April 4, 2016
In the contemporary dystopia, property ownership provides ordinary people with space in which to live, work and play in peace, safety, and freedom. Americans also see real estate as an investment. My high school friend Tom was one of my first classmates to purchase a home. Years ago, he explained that the great thing about a home is that it is an investment and you also get to live in it. Unfortunately, there are many predators in the marketplace seeking to capitalize on consumers’ commitment to home ownership. Some loan servicers, debt collectors, and contractors see owners as opportunities. Their trade groups lobby state capitals. Owners have to stick up for themselves in Court and with their elected representatives to protect themselves from becoming someone else’s cash drawer. Sometimes unscrupulous people get what they want by conceptually framing a crisis to shape the perceptions of decision-makers. Fear is one of the easiest emotions to manipulate. Owners should be skeptical of how the housing industry describes the Zombie Foreclosure Apocalypse.
In a recession, financial struggles can render owners unable to make payment obligations to mortgage lenders and HOA’s. In many cases, these personal crises are temporary. Job loss or illness of the owner or a family member can cause a temporary but acute financial crunch. The problems may be fixable by a new job or resuming work after addressing a family member’s needs. Unfortunately, lenders and HOA’s tend to treat all defaults in payment obligations the same. In the past few years, HOA’s have waited for assessment income when banks delayed foreclosing on homeowners. In these so-called “zombie foreclosures,” banks delay completing foreclosures for years because there is little economic incentive to adding the distressed property to their own real estate inventory. If they buy the property, they become responsible for it as the new owner. Usually the owners stop paying their HOA dues around the time they can’t pay their mortgage. The HOA industry sees themselves suffering financial losses at the hands of loan servicers who fail to timely foreclose and put a new owner in the property with the willingness or ability to pay the HOA assessments.
On March 25, 2016, Dawn Bauman posted an article on the Community Associations Institute’s (“CAI”) blog titled, “Clean Up Foreclosures in Your Community.” Ms. Bauman argues that because the banks delay foreclosure, other owners must pick up the tab of the struggling neighbor to support an HOA’s budget. This blog post calls upon neighbors to file citizen complaints with the Consumer Financial Protection Bureau (“CFPB”) when banks delay foreclosing on neighboring homes. The blog post contains links and instructions for submitting complaints. I understand Ms. Bauman’s point that Boards might have to make budget changes if there is a spike in “zombie” foreclosures. These budget decisions might include increasing dues for other owners, slashing budgets or even raiding reserves to pay for major repairs. However, I’m not convinced that a campaign to expedite foreclosures would really advance the interests of other owners. As films and books such as “The Big Short” illustrate, the foreclosure crisis is a complex phenomenon. When a borrower falls into default, wouldn’t the community’s interests be better advanced by helping them get back on track with their existing lender and HOA? There is no guarantee that the CFPB would have the resources, authority and/or will to take regulatory action upon receipt of a complaint submitted through web forms on the internet. This CAI blog post seems to perpetuate the stereotype of debt collection as the common denominator of a HOA community. Yes, communities require accountability, but that should go both ways.
What is happening here? Imagine that a prospective buyer met with a realtor or property manager to discuss a home in an HOA. What if the real estate professional candidly told the prospective buyer that in this community, if you default on your mortgage, your neighbors and HOA will contact regulatory authorities to make sure the bank expedites your eviction. The prospective buyers are expected to also do the same against to their neighbors. The home shoppers innocently ask, “Why is this?” The manager candidly explains that the local government has outsourced its functions to the HOA. That HOA has a big budget. The locality and the HOA have an interest in keeping property assessments high. If the homebuyers are rational, they will walk out of that meeting and never come back to that development. Home owners want neighbors who support each other, or at least leave each other alone. No one wants to live in a community where neighbors are expected to tattle. If that’s necessary, then there is something wrong with the community association model. To sustain themselves, the community associations should seek to advance the interests of their members and not the other way around. The task of creating communities traditionally belonged to local governments, developers and the owners themselves. However, real estate is also a national policy concern because of the roles of Fannie Mae, Freddie Mac, the CFPB and a host of other federal agencies. At a March 29, 2016 town hall meeting, Republican presidential candidate Donald Trump identified “housing, providing great neighborhoods” was one of the top three responsibilities of the federal government. Such statements are easily dismissed as political pandering. However, Mr. Trump, however controversial, seems to have a knack at getting into the minds of many voters.
When an owner falls into a persisting default, usually the lender, HOA, and local government want to start over with a new owner. In fact, the HOA industry and local governments want to work together to eliminate these “zombie foreclosures.” Fairfax County holds an annual “Community and Neighborhood Leaders Conference” to provide face-time between HOA board members and county agencies with authority to enforce laws and ordinances. This alliance puts the elderly and disabled at a particular disadvantage when it comes to complying with local ordinances about how property should be maintained. Owners may find their lenders, HOA’s, and local governments taking action against their property interests.
If owners find themselves in default of their loan and assessment payment obligations, what can they do to protect their financial interests and property rights? Fortunately, there are some strategies that work.
- Avoid Falling into Default in the First Place. If the owner isn’t in default, then the lender or HOA doesn’t have a basis to institute foreclosure or debt collection proceedings. For many owners, the financial crunch of making the payments is less costly than digging themselves out of a persistent default.
- Know Your Rights. Many owners rely upon what bank representatives or HOA board members say in order to determine their rights. However, in court a judge can be expected to apply what the mortgage or HOA documents say to resolve any dispute. Owners should organize and understand the applicable legal documents and not rely on hearsay.
- Have a Plan. The bank representative or property manager is not going to take the lead on how to resolve the payment default. Debt collectors are looking to get paid as much as possible and/or to push the owner out. The owner must determine whether they want to keep or relinquish the property. The circumstances of each case are unique and which strategies to employ is outside of the scope of this post.
- Present Well. If a property appears to be abandoned, then the local government, HOA, and lender will treat it as such and move aggressively. If an owner keeps the property up, they are less likely to be bullied. Likewise, in negotiating with a lender’s or HOA’s representatives, an owner should consider how their actions and works are likely to be interpreted. If the owner has unrealistic expectations or appears to show signs of weakness, then the industry professionals are less likely to take them seriously.
- Have a Team. Board members, property managers, and collection attorneys are working together to maximize the accounts receivable of the HOA and minimize their own hassle. The lenders have account representatives and lawyers to service the loan. Owners should have a team of their own. Allies in a community can look out for each other and guard against bullies. Many state legislators want to take up the cause of property ownership. Lenders and HOA’s have experts and attorneys of their own on call to advance their interests. Out of experience they are able to think two or three steps ahead of consumers. If a lender or HOA behaves in a mysterious manner, it may be that they contemplate future legal action. Many times owners need legal assistance of their own.
An owner who struggles with financial difficulties is not a “zombie.” What is really “undead” is the complex web of loan documents, HOA rules, and public policies putting an owner’s property rights and financial condition at unnecessary risk. Financial challenges do not have to result in intractable crises. When told about the pending Zombie Foreclosure Apocalypse, owners need to understand what is really “undead.” The industry should educate and advocate for owners in these situations in order to keep the HOA model from turning into an unsustainable dead end. Until then, owners must work together and with qualified professionals to protect their rights.
UPDATE: Check out my April 23, 2016 “On the Commons” podcast with HOA attorney Jeremy Moss and Host Shu Bartholomew. We discuss the Zombie Foreclosure phenomenon and what it means for HOAs and owners.