Foreclosures and How they affect homeowners

Written Version of a Presentation made at the Town Hall Meeting in Boca Raton, FL.

By Jean Winters, Esq.

Winters & Winters, P.A.

Published February 2, 2009

The phrase I have heard most frequently regarding foreclosures and declining property value is “death spiral”.  

Homeowners increasingly have “upside down” mortgages- they owe more than their properties are worth. 

With increasing foreclosures, homeowner associations ultimately face the choice between not maintaining the common property, or levying special assessments which homeowners can’t afford. Increased assessments then lead to more delinquencies and foreclosures, further depressing property value.

• Florida is especially hard hit.  In 2008, California and Florida accounted for nearly half of all the foreclosures filed.  The crisis started with subprime mortgages– no-doc loans (no proof of income required), and high risk loans -- causing a flood of bad debt.  But the problem has spiraled far beyond that. 

On December 14, 2008, a program on CBS’s “60 Minutes” discussed the second wave of foreclosures. Mortgage defaults on ALT-A and Option ARMs mortgages are expected to dwarf the subprime mortgage crisis.

The declining economy and rising unemployment further aggravate the problem.

On Jan. 19 of this year, an article in The South Florida Business Journal suggested that South Florida foreclosure filings could double in 2009. 

To make matters worse, Fannie Mae – which buys mortgages and funds loans, owning about half of the mortgages in Florida- tightened lending requirements on January 15. It will no longer fund loans in condo developments where 15% of the total number of units are late in assessments by 30 days or more.   This will affect lending for purchases and refinancing of condo units, and make it even harder to sell condos, leading to further depressed home values and foreclosures.  Although this now applies to only condos, it would not be surprising to see a constricting of HOA lending, as well – especially those with significant common property or shared facilities.

What can a homeowner or association do?

The obvious remedy is to reduce the number of foreclosures.  How?   Congress is looking at ways to help, but beyond of making plenty of phone calls to your legislators, what can homeowners and associations do?

HOMEOWNERS -   If you are a homeowner facing a financial crisis and having trouble paying your mortgage, there are a number of resources available to help.  

1.    HUD (Dept of Housing and Urban Development) has a great webpage with links and suggestions for avoiding foreclosure .  See www.hud.gov/foreclosure.

2.    The Florida Bar has a program called “Florida Attorneys Saving Homes” and a toll-free hotline 866-607-2187.  Homeowners who fear they won’t soon be able to make their mortgage payments or who have already missed payments but are not yet in foreclosure are urged to call.

3.    Florida H.O.P.E. for Palm Beach County residents at  http://www.mariasachs.com .

4.    Do not quit paying assessments – if you are trying to renegotiate a mortgage or are considering short sale or even deed in lieu of foreclosure, you won’t want  a personal judgment against you for assessments.  Florida law allows HOAs to seek either a personal judgment for late assessments, or a foreclosure (or a combination of the two remedies).   The Florida Asset Protection Blog, which is maintained by a north Florida attorney representing debtors, now cautions people on this issue.  Failure to pay assessments may result in a personal judgment and garnishment of wages or other collection procedures.

ASSOCIATIONS:

1.    Establish priorities.  How much “property value” is added by spending $35,000 on legal fees to force a homeowner to paint their home “White Dogwood” instead of “Abalone Shell”, for example?    When I see boards suing their neighbors to enforce rules that are often based on the personal preference of a board member and not on any objective criteria, I know something is wrong.  When I see it in this economy….board members should be – as Vice President Biden said about executives receiving fat bonues while taking taxpayer money – thrown in the brig.   Or the HOA equivalent thereof.

2.    Support homeowner friendly legislative changes. 

• lender liability for assessments-- Lenders routinely escrow for taxes, and most mortgage contracts reserve the right to escrow for assessments, as well.  Lenders that foreclose on a property still have to sell it.  In other words, they benefit from the assessments – just like everyone else.   The law now allows a lender to escape most of the delinquent assessments, and treats lenders differently from any other purchaser.  These are the same banks that received your bailout money.  Now that taxpayers are footing some of the bill, we should demand that lenders pay their fair share;

• DUE PROCESS /FIRST NOTICE BY CERTIFIED MAIL- important to the homeowners and the association as a whole.  Why would an association want to make it less likely to be paid?  Give the homeowner a fair chance to pay, before incurring additional “administrative” or legal fees.  I have seen too many instances where boards do not notify a homeowner of late assessments, until after the account has been sent to the attorneys for collection.  Or conversely, boards that have sent a letter, but the homeowner denies receiving it and then complains about the additional fees.   There is a simple answer to this.  Require a first communication to the homeowner to be mailed by certified mail, and prohibit the association from charging anything other than interest or the late fee as allowed by statute (or the Declaration, if a lower amount).

• Urge your legislators to define the “costs of collection” charged to the homeowner – does this include $200 “administrative fee” by the property manager, before the account is sent to the attorney for collection?  It shouldn’t.

3.      CONSIDER COLLECTION OPTIONS ON A CASE-BY-CASE BASIS.

The Board has a fiduciary duty to collect assessments, to maintain common property.   To do nothing to collect for assessments (unless you are dissolving the association) is asking for trouble.  This is especially true in a large association.

On the other hand, does it make sense to spend $2,000 in fees and costs to foreclose $200 in assessments, where there is no equity in the property, and when the first priority lender is foreclosing anyway? 

The board needs to make a business decision, considering the benefits and costs.

·         The Board should not delegate its responsibility. The Board should decide whether or not to pursue a foreclosure action – not a property manager or association attorney.  Professionals can offer suggestions or advice, but it is the Board’s responsibility to make business decisions applying clear and consistent criteria.   Economics, practicality and the law are all factors to consider.

• Protect the association’s interest by recording a lien;  under current law, the HOA lien is good for 5 years, and there may not be an immediate need to foreclose.

• Where there is an expected or pending mortgage foreclosure, it may be advisable to wait on filing an assessment foreclosure;

• Consider other options – With delays in mortgage foreclosure process reaching into years, rather than months, some associations are considering the option of pursuing a personal judgment in small claims court.

In summary, the Board should discuss their options with the association attorney and understand the costs and benefits before proceeding.   If an attorney tells you that he or she should always proceed to foreclose, even in this environment – find another attorney.

Find out what litigation is pending by or against your association.  Ask your board to explain their reasons for litigating ANY matter.  Did your Board consider both the costs and benefits?  How likely is a successful outcome to improve property value?   While some issues in pending litigation may be privileged, homeowners have a right to know the number of lawsuits to which the Association is a party and the matters that are being litigated.  If your association is paying $400 an hour to sue your neighbor over his “White Dogwood” paint color, you have a right to know.

In this economy, it is more important than ever to know how your association funds are being spent.