Condos Feel the Mortgage Crunch
Behind on Payments, Many Owners Forgo Association Dues

By Nancy Trejos
Washington Post Staff Writer
Saturday, April 7, 2007

At Glen Waye Gardens Condominiums in Silver Spring, 21 owners are more than 30 days behind on their monthly condo fees. Two other owners have not paid since they bought their units, one in April 2005 and the other in September 2006. Both properties went into foreclosure.

The lost fees, which make up 5 percent of the association's annual budget of $1.3 million, have pushed the condo board to dip into its reserve funds to fix the roof and replace a water heater.

"When those things go bad, you have to spend on them. You have no choice," said Vicki Vergagni, president of the 214-unit community's board. "We've had to use way too much of our reserves."

In a sign that the turmoil in the subprime mortgage industry is affecting entire communities and not just individual homeowners, condominium association officers, property managers and real estate lawyers throughout the region say they are noticing more delinquencies in monthly fees.

"If someone is not paying their mortgage, they're not paying their condo fee, and the condos need money to pay bills," said Jeffrey van Grack, a community association lawyer with Lerch, Early & Brewer in Bethesda.

About one in six Americans live in a community run by a condo or homeowners association. Fees pay for such services as water, garbage removal, cleaning and repairs.

"When times get tough, either because mortgage terms start to weigh in or the economy takes a dive and people are not making enough money, you do see an uptick in delinquencies," said Joe Douglass, a community association lawyer at Whiteford, Taylor & Preston in the District.

Millions of Americans financed their homes in the past few years with nontraditional adjustable-rate mortgages. Many of these were subprime loans, mortgages offered to people with poor credit or insufficient cash for down payments. Now, many are struggling to keep up as the interest rate adjusts and their payments climb. Their escape hatches are few. They cannot refinance because their properties are worth less than they used to be. If they sell, they would still owe money to the bank.

When mortgages become too burdensome, the bill from the condo association becomes easier to ignore.

Phil Ochs, a lawyer who represents about 40 condo and homeowners associations in Montgomery and Prince George's counties, said he has seen 10 foreclosures since January. In the past 45 days, 15 people living in communities he represents have declared bankruptcy to stave off foreclosure. Most of them bought their condos in the past two years, he said.

Normally, Ochs said, he may see one or two foreclosures and one or two bankruptcies a month. But now, that's changed. "Something's going on," Ochs said. "This is historically out of line."

Delinquencies are also increasing on investor-owned units, lawyers and property managers said. At the height of the real estate boom, investors bought properties with the intention of selling for a quick profit. When the market turned, they couldn't sell. Now, they are renting the units out, sometimes for less than the monthly mortgage. To make up for the shortfall, some choose not to pay condo fees.

"We're starting to see delinquencies where they're not owner-occupied. It's not just a matter of a subprime borrower," said Thomas Schild of Thomas Schild Law Group in Rockville, which represents many community associations. "They were counting on increased equity. That equity is not happening."

Many communities do not have large pots of money in reserve. It is worse for older communities because they tend to need more expensive capital improvements.

"Associations aren't corporations," said Frank Rathbun, vice president of communications and public relations for the Community Associations Institute, an Alexandria-based group for condo and homeowners associations. "They essentially operate year to year. They collect in assessments what they believe they need to pay for amenities and services that residents expect."

Clara Perlingiero said there are two units that are close to being foreclosed on in her Silver Spring condo community. In her 30 years living there, she said, there has been only one foreclosure.

Her building, on Old Columbia Pike, is old, and the elevators need fixing. The condo fees, which range from $275 to $400 per month, are crucial, she said. "We have to maintain the building because everyone loses if you don't," she said.

Several lawyers and property managers said they are seeing something similar to the early 1990s, when the economy weakened, property values decreased and foreclosures increased. Faced with budget shortfalls, condo associations dipped into reserves, raised fees, or scaled back on amenities and maintenance.

Fearing a repeat, advocates for condo boards in Maryland pushed unsuccessfully this year for a state law that would have given associations priority liens over properties. That means that the association would collect unpaid dues on a foreclosed property before the lender got what was owed on the mortgage. The District has such a law, so associations can collect up to six months in unpaid dues before the bank steps in. Virginia, like Maryland, gives the lender priority.

The bill's backers argued that in a down market, there usually is no money left after a foreclosure sale to pay both the lender and the association. The mortgage industry opposed the bill.

Critics argued that associations already have enough power to collect debts. In all three jurisdictions, they can sue the owner to recoup fees. They are also permitted to initiate foreclosure on a property -- but if there's no equity and the lender has priority, the association gets no money.

Craig Wilson, president of Vanguard Management Associates, a property management company in Germantown, said, "99.9 percent of the time, when a mortgage is foreclosed upon, the homeowners association or condominium gets nothing."

At Glen Waye Gardens, monthly fees range from $396.50 to $588.75 and cover utilities, groundskeeping, snow removal, and maintenance of the furnace and air conditioning system.

"We're not running a resort out here," Vergagni said. "These are living expenses."

Vergagni, who has lived in the community for 32 years, said some of the most delinquent people had low incomes and weak credit or got 100 percent financing. In one case, New Century Financial, the troubled subprime mortgage company that this week filed for bankruptcy protection, financed the sale, she said.

Those owners "really had no business in terms of their creditworthiness to buy into our community," she said.

A foreclosure usually costs the association about $3,000 in legal fees. Suing the owners would just cost more money. In the past year, the association has chosen to write off $12,000 in unpaid dues instead.

"The best thing you can do is get them out of there and get a paying owner," she said.

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