Tuesday, September 24, 2013

Bank-Held Properties

One of our managers will be addressing a national gathering of representatives from FDIC, FNMA, FHLMC, HUD and various rating agencies.  The purpose of the symposium is to help these agencies understand the impact of their policies and processes on the homeowner association industry.  Our speaker will be discussing delays in obtaining homeowner assessments from bank-held homes.  Below are some key points from this presentation.

Too often, a home will be abandoned but not foreclosed for long periods of time.  Three, six or even twelve years may pass before the bank moves to foreclose, leaving the homeowner association without the needed funding for the most basic services.

While an Association may foreclose on unpaid assessments, the entire process takes six or more months.  For banks, Georgia has one of the fastest non-judicial foreclosures at 37 days:  An Association will incur five to ten thousand in legal fees, only for the bank to immediately foreclose afterward.  The Association’s fees in this instance are often unrecoverable.

To complicate matters, frequently fraudulent deeding of property occurs.  Combined with spurious bankruptcy filings, homeowners can string out the foreclosure process by five years.
Often, an Association has no idea of a fraudulent deed until discovered during a bank foreclosure, when the Association has already incurred time and expense pursuing a debtor.  To avoid this, the homeowner association should be included in bank foreclosure suits (for notice purposes only), so the association is aware of the situation well in advance. 

In some instances the lender takes possession of a home without actually foreclosing.  It sends in a vendor to change locks, pay property taxes, winterize plumbing, etc.  Without an actual foreclosure, the bank is not liable for assessments except in a handful of states
operating under “super lien” laws.  Unless the Association is constantly pulling tax records, it may not discover this situation for years.  To combat this, one item being contemplated is for the Association to file an abandonment claim against the lender for failure to maintain (homeowner assessments, landscaping, etc.).  This potentially leads to the Association gaining title to the property, with legal costs a recoverable expense against the lender.
Once a home has been foreclosed, it is difficult for the Association to track down the lender representative tasked with making assessment payments.  Lenders often outsource property maintenance to third party companies, making things more difficult for the Association.  It is not uncommon for an Association to wait until the bank-owned property sells to a new homeowner, before collecting unpaid assessments from the lender.
If neither the bank nor its servicing agent noted that the home is part of a homeowner association, assessments may not be collected at closing, leaving both the bank and the purchaser jointly liable for the delinquency.  This is not a good introduction for the homeowner to the community.

Some servicers hired by lenders have become proactive in tracking down homeowner association representatives, setting up payment plans.  However, the banking system is so fragmented that two different servicing agents are assigned the same home, with both paying past due assessments.  While this might sound ideal for the Association, it creates problems when the bank attempts to collect overages a year after the home has sold.  The new homeowner may believe the additional funds applied to his account are rightfully his, creating needless conflict.
The banking industry requires a process that, prior to foreclosure, will accurately identify homeowner association contacts.  Similar needs for handling property taxes and hazard insurance are already in place, but the challenges of connecting with 350,000 homeowner associations, many of them self-managed, are formidable.

Tuesday, September 17, 2013

The Price of Avoidance

Recently a client community directed it's management to offer a settlement of 50 cents on the dollar to a delinquent homeowner:  This despite the fact that the debt was recent and had never been pursued via collections.  The Board just didn’t want the hassle and felt that too much money would have had to be spent in legal fees in order to collect.  This type of action (readily caving in to delinquent owners) sends a message to other homeowners about paying assessments.  Those who normally pay will be angered that they are subsidizing others.  Those who don’t pay will be emboldened to push for further concessions.

Another client community also didn’t want to “be mean” to their neighbors, and opted to only file a lien in the courthouse records rather than taking delinquent owners to court.  However, a paper lien is only good for four years, after which the money is barred from collections.  The delinquent homeowners need only wait out the statute of limitations to avoid paying their obligation.  For instances where judgments were obtained (by the previous Board), the current Board refused to garnish wages, bank accounts, rents, or other assets.  Again, the reason given was that this was “too mean”. 

In both of these situations, the Board is violating its fiduciary duty to the Association, and insurance may refuse to cover the Directors if an angry homeowner decides to file a lawsuit.

Instead, these Associations should seek a collections arrangement where the attorney’s fees are paid on a contingency basis, with the attorney retaining a fixed percentage of what is collected.  The Associations will still come out ahead, perhaps collecting 80 cents on the dollar when all is done. 

Community cohesion requires discipline, and unfortunately some homeowners choose to avoid their obligations to their neighbors, whether it is financially or perhaps via a rules violation.  The price of not fully pursuing these matters is greater than any short term savings of Board inaction.

Tuesday, September 10, 2013

On Shaky Ground

“Earthquakes” are not something that we generally associate with the state of Georgia.  However, earthquakes do occur in our area - and also regularly occur in 38 other states.  The initial thought when contemplating earth movement is its impact on buildings.  However, we also need to be mindful of the supporting utility services that provide gas, telephone, and electricity to those buildings. Properties also can sustain significant damage to equipment, windows, partitions, ceilings, and lighting fixtures. Because Georgia earthquakes typically rate relatively low on the Richter scale, these secondary items can be more likely to pose danger than an actual building collapse.
Associations containing multi-story buildings are natural candidates for coverage, and contributing factors - such as tunnels and storm drain systems located beneath buildings - need to be discussed with the association's insurance broker to address realistic scenarios.
Federal disaster assistance (usually in the form of loans or grants) is only available if the damage is widespread, very serious, and the area must be declared a disaster zone by FEMA (Federal Emergency Management Agency).
Standard insurance policies do not generally cover damage directly caused by earthquakes.  You can often obtain earthquake coverage by adding an endorsement to the Association’s policy. The Association also has the option of exploring a stand-alone policy, dedicated specifically to an earthquake event. As with any type of insurance, associations need to check with their insurance agents to ensure that the coverage realistically meets their exposures.

It’s important to know how “earthquake” is being defined to ensure proper coverage. Although one insurance company may define “earthquake” as an occurrence being caused by seismic activity, often earthquakes or earth movement definitions exclude similar events such:
  1. Any earthquake or volcanic eruption that begins before the inception of the insurance;
  2. Earth movement (other than coverage  provided  by  this  optional coverage), such as landslide, or earth sinking, rising or shifting;
  3. Fire, explosion (other than volcanic explosion), tidal wave, tsunami, flood, surface water, water which backs up or overflows from a sewer, drain or sump, water below the surface of the ground (including that which flows, leaks or seeps on or into covered property), mudslide or mudflow, release of water impounded by a dam, even if attributable to an earthquake or volcanic eruption.
The Association should review earthquake coverage with its insurance agent when determining an acceptable level of risk and weigh the costs to obtain the additional coverage. 

Wednesday, September 4, 2013

Lean on Me...and Your CAM too!

Overheard between two IRS agents talking about a tax code provision:  “Just because you don’t understand it and I can’t explain it doesn’t mean we can’t enforce it.”
While the above might be an argument for “limited government”, when it comes to community governance, Board of Directors should never demonstrate such narrow thinking.  In fact, just the opposite is the best way to address - If the purpose of a rule can’t be explained to your neighbors, it’s either a bad rule that needs to be reworked, or the Director has failed in his/her obligation to self-educate on community association governance.

Not only should a Board member be able to reasonably support the governing documents, but he or she should proactively see that homeowners are constantly made aware of key components of communal living.  Consistent newsletters and email blasts are a regular feature of well-run associations:  Usual topics include pet ownership, water damage and insurance, pool rules, and collections. While each Board member can not be expected to be an expert in every aspect of the community's covenants - it is their responsibility to educate themselves, ask questions, and get answers. The Board has many resources to do so - attorneys, vendors, and most importantly - its community association manager!

Your community association manager (CAM) is a great resource for obtaining article ideas, and may be able to provide fully-formed articles ready for use!  They are also there to help and support you when such issues arise.  In addition, Community Associations Institute (CAI) provides copyright free newsletter articles to members of their organization – at least one of your Board Directors should be a member of this entity to access valuable resources for the benefit of your community.  You may find details at www.caionline.org

While some members may grouse at the effort involved informing the community on regulations, such proactive measures greatly reduce the stress, anger and confusion that otherwise occurs when a homeowner is suddenly faced with community rule.  The best enforcement action is the one that never has to occur!