By Carl Selph
Unfortunately, banks, Fannie Mae, and Freddie Mac are still contributing significantly to the continued decline of housing prices through the ongoing deterioration of our neighborhoods and homeowners’ association communities. Anyone can drive down a street in a neighborhood of single family homes and observe overgrown lawns, unkempt landscaping, houses in need of paint and repair, not to mention swimming pools with nasty stagnant water covered with 2 x 10’s and hog wire. With few exceptions most of these unkempt properties are lender owned and an aesthetic disgrace to the surrounding occupied homes. Too often, the foreclosed properties owned by banks, Fannie Mae, or Freddie Mac become a haven for vagrants, drug addicts, or homeless persons.
The shame of it all is that these properties have been owned by the lending institution for a year or more; with each passing day the properties become: more unkempt, more in need of restorative or preventive maintenance, more of an eyesore to the neighbors and the neighborhood, and exacerbate the continuing decline of property values.
The owners of these properties – banks, Fannie Mae, and Freddie Mac are not behaving as good corporate citizens or community neighbors and such behavior has both tangible and intangible injurious effects on the neighborhoods and its homeowners.
However, as abhorrent as this situation is for traditional neighborhoods and communities, it is even more devastating and injurious to owners who are bound by the regulatory effects of community associations (homeowners’ or condominium). In community associations the expenses of maintaining the common elements (roads, grounds, buildings, security, etc.) are borne by the owners in proportion to their respective ownership interests. Generally, when a mortgagee like a bank, Freddie Mac, or Fannie Mae start foreclosure proceedings on a property, the borrower will quit making payments to the association and will also vacate the property.
However, in most situations the lending institution chooses not to move forward expeditiously with the foreclosure proceedings; in fact, more typical is for the lending institutions to become very dilatory in their actions in order to delay the foreclosure proceeding and their taking title to the property.
The reason for the lending or servicing institution’s dilatory behavior is clearly explained by the metaphor “follow the money”. Given the slowdown of the the real estate market the time that a mortgagee will have to hold title to a foreclosed property prior to sale is unusually long – maybe a year or more. Once the lending institution takes title to the property, it becomes responsible, like other owners, for paying the community association’s assessments; additionally, it is responsible for the past due assessments, subject to a statutory maximum of amount (known as safe harbor provisions) equal to one year’s worth of assessments or 1 percent of the original mortgage amount, whichever is less.
In the short-term the lending institution seems to be saving money or conserving its cash position using the foregoing foreclosure strategy; however, such a strategy is bad for the community and, in the long-term, costs the lending institution money or resources. It is bad for the community, for several reasons: (1) it requires the responsible owners in the community to “foot the bill” for the dilatory lending institution. It is not uncommon for homeowner associations or condominium associations to file for bankruptcy because the few owners paying assessments are not able to fund the entire association; and, (2) while the properties are occupied by owners not paying their mortgage or remain vacant awaiting action by the lending institution, the properties are generally not maintained properly and lose significant value causing a commensurate loss in value of the surrounding properties.
To limit the aforementioned adverse effects community associations, their boards, and managers should take a very pro-active role using the limited legal strategies that are available to force the lending institutions and servicing agents to step-up to the plate and act responsibly to fulfill their responsibilities to the communities where they hold mortgages. Unfortunately, all too often, association boards and managers do not understand fully the foreclosure process and the tools and strategies available to them to force a more expeditious and responsible behavior by the lending institutions and servicers. Boards and association managers should ensure that their legal counsel is experienced in such matters and apprises the association with all of the options available and the costs of inaction.
Additionally, the 2012 Florida Legislature should take action to amend the Homeowners’ and Condominium Statutes to further increase the mortgagees’ liability for past due assessments or eliminate the mortgagees’ safe harbor provisions completely. Also, the judicial system should take a close look at a mortgagee’s action in foreclosure cases and impose sanctions on mortgagees that deliberately delay the process to avoid or postpone their responsibilities to the respective community. Lending institutions and their servicers need to do more to alleviate the situation they created.
(Carl Selph is a former CPA and Florida Legislator; he is a Florida Supreme Court Certified Circuit and Appellate Mediator, court approved foreclosure mediator, Arbitrator, and licensed Community Association Manager; he is the founder of Selph Mediation and Arbitration Services, LLC and can be reached via email: Carl@CarlSelph.com)