By David Swedelson, Esq. and Sandra Gottlieb, Esq.
As we near the end of 2010, we thought it timely and appropriate to provide you with a report as to the status of the assessment collection problems that continue to plague many California community associations as a result of the recession. The following information and opinions come from our perspective as experts in the field and as the operators of one of the leading assessment collection services in California.
We had hoped that we would have better news to report by now. We don’t! All of the reports we have seen indicate that our nation’s economy, while improving, is still a mess, and community associations (condominiums, planned developments and stock co-ops) are unfortunately suffering as a result. Unemployment remains high, creating an ongoing and significant problem. Recent government reports indicate that nationally, unemployment is now at 9.4% (increasing rather than decreasing).
Ben Bernanke, Chairman of the United States Federal Reserve, recently gave 60 Minutes an interview where he indicated that unemployment will not return to normal levels of 5% to 6% for 4 to 5 years. When you consider the fact that unemployment in California exceeds 12%, who knows when we’ll get back to a normal unemployment level. And so long as unemployment remains high, California community associations will continue to suffer high assessment delinquency rates and collection problems.
High unemployment means that community association homeowners will continue to default on their mortgages and, more importantly for our associations, become delinquent in the payment of their assessments/fees to their associations. This not only impacts the unemployed but also other owners who have the means to pay their assessments. Unfortunately, we are seeing some associations defer maintenance, and most associations had to increase their assessments (budget for bad debt) to make up for the deficit. This trend is seriously impacting many newer associations which were developed in the last 5-7 years, as many of those owners bought at the height of the market, and those units and homes are not worth what they paid for them.
Reports show that many owners believe their properties will not increase in value to the level of the equity in the property for years to come. Many of these owners, despite their ability to pay their assessments, are going into default, taking advantage of the free ride. And as long as they are not paying their lender, they are not paying their association either.
The situation is further complicated by the fact that lenders are slow to foreclose (an understatement to be sure). Recently there were some self-imposed moratoriums as lenders were dealing with legal issues such as confirming their ownership of the mortgage or deed of trust and/or adequate review of the documents (robo signers). The fact is that many lenders are not moving quickly to foreclose because they don’t want the property in their inventory and they don’t want to flood the market with too many properties, which would further drive down the prices of homes and condominiums. While it is hard to challenge their reasoning, the fact is that there is nothing that California community associations can do to compel the lenders to foreclose so that someone other then the non-paying owner owns the property, other than the association’s action by foreclosing. Does that always work? No. Does it work some of the time? Yes.
We’ve seen many of you lately at industry conferences, holiday parties, meetings and the like. We are getting a lot of questions about assessment collection, as it is still a BIG problem. We’re still getting questions as to whether associations should foreclose or not foreclose (usually, our advice is to foreclose, see our previous posts). We’re also getting an earful from many of you regarding the assessment collection procedures and process. What we are hearing is that you are disappointed with how your delinquent accounts have been handled by other law firms and collection services. As we expected, we are getting complaints that associations are incurring large bills for legal services for lawsuits that have not netted any recovery. In many cases, the owners have disappeared, and even if they are still living at the property (rent-free), they have no money or assets. Associations are going to have to look at each of their delinquent accounts and determine whether it is better to move forward with non-judicial foreclosure. This may not result in a recovery of the assessments unless a third party bidder purchases the property, which may motivate the lender to finally foreclose or allow the association to put a tenant in the property and collect some of the money that was lost (subject to rent skimming laws). Another option is to proceed judicially against the owner who may have money to pay a judgment. In the vast majority of cases, based on our experience, the association’s best option is to proceed with non-judicial foreclosure, and actually foreclose, as at least the delinquent owner will be forced out of the property, and the association can exercise some options to hopefully recoup lost money or at least get a new owner that will start paying assessments.
Please refer to the left column of this blog to browse our previous posts regarding assessment collection.
If you want some assistance in evaluating your collection issues and problems, please contact Sandra L. Gottlieb at (310) 207-2207 or by email at email@example.com.