Fallout and repercussions from the unprecedented bust in the real estate and mortgage industries are still dogging condo associations all over the country.
Within community associations, owners continue to default on both fees and mortgage payments, and lenders are delaying foreclosure because they don't want to take properties back and assume responsibility for condo fees.
The worst of the fallout was in those areas that had enjoyed the biggest boom—especially parts of the west and Florida (which has over 20,000 condo associations). In Fort Lauderdale, one attorney reports on an association where nearly 80 percent of the units have fallen behind, and a unit owner lent money to the association to help pay the bills. Another lawyer knows of at least eight condo associations in southern Florida that have filed for some kind of protection from creditors with some sort of bankruptcy filing.
However, where delinquencies are threatening the interruption of essential services, bankruptcy will only buy a little time—and not be cost-effective. Bankruptcy is intended to help organizations that are drowning in debt, not those suffering from a shortage in revenues. Legal experts say Chapter 11 bankruptcy won't help associations, since it’s intended to keep creditors at bay until a company restructures its finances. If it’s an income problem and not an expense problem, Chapter 11 won't work.
In spite of that, stressed-out associations are finding ways to test bankruptcy law and their efforts could lead to even more litigation in future years. Associations start considering bankruptcy when the remaining solvent owners in a community have to pay far more than their share in assessments and fees, forcing them into delinquency. Then it becomes practically impossible for the association to borrow money and consequently, owners suffer when FHA or Fannie Mae deny insurance on sales of units.
Some associations have stopped just short of bankruptcy, asking the courts to appoint a receiver to collect fees from individual owners. But in most cases, the bankruptcy process is too complicated and costly to be useful to a condo association.
Fortunately, communities in the Northeast have been spared as subjects of these drastic tales—so far.
Smaller Numbers Meant Smaller Swings
In New England, most community associations can testify about any number of foreclosures of unit owners, but the resulting damage to association boards has been much less dramatic than the rest of the nation—for a variety of reasons.
Chris Snow, agency principal at Bernier & Snow Insurance of Rochester, New Hampshire, says that “in New England, maybe we see one or two foreclosures per condo association each year. Properties seem to be keeping their value in the Northeast.”
“Since condos aren’t as expensive [as single-family homes] to begin with, they don’t go upside-down, [where market value drops below mortgage value] so badly,” he adds. “People can sometimes still pay their mortgage… but just cannot sell their unit [without a loss]. You don’t see a lot of owners walking away from an underwater unit… Another alternative, to avoid losing the property, [is] they sometimes choose to rent it.”
Expected, and unexpected, problems cascade when owners stop paying their mortgage, utility bills, condo fees, insurance and everything else, and simply walk away from their unit. Even though ownership and related responsibilities may transfer after foreclosure to the mortgage lender, Snow points out that “lenders sometimes don’t understand the urgency of maintaining an unoccupied condo. The worse thing that happens is when a bank [forecloses] and then does not take care of a unit… especially in winter. They [lenders] may be based in Texas or somewhere and not understand New Hampshire winters.”
“We had one case where the resident abandoned his condo and took the built-in AC unit with him. He left a big hole in the wall and it was winter and the pipes froze,” he continues. “There was a big claim.
“These problems happen with pending foreclosures,” notes Snow, “when no one is checking on the place. Eventually, a neighbor contacts the property manager or board member and they have to assess the scope and remediate any damage and report to the insurer.” In an abandoned unit, the owner’s policy may have been long-cancelled, and the association’s master policy steps in. “But the damage may not meet the deductible,” Snow points out, “which can be as high as $25,000 in a master policy.”
When there is a shortfall in insurance coverage, or to cover the deductible, Snow explains, “there may be a special assessment charged to the remaining unit owners.”
Because of these kinds of increasing demands on insurance coverage that resulted from condo foreclosures, it’s become another criterion for anyone seeking FHA-backed mortgages. The federal programs now require proof of adequate insurance in order to place a condo association on its approval list.
Who’s Got That Deed?
Gary Daddario, a partner in the law firm of Perkins & Anctil, PC, in Westford, Massachusetts, states that for associations in New England, “We’ve been spared… because we have fewer numbers of foreclosures in general.” He agrees that vacant units are the main problem after foreclosures, “especially in the winter, when you can get burst pipes. But if you try to anticipate [problems], who do you even contact about the empty unit if there has been a foreclosure but there is no new deed on record? One big headache is getting a hold of someone to deal with… the bank’s attorney? The realtor? Some communities have regularly-scheduled maintenance programs, such as exterminators, so how do you deal with the vacant unit?”
“When banks foreclose on a unit, they don’t [immediately] pay condo fees, but the association needs those fees right away…. But whom do you send notices to?” he continues. “I take a shotgun approach to the noticing requirement [of late payment, default or pending foreclosure] when ownership of the unit is no longer clear… I’ll send the notice everywhere, to all parties involved, and see what happens.”
One stumbling block in the process, says Daddario, is the “foreclosure deed, which is the document indicating who owns the property subsequent to the foreclosure and, thus, responsible for condo fees. “But in Massachusetts,” he adds, “there is a serious loophole in the law in that there is no established deadline for the recording of the foreclosure deed after the foreclosure auction has taken place.
“Another stumbling block for condo boards dealing with abandoned units is insurance coverage for incidents caused by the unit owner,” he continues. “Ultimately, however, abandoning a unit is negligence by the owner and therefore misconduct. So, the association may seek to collect any damages from the unit owner. Also, if a mortgage company accepts a deed in lieu of foreclosure, then it becomes responsible for paying fees or damages. A deed in lieu of foreclosure yields a similar result to a ‘short sale,’ but either solution is not the norm. Foreclosure is still the most common end for a failed unit owner.”
He explains the reason: “There is an alarming number of people willing to just walk away from everything [financial commitments]… including their condo property. It’s almost like the cliché of ‘the dad who went out for cigarettes one night and never came back.’ Unfortunately, if a unit owner is not cooperating [with creditors] and cannot even be contacted, then foreclosure is the only option.”
The durability of an association faced with foreclosed or abandoned units depends on how they’ve managed their budgets all along. “I have an association that has been struggling year to year with their budget… and now they’re in trouble,” Daddario explains, when units stop contributing fees. “Hopefully, this association will seek assistance before things fall apart… and start collections, getting mortgage lenders to pay up past fees instead of waiting until the unit sells when they can pay the association all the back-owed fees.”
It’s worth the trouble to take legal action, Daddario believes, because “Judgments against the banks who are not paying condo fees tend to be successful.”
He admits, however, that it rarely comes down to court action. “The more responsible lenders will send vendors in to maintain and winterize units [they’ve taken over] and pay the condo fees… They will behave like a regular unit owner. By contrast, the most irresponsible banks or lenders are the ones who cannot be reached. The most typical situation is something in the middle.
“The vast majority of ‘underwater’ lenders are not the local banks and lenders,” he continues, “Most foreclosed condo units were foreclosed on by large, national lenders. This may be true because local banks do a better job of vetting their applicants or dealing with their delinquents or it may just be that local banks have done fewer condo loans by comparison.”
In this region, he continues, “I have not seen any association file for bankruptcy or go into receivership… They have other options, starting with a real focus on cutting expenses—belt-tightening. Or they can actively pursue absentee owners, or the bank that’s taken title. They may even get a loan to hold them over. Even if they are teetering, associations should have loan collateral that is considered solid because it’s predictably collectable.”
Clearing Out the Deadwood
Ken Foley is director of property management at NextGen Management Co. in Merrimac, Massachusetts. As he points out, “the biggest fear in a condo community, when owners are foreclosed, is the devaluation of all the other units.” He says that condo boards may take a different view on the effects of unit foreclosures. In the long run, he notes, “It may have a kind of cleansing effect, getting rid of owners who hadn’t been paying their fees anyway, or had that kind of ‘transient’ mentality,” with little commitment to their investment or the community. “I had a property in New Hampshire with one owner who thumbed his nose at the association. He eventually foreclosed and lost his unit, and he hadn’t paid his fees. It took a long time to file all the documents and get the lender [who took title] to pony up and pay the fees.” While New Hampshire has a “superlien” provision that would have put condo fee collection ahead of the mortgage, Foley adds, “It didn’t apply to this unit… the superlien legislation only started in January.”
He agrees with Attorney Daddario about associations arming themselves by being proactive. “The worst situation for a community is [depending on] fees coming in once a month, then when a few are delinquent, it affects the people left who are paying their fees. Everything the association does is then impacted; there’s a domino effect where remaining owners lose faith in management. Boards and management should set themselves up for the best possible results in dealing with foreclosed units… and get legal help right away.”
Marie Auger is a Massachusetts freelance writer and a frequent contributor to New England Condominium.