By Benny L. Kass
Saturday, April 7, 2007
Q: Our condominium is in trouble. Many of our owners obtained those "favorable" interest-only loans a couple of years ago, and now that their monthly payments have increased, their units are being foreclosed upon. This is putting a burden on the rest of us because those owners are no longer paying their condominium fees. We are a small association with a tight budget. The developer left us with very little reserves, and now we are struggling to keep alive financially. What should we do?
A: You have raised a serious question. There has been a lot of press about the increasing foreclosure rate and how that affects homeowners. What you are feeling, though, is the ripple effect that foreclosures have on the rest of the community.
Let's go back a few years. The real estate market was hot. Condominium developers were selling units faster than they could build them. Lenders were making what everyone saw as very favorable loans -- 100 percent financing with interest-only payments.
Many developers lowballed the proposed budgets for their condominium associations, thus keeping the fees low. Many also did not pay any money into a reserve for the units that were unsold.
Things have changed. Condo prices have stalled or fallen, especially where developers reduced prices. Some of those owners who are now faced with higher mortgage payments are being forced into foreclosure. They're not paying either their mortgage or their condo fees.
Every year, the board of directors of a community association prepares a budget for the next fiscal year. The board estimates the expenses the association will have, including insurance, utility bills, management and legal fees, and ordinary repairs. The directors also obtain a reserve analysis of future costs to repair or replace such major common elements as elevators, roofs and walkways.
Usually the only source of income to pay these costs is the owners themselves. Board members are elected and, like other elected officials, often are reluctant to raise fees. So most association budgets are quite tight; they're based on the hope that all the association owners will promptly and regularly pay up.
So if several owners suddenly stop paying, the association usually faces a shortfall. That means that its bills will be deferred or not paid.
What options does an association have?
First, the association can enact a special assessment, forcing all owners to pay more, either monthly or as a one-time payment. Obviously this money will come only from those who are not facing foreclosure -- but, again, the ripple effect may cause even more owners to become delinquent if they cannot afford those added fees.
Ultimately, the association might have to file for bankruptcy protection. I have been reading that more associations are, in fact, contemplating such a drastic measure.
Next, the association can adopt -- and enforce -- a zero-tolerance rule. If a unit owner is delinquent for more than a month, begin legal action against him. Don't let the unpaid fees get so high that there is no way the owner can ever repay.
If associations do not have enough to operate, the property will go to waste, and more owners will stop paying their association fees, as well as their monthly mortgage payments. Clearly that will only lead to more foreclosures and more depressed areas.
I have three long-term recommendations for all condo associations.
In the District, for example, if a lender forecloses on a mortgage that was recorded on land records after March 7, 1991, and the foreclosed-upon owner was also delinquent in paying condominium fees, the lender is required to pay the association up to six months of these delinquent expenses.
Virginia and Maryland don't have super liens. A bill proposing one was introduced in the Maryland legislature this year, but lenders strongly -- and successfully -- opposed it.
The law has worked in the District. Lenders have not gone out of business, as opponents have been telling legislators would happen elsewhere. More important, if a potential buyer at a foreclosure sale sees that the association is solvent, this will encourage competition at those sales, which will benefit everyone, including the lenders.
In my opinion, the super lien should be enacted all over the country as soon as possible.
Condominium boards of directors should seriously consider this policy. Depending on your legal documents, the board may have the authority to do this on its own, or it may have to have the membership vote to amend the bylaws.
Either way, this will assist in keeping the financial ship afloat for at least a few more months.
If you want to purchase a cooperative apartment, you usually must meet with the board or its admission committee. The members will determine whether you can be approved to join the cooperative. The board or committee will consider only two factors: Is the potential owner willing to comply and capable of complying with the rules and regulations of the association? Is the potential owner financially able to pay the monthly assessments?
Obviously, such a process is risky. A person who is rejected may claim discrimination based on issues such as race, religion or sexual preference. Nevertheless, because most boards or committees are conscientious, there have been very few such complaints over the years.
To my knowledge, although it is legal for a community association to adopt such a process, very few associations have done so. Perhaps it is time to consider changing.
If lenders will not screen their borrowers, why should a community association have to suffer by having new owners who will not be able to meet their financial obligations to the association?
I recognize that this is a drastic and controversial proposal. I certainly do not want to keep anyone from homeownership. But the alternative may be that potential owners ultimately hurt not only themselves but also the community in which they live.
Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed, stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, http://www.kmklawyers.com.
View all comments that have been posted about this article.