basis, depending on the loan amounts owed to the primary mortgagee (as an aside, how do you remember that a mortgaGEE is the person who owes the money in a loan? Because the bank thinks “Gee, I hope they make their payments!”) The risk of this strategy is that any owner who is over-leveraged knows that the association will never foreclose on their unit, and it is essentially a free pass for them not to pay their maintenance.

The current economic times have presented very difficult issues for all association boards, and SOCs will have to make due the best they can until the crisis passes. Encourage your legislators to pass laws that force banks to pursue foreclosures aggressively, or that require banks, after filing a foreclosure, to pay maintenance to the association, whether or not they have effected the judgement. There is no simple solution to this problem, and every SOC board will have difficult choices to make in the months, and perhaps years, to come.

Social Events Can Make for a Happy New Year in any Shared Ownership Community

Thursday, January 7th, 2010

Like all blogs, I tend to spend a lot of time talking about various problems that Shared Ownership Community (condo, co-op and HOA) owners may have, and various ways of fixing them. But we all tend to forget that, for all the trials and tribulations of shared ownership, one of the biggest benefits of any SOC is the increased social interaction that we have with our neighbors. In fact, social events can often make or break a community, healing wounds and helping us to put aside neighborly differences. Here, then, are some ideas of things you can do with your community that will help everyone have a happy new year.

Have a Party! You don’t need a social budget to have social events. We have BYOB cocktail hours in our condominium every few weeks where owners can meet and simply enjoy each other’s company. Sometimes the condo will use a few dollars to buy some appies, but mostly people just bring what they’re in the mood to eat and drink. If we drink enough, we may even play some games (Jenga being a popular option). Nothing too brainy, just having fun with your neighbors. Now, if your association can afford it, a social budget may allow you to plan at least 2 or 3 large social events per year, complete with music, catering and drinks. We generally supplement those events with a modest entry fee, and they are always well attended. Pot-luck desserts are also a lot of fun, and if you get your children involved, you can even turn it into a pajama party. And while it may not be an obvious effect, well-planned and well-attended social events almost always have a positive effect on property values (really, who doesn’t want to live in a happy, friendly neighborhood?)

Play with your pets! Do you live in a pet friendly building or community? A great idea is to create a pet committee that is responsible for events where people can get together and have fun with their dogs (and perhaps very outgoing cats). Play dates in the dog run, Halloween costume parties, training sessions and more can all be sponsored by various local businesses. For example, many dog trainers or doggy day care centers would be happy to bring some treats and present a training seminar for even a handful of new potential clients. Pet people tend to be among the most outgoing in any community, so pet-themed events are often among the most popular and well-attended.

Play with your kids! Many of our favorite holidays throughout the year are best enjoyed with our children, and it’s easy to get people together for fun, well planned events with the kids. Halloween is a perfect opportunity for a neighborhood costume party or even a parent/child pumpkin carving contest. Even communities for older persons can enjoy and occasional planned event with the grandkids. Trim the community Christmas tree (and light the Menorah), have an Easter egg hunt or supervise sparklers and loud patriotic music on the 4th. Getting the kids involved is a great way to get the community together.

Get educated! Depending on the age and style of your community, educational events might be quite popular with residents. Authors are especially willing to visit communities to give speeches and presentations (and sell their books, which is only fair), but lots of others might be willing to speak at your community, including local politicians, or even professors. Or, consider bringing in an art fair where art students are able to display and sell their artwork at a significant discount from gallery prices (though, with any consumer event, make sure you get the pulse of the community first–some love these types of events, and some, not so much).

If you’re a board member, I hope these ideas stimulate you to brainstorm ways that you can get your community together and have fun. The goodwill you build throughout the year will result a lot less stress when contentious issues come up at meetings later on. As always, everything comes back to the same basic idea–just be neighborly!