HOAs squeezed when dues not paid

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CHARLOTTE – While the housing market continues to recover, many homeowners associations are still feeling the consequences of the recession.

Foreclosures are down, though there were still 2,328 bank-owned homes in the Charlotte-Gastonia-Concord metro area in September, according to RealtyTrac, with 54 percent of these bank-owned homes being owner occupied.

But homeowners associations are still squeezed by a backlog of foreclosures which can take years to process. Jim Laumann, president of the Homeowners Association of North Carolina, said that in North Carolina, banks are sitting on foreclosed properties for two to three years.

During that time, no one is paying the dues on the home.

A property owner is responsible for his association dues, though it may not be a priority when faced with financial distress as in foreclosure. Months of delinquent assessments may add up while the property owner attempts to work on a settlement with his lender.

While there is no hard data on the number of property owners with outstanding assessments, Jim Slaughter, a partner with Greensboro law firm Rossabi Black Slaughter who works with homeowners associations, believes it’s become more frequent in the last five years.

Derek Greene with Community Management Association, a property management company offering services to over 200 communities in North Carolina, said the problem is across the board in established developments as well as newer ones. “Every association has been touched by this,” said Greene. Communities with million-dollar homes are as likely to face this problem as less expensive developments.

Slaughter thought community associations in the condo market took a harder hit because many of the homes were owned by investors who were willing to walk away from the properties when things went south. “Single-family homeowners will work to keep a property,” he said.

Even if it’s hard to measure the level of bad debt faced by homeowners associations and condo boards, there’s no doubt that it can be devastating to a community. Laumann said that in some parts of Florida, for instance, developments were very hard hit as investors and owners of vacation properties left communities in droves during the heights of the housing crisis, creating delinquency rates as high as 30 to 50 percent.

Nationally, it is a widespread problem too. In its most recent survey in 2011, the Community Associations Institute asked its members about the effects of the mortgage foreclosure crisis and economic crisis. Forty-six percent of community managers said their associations faced “serious” problems as a result of the housing and economic downturn, while 10 percent described the impact as “severe.”

The CAI survey found that assessment delinquency rates had almost tripled since 2005. In 2011, 63 percent of associations had delinquency rates exceeding 5 percent, up from 22 percent of associations in 2005. One in three associations had a delinquency rate exceeding 10 percent, and for almost one in 10—or close to 30,000 associations nationally—the rate was more than 20 percent.

In response to the fiscal challenges, 50 percent raised assessments, 40 percent reduced contributions to reserve accounts set aside for major repairs, 39 percent reduced landscaping services and 38 percent deferred maintenance.

Faced with outstanding assessments, Laumann said that single-family homeowners associations are faced with two options: raising fees on everyone else or cutting back on services like landscaping and irrigation of common areas and closing the pool.

For town homes, it’s more of a problem because of shared expenses like painting, and roof and gutter maintenance. Some items can be deferred, but not indefinitely.

The worst consequences are felt with condominium developments where owners have shared elevators, boilers, heating and air systems, cable TV, utilities, security services and trash pick-ups.

Consequences of high delinquency rates at HOAs can also affect communities and banks in other ways. Freddie Mac, Fannie Mae and FHA are reluctant to making new loan commitments in communities with high HOA delinquencies, making the selling of these properties even more difficult.

Once a lender has foreclosed on a buyer, the bank becomes responsible for the property, but many lenders have neither the interest nor the ability to maintain a home, let alone keep up with the property assessments.

And they may not transfer the deed, meaning that they don’t take responsibility for the dues.

When a homeowner falls behind on his dues, the HOA does have the power to place a lien on the property, though in the case of foreclosure by a bank, this lien is subordinate to the first lien placed by the lender. The association gets paid only after the foreclosed property is sold, which can take years. During this time, the HOA can continue to accrue costs.

But if an HOA doesn’t file a lien, under North Carolina law, once a bank forecloses on the property and the deed is transferred, all back dues are excused. The banks then owe only dues accrued from the point that they take title. If they delay transferring the deed, the association is left holding the bag for the money owed during that time.

But the headaches for the HOAs don’t end there.

“Banks not paying dues on homes they own is not much of a problem.  We can file liens against them just like we can for any other homeowner,” said Mike Hunter, an attorney at Horack Talley specializing in community and condominium association law.

“The far bigger problem is banks not foreclosing on abandoned homes, or homes that are still occupied by an owner, or tenant, who’s not paying the mortgage or the HOA dues,” added Hunter.

Greene agreed: “Lender foreclosure has been the bane for a lot of associations. We’ve seen mortgage lenders play dirty.” Greene said banks will sit on a property for a year or two until they find a buyer before transferring the deed. Until the deed is transferred, no one is paying the dues.

Greene said it’s the big banks – Chase, Bank of America, Citigroup, Wells Fargo – that use this tactic the most.

Nathan Batts, senior vice president at the North Carolina Bankers Association, whose group represents all banks doing business in state, said the association works with a variety of stakeholders involved with property rights. Batts admitted that the foreclosure process can be long, but he believes that banks have a vested interested in ensuring that properties in communities with associations are well maintained. It’s against their interest to own properties that won’t sell because they are poorly maintained.

A new law may help some.

Beginning Oct. 1, the buyer of a property at a foreclosure sale, often a lender, becomes responsible for the dues after 10 days whether the deed has been transferred or not. The law is not retroactive, however, so it won’t apply to past foreclosures.

Some states have taken additional steps to help HOAs recoup at least some of their lost assessments. Twenty-two states, but not North Carolina, have what is known as a “super lien.” In a super-lien state, when the first-mortgage holder forecloses, the HOA is repaid first up to the allowable amount under the state’s law, usually a couple of months of unpaid assessments.

Greene said his industry has pushed for years to get a similar statute passed in North Carolina, but many special interest groups including the mortgage lending PAC have fought against a super-lien statute.