Wednesday, May 26, 2010

The Great Foreclosure Debate, Part IV

Lenders' Reluctance to Foreclose is Crippling Community Associations

The Contra Costa Times, May 25, 2010: “Tens of thousands of homes in the East Bay are in foreclosure or are owned by banks. Some sit empty; a few are boarded up. Beyond the squatters and over-grown yards blighting neighborhoods, the glut of bank-owned homes means years of decline in the property taxes on which cities, schools and the state of California depend.”

     Sound familiar? Of course it does, because the same economic forces are wreaking havoc with the budgets of community associations. The article continues:

     “Foreclosed houses do not obtain lower property tax assessments until banks sell them. So tax revenue will keep falling until banks sell all the houses they end up with, creating a long-term lower tax base.” Basically this means that no one will know the full extent of this economic crisis until all of those foreclosed homes are re-assessed at dramatically lower values resulting in dramatically lower property taxes being paid over a long term.

     But there is another result as well. Property taxes upon which local governments are dependent may not be re-assessed until the banks sell the properties, but homes in community associations that are in foreclosure for non-payment of the monthly mortgage most likely are also delinquent in their homeowner assessments. Banks don’t start paying these assessments until they actually complete foreclosure and obtain title.

     The article states: “In the East Bay, banks own more than 10,000 homes, only a fraction of which are listed for sale. Another 20,000 are in foreclosure headed toward bank ownership.” But “headed toward bank ownership” is not bank ownership, and until the foreclosure is completed, the banks pay nothing toward the costs of maintaining the home which community associations must continue to pay. A healthy fraction of those 20,000 homes are in community associations and while the bank foreclosure process slowly continues, no assessments are being paid.

Click the title link above to read the rest of this article...


  1. It truly has been a great awakening for some assocaitions. Those that maintained healthy reserves over the years and learning how valuable of a good decision this was. Good Management Matters and Boards are recognizing how imporant this really is. While it is true for the most part the Board's cannot make any real impact on the foreclosure situtation, Boards who made wise finanical decisions of the years are in better position to deal with this unfortunate situation.

    Lori Burger, CPM, PCAM, CCAM, CAM
    Senior VP
    Eugene Burger Management Corporation

  2. I couldn't agree more. Smart funding of reserves in prior years is without question the best hedge against times like these and against other problems brought about by the effeccts of aging on community associations.

    Further, if that solid reserve funding is based also on periodic, in depth inspections of older buildings, investigations that go beyond the scope of the normal reserve study so that otherwise hidden problems can be discovered in time to prepare for them, it could very well extend the life of an association indefinitely.

    Good management is essential to all of this, as owners usually don't have the experience necessary to appreciate the difficult financial and maintenance problems that gradually begin to overtake them.

  3. Tyler, for some reason the link didn't work for me to read the rest of the article so you probably covered this. BUT let me tell you as a Realtor out there in the field the issues are serious and may require HOA's to be flexible about owner occupancy rules. I have a client who wanted to purchase a condo for her sister to live in and cannot do so because the association is beyond their owner occupancy. What if the sister moves? She'd be out of compliance even if Sis was on title. She can't take a chance. But this unit has been vacant for about a year and presumably no HOA dues collected.

    In another association where a client has owned two units for over 15 years as part of her retirement plan...(with the association permission and knowledge she was an investor) The association let the owner occupancy get over the limit in their CC&Rs and had not done anything about it, and now want to do a lottery and require the unlucky investor/owners to sell their units...At a homeowner's meeting with the deluge of was brought up that they have huge delinquencies due to foreclosure, etc, already why would the association (who set the precdent and let it get this far without monitoring it themselves) turn away dues paying owners? A quandry for both board and homeowners. BUT I know if I owned in one of the complexes I would feel the association should do what it can to see that the complex receives the funding needed to keep the place up, to keep adequate reserves and not jeopardize my investment. Who knows how this will end up, but the condo market is not served by complexes falling apart and sales prices dropping more than the average in the bay area...what to do? Oh tell us please wise one. Terrylynn :-)

  4. Terrylynn,

    Yes, you've described a true dilemma--shall we enforce the rental restrictions in the governing documents at the risk causing an abnormally high vacancy rate? Rental restrictions were put in place to keep "owner occupancy" high. The belief is that owners take better care of their properties than renters with fewer behavioral problems.

    In this economic market, however, different concerns arise. If insisting on compliance with owner occupancy rules results in vacancies or a higher than normal number of defaults, then the association loses income which it probably can't afford to lose.

    This is something that is probably not the board's decision, however, since most rental restrictions are in the governing documents and would typically require a vote of the members to change.

    But isn't that really what you want anyway? Shouldn't the owners as a group decide whether easing rental restrictions is in their best interest or not? This is something that should be the topic of an open forum at a board meeting so all views can be expressed.

    If there is significant support for changing the rental restrictions then an appropriate amendment to the governing documents can be put before the voters to let them decide. Democracy is a wonderful thing!