Thursday, June 26, 2008

The Tables Turn: Condo Association Forecloses on Bank

There was a great discussion here recently about the dangers of buying a Condo in a complex with multiple foreclosures, as the banks don't often pay the HOA fees.

It seems that one association has gone as far as to foreclose on the lenders!

According to an article in the Daily Business Review:

"Condo associations that are in a financial bind from mounting foreclosures are now targeting lenders who have taken back units from owners in default but are themselves failing to pay their share of maintenance fees.

As more units end up in the hands of lenders, the banks and mortgage servicing companies are responsible for maintenance payments for those units. But administering the growing pool of real estate has proved challenging for lenders.

The Residences at the Bath Club Condominium Association in Miami Beach is pressing a foreclosure action against Wells Fargo as trustee for an investment pool that owns the mortgage on a unit that isn’t paying its maintenance fees. "

These could result in some serious bargains, assuming that prices don't continue to plummet.


Perplexed said...

This is absolutely what needs to happen to all owners of condos who don't pay HOA. The failure to pay means that the assn can't meet the needs of the community.

While not selling a unit may mean that the valuation of others may be maintained and the lender doesn't have to report an greater loss in their financials, ultimately the viability of all of the units is at risk.

I wonder who is paying the HOAs of the foreclosed units at McCormick Pier.

Perplexed said...

Me again...

Note the last paragraphs in the report:
"Attorney Paul Breitner, who represents community associations, said lenders are finding a way around having to pay association dues. They initiate foreclosure procedures but don’t seek a final judgment. That way, they avoid taking title to the property.

“We increasingly see banks reluctant to take control of a unit,” said Breitner, with The Barthet Firm in Miami. “They would rather keep a unit in limbo and wait until the market comes back.”

Perplexed said...

Again and again....

While searching more on this subject I found the following:

Because of the potential housing market meltdown, Fannie Mae has adopted new underwriting guidelines in terms of individuals buying housing in condominium and community associations. In the past, the major focus of lenders has been on the buying power of the purchaser, but in today’s volatile housing climate, the new rules also stress the financial strengths of condominium and community associations. Lenders will be required to assume more responsibility for reviewing the finances of condominium and community associations, which will cause those associations to focus more intently on their budgets and their reserve policies than many have tended to do in the past.

Association Budget Items That Must Be Verified

Under the new guidelines, Fannie Mae wants lenders to perform full scale reviews of most condominium loans as opposed to the spot reviews that lenders have performed in the past. The full scale reviews will require lenders to verify the following four essential association budgetary items:

The association has an “adequate” budget.

The budget contains a line item allocating ten percent (10%) of annual revenues for the association’s reserves.

The association has available funds equaling the deductible under the association’s master insurance policy.

No more than 15 percent (15%) of the common area fees are delinquent by more than one month.

While the first three requirements are most likely already being meant by condominium and community associations,
the fourth requirement could cause a definite problem for associations and lenders alike. With the housing market at an all time high foreclosure rate community and condominium associations may have a difficult time keeping under the 15 percent (15%) delinquency rate, especially the smaller associations.

How Do These Guidelines Affect The Buyer?

While these are recent guidelines imposed by Fannie Mae, I have been preaching for years that potential buyers must look into the financial condition of any association into which they intend to move. It is only sound business practice that one would strongly consider the economic state of any investment, and for most Americans the purchase of a home is the largest investment they will make in their lifetime. For example, if the roofs of buildings in a distant portion of a condominium project are deteriorating and the condominium documents provide that the association is responsible for the maintenance of the roofs (as is usually the case), the fact that your own roof is in good condition and will not soon leak may not mean that your investment in the condominium project will be a good one.

If the association’s reserves are not adequate, the association may be required to levy substantial special or additional assessments to defray the cost to replace the roofs at the other end of the project. Or, if the roofs were defectively constructed by the developer and the right to sue has not expired, the association may start a lawsuit against the developer, which, potentially, may cost tens of thousands of dollars to prosecute. The bottom line is that these new imposed guidelines also may protect the buyer from getting into a situation where he or she does not want to be."


PDX Outsider said...

Great stuff perplexed!

bealee said...

Great moment for my Greeley, Colorado update. I know, not Portland but it's all relative. My brother bought into a nice new development a few years ago. With the mile high prices of Denver, folks moved way out to places like Greeley and commuted to Denver! Any way, two things, he thought the foreclosures peaked last fall and two nights ago he tells me 34 houses in his HOA went into foreclosure just last month (about 300 homes in his HOA for perspective). Secondly, his HOA farmed out the business, ie, they hired a management group to start implementing the laws of the HOA, most commonly broken laws currently: lack of yard maintainance and not paying HOA dues. They are not only passing out the tickets but placing liens against properties.

My brother is currently mowing an undeveloped lot next to his home and will soon be mowing the neighbor's lawn which is chock full of renters who have been recently given an eviction notice.

This HOA is single family homes, comparable to the Forest Heights HOA meaining you buy the house and the land and pay approx $600/year for maintainance of trails, playground, and other common areas.

Perplexed said...

Yips. The FannieMae may bright line is 15%, 34/300 = 11.3% in foreclosure. As time passes more are likely to go into default and every assn has one or two slow pays.

Once they don't meet the FannieMae test purchasers will have a problem getting mortgages.