Wednesday, May 26, 2010

Lenders’ Reluctance to Foreclose is Crippling Community Associations.

The Contra Costa Times, May 25, 2010: “Tens of thousands of homes in the East Bay are in foreclosure or are owned by banks. Some sit empty; a few are boarded up. Beyond the squatters and over-grown yards blighting neighborhoods, the glut of bank-owned homes means years of decline in the property taxes on which cities, schools and the state of California depend.”

Sound familiar? Of course it does, because the same economic forces are wreaking havoc with the budgets of community associations. The article continues:

“Foreclosed houses do not obtain lower property tax assessments until banks sell them. So tax revenue will keep falling until banks sell all the houses they end up with, creating a long-term lower tax base.” Basically this means that no one will know the full extent of this economic crisis until all of those foreclosed homes are re-assessed at dramatically lower values resulting in dramatically lower property taxes being paid over a long term.

But there is another result as well. Property taxes upon which local governments are dependent may not be re-assessed until the banks sell the properties, but homes in community associations that are in foreclosure for non-payment of the monthly mortgage most likely are also delinquent in their homeowner assessments. Banks don’t start paying these assessments until they actually complete foreclosure and obtain title.

The article states: “In the East Bay, banks own more than 10,000 homes, only a fraction of which are listed for sale. Another 20,000 are in foreclosure headed toward bank ownership.” But “headed toward bank ownership” is not bank ownership, and until the foreclosure is completed, the banks pay nothing toward the costs of maintaining the home which community associations must continue to pay. A healthy fraction of those 20,000 homes are in community associations and while the bank foreclosure process slowly continues, no assessments are being paid.

So what is a bank’s incentive to foreclose on a home in a community association? Not much. They can’t sell it right now except for a price likely much lower than what is owed. Whatever value the bank has on its books for the loan in question will have to be greatly decreased when the foreclosure is complete and the bank has to disclose to its shareholders the decline in the asset's value. The bank could rent it, but that usually means spending additional money to clean it up as well as the administrative costs of the rental program and the obligation for taxes and assessments. If they delay foreclosure, the property continues to be maintained by the other owners without any obligation on the part of the bank. In other words, the bank’s security is protected and maintained at the expense of the other owners in the community!

In one case, a bank held a loan secured by 150 unsold condo units converted from apartments. It refused to foreclose on its note for over three years, resulting in accumulated unpaid assessments on those units of over $700,000, slowly strangling the community association. Less dramatic examples are everywhere.

Lenders should not be permitted to ride on the backs of other owners due to the simple expedient of delaying foreclosure. The statistics are frightening and the results bear them out. Legislatures should consider making past due assessments the responsibility of the foreclosing lender even if for no other reason than to compensate the community association for protecting the bank’s security. In a homeowner’s association, unlike single family homes where no community association exists, the lender continues to receive real value in the form of the protection and care of its security while paying nothing. Lenders should be given a limited amount of time to complete the foreclosure process, and if they delay it unreasonably, they should either begin paying assessments or lose their security interest in the property.

Another way of assisting community associations would be to give association assessments the same priority as a property tax lien. In California and virtually everywhere else, property tax liens do not disappear during foreclosure by a lender because they have first priority over other liens. Community association assessments serve many of the same purposes as property taxes--they are used to maintain roads and utilities and other common facilities. When cities transferred their obligation to maintain these common facilities by requiring developers to assign that responsibility to community associations, their lien priority should have been transferred also. It wasn’t and community associations everywhere watch their assessment liens disappear during foreclosure by a more senior lien holder—usually the first mortgage lender.

Either give community associations the same lien priority as that held by local public entities, or require lenders to pay delinquent assessments after a short, but reasonable period of time whether they have foreclosed or not, and if not, risk losing the priority of their security interest. Everyone should pay their own way. The remaining owners should not have to bear the cost of protecting the security of foreclosing lenders.

1 comment:

  1. Right on about protecting the HOA lien. We sit on 13 acres and must maintain our own roads (paving and cleaning - a significant expense)plus maintain our street lights, storm drains, etc. even though we are paying taxes for this service.

    I there any legislative initiative on the horizon from our industry?