Boards Underwater Can Associations Float When Units are Sinking?

Boards Underwater

 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.


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  • How is a 40b unit in foreclosure in Massachusetts effect the HOA? How are decreases in overall market value effect 40Bs? If a 40b has a "restricted" market value at 50% of true market value will it have any economic disadvantage to the 40b owner when selling their unit?