Irvine Housing Blog

Will HOA Lawsuits Compel Lenders to Foreclose on Shadow Inventory?

Posted: 16 Jun 2010 03:30 AM PDT

Home Owners Associations are being crushed by delinquencies, and there is little they can do about it. If the first lien holder doesn't foreclose, HOAs can't get paid, and any bills are wiped out when the foreclosure finally does occur. Existing homeowners are the ones who are damaged most.

Irvine Home Address ... 77 CANYONCREST Irvine, CA 92603
Resale Home Price ...... $650,000

The fields of Eden
Are full of trash
And if we beg and we borrow and steal
We'll never get it back
People are hungry
They crowd around
And the city gets bigger as the country comes begging to town

We're stuck between a rock
And a hard place
Between a rock and a hard place

The Rolling Stones -- Rock and a Hard Place

The amend-extend-pretend policies of lenders is fraught with unintended consequences. The obvious costs to lenders is lost revenue from squatters who get to stay in their homes without making any payments, but lenders are not the only parties involved who aren't getting paid.

Local taxing authorities and Home Owners Associations (HOAs) also are not being paid. The taxes will get paid eventually because property tax obligations survive the foreclosure. Whatever bills the old owners left behind are the responsibility of the new owner. Bills due to HOAs are only paid after mortgage holders are paid in full. Since most delinquent homeowners are underwater, there is no equity left over to pay the HOA bills, and any delinquent amounts are not paid by the new owner. The costs of extinguished HOA dues are passed on to existing homeowners who are still paying their bills.

Home owners associations have only one recourse to compel an owner to pay their dues: foreclosure. In a normal real estate market -- one where home owners have equity -- the threat of foreclosure is an effective threat; however, when owners do not have equity and they are not paying their mortgage, HOAs have no leverage. HOAs are generally unwilling to foreclose because their ownership position after the foreclosure is subordinate to the surviving mortgages -- an HOA foreclosure does not wipe out the superior liens. In other words, HOAs can take possession of an underwater property -- which provides them no benefit -- and in the process wipe out any claims to back HOA dues. Taking ownership of a property they cannot sell to a dues-paying owner does not help them.

The HOA dilemma

HOAs cannot compel payment without foreclosure and their bills do not survive foreclosure if the home owner is underwater. Most HOAs are praying that loan modification programs succeed; unfortunately, cure rates fell off a cliff when prices started falling. The recent uptick is the short-lived boost from the government's loan modification program designed to shift liabilities from lenders to the US taxpayer. With millions of squatting homeowners underwater and unemployed, HOAs are not likely to see delinquent homeowners get current on their HOA dues any time soon.

HOAs want a dues paying homeowner. They would prefer banks to work out a loan with an existing borrower and get paid for the past due amounts. Since this is rare, their next best alternative is for the bank to foreclose, sell the property, and get a new homeowner to start making the HOA payments. However, when lenders refuse to foreclose -- which is what creates shadow inventory -- then HOA finances do not stabilize, and property owners face huge assessments or even bankruptcy of the HOA.

The current laws create two separate problems for HOAs. First, they must determine if there is any hope the existing homeowner will ever pay their delinquent HOA dues. Vacant properties owned by speculators are never going to pay their HOA dues, so these properties become targets for HOA foreclosures. This leads to the second problem: banks don't like to pay the HOA dues either once they have foreclosed.

New law lets HOA's go after banks

Friday, 11 Jun 2010

NEW PORT RICHEY - There are several houses in the Hunter's Creek neighborhood where the grass is long, the paint is fading, and the houses are vacant.

Neighbors call them eyesores, but they've become more than that. Foreclosed homes have become a financial drain on entire neighborhoods.

People often stop paying their HOA fees long before they stop paying the mortgage. Michael Paulson is a member of the Hunter's Creek homeowners association in New Port Richey.

He says once a house is empty, it's impossible to get even a nickel of the past due fees.

"We try to get with the banks who own the home and they don't do anything about it either, so we're constantly trying, it makes our property value go down," Paulson said.

It also forces those who do pay, to pay more.

"The cost of keeping up the common areas, the upkeep of the association and other bills that may come in is now spread out to those who continue to live there and are paying their maintenance fees," Paulson said.

State Senator Mike Fasano authored a bill that becomes law next month.

It allows homeowners associations to bill banks for delinquent HOA fees for home on which they've foreclosed.

"The mortgage company, the bank, the lender is now going to be responsible for paying up to 12 months of the maintenance fees, the monthly dues," Fasano said.

Condo associations have been especially hard hit by people who walk away from their homes, leaving thousands in unpaid association dues.

"We just had a special assessment. Everybody here has to pay extra. We had to raise $100,000 to cover these delinquencies," said Bill Sanders.

HOA board members say there is a limit to the number of extra fees they can force their members to pay to help make up for the bills their old neighbors left behind.

"They're saying 'hey look, every $50 dollars a month, you know it really hurts us,'" Sanders said.

The payment of HOA dues provides a strong incentive for banks not to foreclose. Even though they may end up paying the bills later, each month that passes with the property in shadow inventory is one more month the bank doesn't have to pay the HOA dues. This new Florida law makes it clear that lenders are responsible for HOA payments while they own the property. What this law will do is increase shadow inventory and decrease the time from foreclosure through disposition. In other words, lenders will not foreclose any faster than they can process and sell the REO in order to minimize their HOA dues.

HOAs need to force first-lien foreclosure

What HOAs really need is the ability to force the first lien to foreclose. Only then will a dues-paying homeowner get into a property. The law Florida gets banks to pay after the foreclosure, but it also provides a huge incentive not to foreclose. The only solution that will serve HOAs is for them to be given the ability to force the first lien holder to foreclose and make lenders pay the HOAs on their REO. Anything short of that will leave HOAs in the circumstances they are in now: bleeding cash with no recourse and no end in sight.

Something has to change or we will see an epidemic of HOA bankruptcies ahead.

She nearly forgot her down payment!

I wonder sometimes if lenders have learned anything about cash-out refinancing during the bust. The previous owner of today's featured bank-owned property would have lost her entire down payment if not for a HELOC.

This property was purchased on 5/27/2005 for $759,000. The owner used a $607,200 first mortgage, a $75,900 second mortgage and a $75,900 down payment.
On 7/3/2006 she got a HELOC for $135,000. Assuming she rolled the second mortgage into the first, she left $16,800 in the property which she has now lost.
Total property debt was $742,200.
Total mortgage equity withdrawal was $59,100.
Total squatting time at least 13 months.

Foreclosure Record
Recording Date: 03/12/2010
Document Type: Notice of Sale

Foreclosure Record
Recording Date: 06/01/2009
Document Type: Notice of Default

This is a pattern observable on many bank-owned properties; the first mortgage was held by Wells Fargo, and the HELOC was from American Mortgage Express Corp. Since the same lender did not hold both the first and the second, it is wiser for the first mortgage holder to foreclose, extinguish the second mortgage, and resell the property to recover their capital on the first mortgage.

Going forward expect to see short sales when the same lender owns both the first and the second and foreclosure when these mortgages are owned by different parties.

Irvine Home Address ... 77 CANYONCREST Irvine, CA 92603

Resale Home Price ... $650,000

Home Purchase Price … $759,000
Home Purchase Date .... 5/27/2005

Net Gain (Loss) .......... $(148,000)
Percent Change .......... -14.4%
Annual Appreciation … -2.9%

Cost of Ownership
-------------------------------------------------
$650,000 .......... Asking Price
$130,000 .......... 20% Down Conventional
4.84% ............... Mortgage Interest Rate
$520,000 .......... 30-Year Mortgage
$132,148 .......... Income Requirement

$2,741 .......... Monthly Mortgage Payment

$563 .......... Property Tax
$150 .......... Special Taxes and Levies (Mello Roos)
$54 .......... Homeowners Insurance
$181 .......... Homeowners Association Fees
============================================
$3,689 .......... Monthly Cash Outlays

-$466 .......... Tax Savings (% of Interest and Property Tax)
-$644 .......... Equity Hidden in Payment
$241 .......... Lost Income to Down Payment (net of taxes)
$81 .......... Maintenance and Replacement Reserves
============================================
$2,903 .......... Monthly Cost of Ownership

Cash Acquisition Demands
------------------------------------------------------------------------------
$6,500 .......... Furnishing and Move In @1%
$6,500 .......... Closing Costs @1%
$5,200 ............ Interest Points @1% of Loan
$130,000 .......... Down Payment
============================================
$148,200 .......... Total Cash Costs
$44,400 ............ Emergency Cash Reserves
============================================
$192,600 .......... Total Savings Needed

Property Details for 77 CANYONCREST Irvine, CA 92603
------------------------------------------------------------------------------
Beds: 3
Baths: 1 full 2 part baths
Home size: 1,275 sq ft
($510 / sq ft)
Lot Size: n/a
Year Built: 2004
Days on Market: 14
Listing Updated: 40336
MLS Number: S619029
Property Type: Condominium, Residential
Community: Turtle Ridge
Tract: Chnt
------------------------------------------------------------------------------
According to the listing agent, this listing is a bank owned (foreclosed) property.

Charming beach close town home in gated community of Turtle Ridge. Bamboo flooring, high base boards designer light fixtures. Elegant Lami doors throughout. World Class association amenities include a cabana lined pool, spa, bbq and clubhouse facilities. The good life!!!

We have a special visitor tonight. Pat Regnier from Money Magazine is doing a story on Orange County real estate, and he will be in attendance for anyone who wishes to express an opinion on the subject. Of particular interest is anyone who is underwater but isn't going to walk away from the property. Come out and tell your story, and you may make Money Magazine.

I hope to see all of you this evening.