This is how it works. Or, rather, doesn't work.
A mortgage servicer completes the foreclosure, eventually. And the bank has taken title to the home and arranged to sell it as an REO to a new buyer. The purchase contracts are even signed. So, take another home out of the however-many-millions there are in the shadow inventory. It's off to the next one.
But then the bank finds out there is a homeowners association or condo association past due amount. In each state it is different, but in Florida, it's a nightmare. A safe harbor rule under a legal statute declares the first-lien holder can pay the lesser of either the past 12 months in assessments or 1% of the original principal balance on the home.
So, if a homeowner is paying $250 per month in HOA fees for a home that originally cost $140,000, that would be roughly $1,400 owed to the association as 1% of the original principal balance, opposed to the $3,000 in past due fees.
You can imagine the shock on Charles Gufford's face when his client, the servicer, comes to him at the 11th hour of the process and says the association is asking for $25,000. Gufford works as the resident expert on assessment and associations disputes for the Florida law firm McCalla Raymer.
There's actually no shock on Gufford's face. This happens all the time. Often, after months of negotiation, he can get the price tag down to around $5,000 on a $25,000 assessment bill. Many servicers don't even use the safe harbor option of choosing the sometimes least costly 1% option, which often have the same late fees, overcharges and attorneys fees with it.
The managing partner of the firm, Jane Bond says that's nothing. She's seen cases in which the HOA of a beach-front property billed the servicer $90,000 in assessments before the foreclosure or REO deal could be completed.
"I don't want to say it's a vague statute, but in some aspects it needs a little clarification so that we all know what we have to pay," Gufford says.
The problem is that the statue doesn't fully define what the term "assessments" means. The HOAs and condo associations have been bleeding money since the foreclosure crisis. So, most of them are taking everything they can.
Gufford even feels sorry for them. A little.
"Think of how long it takes to foreclose today (nearly 1,000 days on average in Florida) and all the dues they're missing during that time and that other owners are having to bear that cost," he says. "When title is taken by the lender, they shoot for the moon and not for what they're entitled to."
According to the Community Associations Institute, which provides resources to condo and homeowner associations, assessment delinquency rates tripled since 2005. According to a survey in December, more than 63% of these associations reported delinquency rates above 5%, compared to 22% reporting rates that high six years prior.
More startling, one in 10, or roughly 30,000 associations, have an assessment delinquency rate above 20%.
"High delinquency rates place tremendous pressure on associations to meet their obligations to the homeowners who are paying their fair share," says CAI Chief Thomas Skiba. "When some owners —including lenders that have foreclosed on homes and now own them — don't pay their share, other homeowners often must make up the difference in higher regular assessments or special assessments. Associations must still pay their bills."
And so they're going after the banks for everything they can.
WHEN THE TROUBLE STARTED
The trouble really began in 2009. The liquidity crisis was beginning to ripple out, and the depth of the foreclosure crisis began to appear.
"REO started selling at a very considerable amount and flow," says Brent Stokes, senior vice president of Sperlonga Data and Analytics, which is creating a large database of homeowners, condo, and community associations information.
Some servicers hired Stokes, who is an attorney, and others at Sperlonga to be middlemen of sorts. He is sent in as a negotiator for all kinds of things, and like more traditional foreclosure attorneys, he's usually sent in at the 11th hour.
"The HOAs started submitting whatever was owed to them, that plus some more. It took the government agencies and the investors by surprise. But their first approach was, 'Well we knew we would take some losses,' so they paid it," Stokes said. "Then, by 2010 it wasn't just on a few properties. The industry started to realize that for some strange reason we're seeing a lot more of these HOA assessment claims."
The reason for the assessments, the industry would discover, is that most of the foreclosures were on mortgages originated between 2005 and 2008. Stokes said most homes being built during that bubble came under an HOA or condo association. He looked at the numbers and estimates 60% of the national REO inventory has an HOA attached, based on the files he receives from clients. That number goes up in places like Nevada and Florida.
"One property," he says in bewilderment, referring to one in Las Vegas, "had six HOAs attached to it. It was part of an enormous development. It had two primary HOAs and four secondary ones."
"It started to affect all stakeholders," Stokes explains, "not just the investors but asset managers, the people selling the properties who weren't able to close on time, the title and settlement providers weren't able to close deals on time, and even the inspectors and appraisers were having a hard time getting into gated communities with HOA requirements because no one knew who that HOA was until the very last minute."
Lenders are developing their own plans on how to deal with the negotiations. Some hire counsel like Gufford and attempt to negotiate. Others just pay what the associations ask, making it more difficult for those who seek to negotiate. The banks who try often wait too long however, usually until the REO stage, and the HOA or the condo association uses this hard deadline against the bank.
"The best way, if I were a lender dealing with this, is if I knew that I was dealing with an association that was going to be a problem child, upon the issuance of title I would immediately get it to counsel to handle the negotiation of the reduction of the dues owed," Gufford says.
Case law is currently turning through the Florida system that could ease the situation, but judges vary on enforcing it. If the bank settles with the HOA, often the association still comes back and attempts to charge the new owner of the home for the difference on the backed-up dues.
Banking attorneys often try to get a "sum certain" amount owed after the negotiations with the HOA. These financial firms claim the state statute allows the bank to ask the court to intervene and force the association to give a "sum certain." Over roughly 30 cases, Gufford says he's saved more than $1 million in fees.
It just may take awhile. The underlying foreclosure can sometimes take four to six months, and that just starts the clock.
"If there is a negotiation, we always try to negotiate to limit my fees and the cost of the time. That can take two months," Gufford says. "If it gets into protracted litigation, I can usually get that down to three to four months." Some negotiations, though, can take as long as five to six months and can include lawsuits against the HOAs.
But there's another tactic associations are taking, one a bit more of a problem for banks. An association in many states can file its own foreclosure for delinquent assessments. Roughly 16 states, including the District of Columbia have this so-called "superlien" statute, allowing HOA assessment fees to not be wiped out by a foreclosure filing.
The foreclosure does wipe out all junior liens, leaving only the mortgagee or first-lien holder. Buried on the sixth or seventh page of a filing is a "quiet title" action.
Once the association has a quiet title —meaning it now has an interest in the property — it will extinguish the superior first lien and resell the home.
The associations argue the lender has abandoned its interest. Often, they point to the elongated foreclosure timelines or the vacancy of the home.
The bank sometimes doesn't notice until it's too late. An employee at the bank sees the foreclosure from the HOA or condo association and recognizes the bank has the first lien and places it back in the stack. Meanwhile, the association is awarded the foreclosure over the bank.
"After the judgment is entered, we'll get a call from our client asking if we can help," Gufford says. "They've done nothing during the case. I personally think it's going to go up. It depends on the jurisdiction. Some of the judges are up on the case law and they know they can't go through with the quiet title. Other areas of the state, mostly in South Florida, I think the judges are overwhelmed and I think they look at it and they say fine and let it pass through."
"Condominiums went crazy, especially in Florida," Stokes says. "You're not going build one condo in Florida without an association."
In 2008, Fannie Mae, Freddie Mac and the Federal Housing Administration — basically the only entities financing new loans — released new guidance. Each explained that if 15% of the total units in a condo development were delinquent on their assessments, new loans would not be financed.
These firms indicated to CAI they would work with lenders who request waivers when a particular project exceeds the 15% threshold. But the line was clearly drawn in the sand.
"CAI expressed its concern that measuring delinquencies by units may be problematic in the case of foreclosures, because the association does not always know who the current possessor of the unit may be for collections," according to a notice the group sent out to its association members.
With the bank trying to figure out who the association is, and the association trying to figure out who the bank is and both sides spending months determining a settlement over past due assessments, an interesting character is emerging: the all-cash condo buyer.
Cash buyers made up 65% of home sales in Miami, and 90% of foreign buyers used cash in the city. Stokes said they're using their leverage as basically the only game in town to drive down the price in some cities.
Because of this origination problem, foreclosures actually become harder to avoid. Without a financed buyer on the other end, a troubled borrower can't get out of the condo through a short sale. The entire market suffers under the problem between the associations and the banks.
"If this is such a problem on the REO on the origination side, how in the heck are they going to get those condos sold when more than 15% are delinquent either by themselves or the borrowers who haven't been foreclosed on yet?" Stokes asks.
One of his clients had him run an analysis on just how many of their cases were tied up in developments with at least a 15% delinquency rate.
Stokes couldn't disclose an exact number, but he describes it as "a boatload."
The association crisis is another tangled knot in the collapsed lattice that was once a booming housing finance web. It grew too fast, got too complicated, and attracted too many players and overlapping interests. Sorting out the problems now means unraveling those interests, restructuring the entire system.
What both sides want is some clarity. Attorneys for the banks simply want to know what they need to pay. Many are willing to pay it. Some are just paying what the associations are asking for now in the name of expediency. But that only makes the problem worse for those too entangled not to negotiate.
And like other problems facing the housing market, it's not going away any time soon.
"We don't see it subsiding, especially in the default world, for at least another three years," Stokes says. "I think of the pipeline of foreclosed properties, not just from the agencies but for the private-label securities guys too, is just too large. If the investor doesn't jump on the HOA until after the foreclosure is finished, then this limited marketability impact from the delinquency rate is going to even further extend the recovery time. It's going to make it that much more expensive."
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