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Legal maneuver can help when lenders refuse to pay dues

November 15th, 2010 10:23 AM by Lehel S.

Legal maneuver can help when lenders refuse to pay dues

Banks that aren't foreclosing to avoid paying homeowners association fees or that are failing to pay after taking possession of distressed properties are being ordered to pay up or give up their liens.

A legal tactic that forces lenders to either pay up or get out of communities governed by a homeowners association has now been sanctioned by three courts in Florida. And it couldn't come soon enough for the millions of associations struggling with the effect that nondues-paying owners are having on their communities.

The strategy, which has national implications because it is not based on state law, has become necessary because financially strapped owners aren't the only ones who are failing to pay their fair share of the cost of running their communities. So are lenders, which either won't exercise their right to foreclose to avoid paying dues and property taxes or simply refuse to pay once they become the legal owner of distressed properties.

According to a study by the Community Associations Institute in Alexandria, Va., more than 7 in 10 bank-owned houses and apartments are not making regular assessment payments to the government-like boards that operate the projects in which the properties are located.

The inability to collect dues is placing a big financial strain on associations and the people who still reside in the communities they operate. Associations rely on dues to fund such services as utilities, trash pickup, landscaping and road and building maintenance. Assessments also fund a wide variety of amenities including swimming pools and playgrounds.

When the association doesn't collect enough money to pay the bills, one of two things happens: Either the residents take up the slack or the association curtails services.

Nationally, some 62 million people live in an estimated 310,000 properties governed by homeowners, condominium or cooperative associations. More than half are having a tough time dealing with the effects of the economic downturn in general and the foreclosure crisis in particular, according to the institute.

In a September survey of 1,500 institute-member association managers, more than half said their client associations didn't have enough funds to carry out their responsibilities. Forty-five percent said their clients face "serious" problems, while 9% described the effect as "severe." The remainder said the issue was just a nuisance or nonexistent.

In addition, a quarter of the association managers said more than 5% of their units were vacant, either because of foreclosures, the inability of absentee owners to sell or rent their properties, or owners who simply walked away from their mortgages.

Moreover, assessment delinquency rates have more than doubled since 2005, the height of the housing market frenzy. Back then, 19% of associations had delinquency rates exceeding 5%. Now, 65% report late rates above 5%. Worse, 30% have delinquency rates exceeding 10%. And for 1 in 10 — nearly 30,000 associations nationwide — the rate is more than 20%.

Although there aren't any state-by-state statistics, the problem is particularly acute in Florida, which is practically overrun by foreclosures. One in every 56 houses in the Sunshine State received a foreclosure filing in the third quarter, according to RealtyTrac. That's the third-highest foreclosure rate in the country, behind only Nevada and Arizona.

Enter the Association Law Group, a Miami Beach firm that has come up with a strategy associations can use against nonpaying lender-owners. The ploy, dubbed the Mortgage Terminator by partner Ben Solomon, won't solve all an association's money woes, but it will at least force a lender's hands after an association forecloses on an owner to collect unpaid assessments.

In too many cases, lenders are failing to foreclose on troubled assets, regardless of whether the owner is a troubled borrower or a secondary lien holder. In many cases, they are either waiting for the market to clear so they can sell the distressed assets at a better price, or they don't want to pay the dues and/or assessments required from owners.

Whatever the reason, lenders that drag their feet are leaving associations in the lurch. But with the Mortgage Terminator maneuver, says Association Law Group partner Solomon, associations can take the title to the property and then force the primary lien holder to initiate its own foreclosure proceeding or release its mortgage so the association can sell the unit to cover what it is owed.

Three times now, Florida courts have upheld the tactic, which Solomon calls "a legal strategy that finally gives banks a legal ultimatum."

In the first case, Citibank agreed to release its mortgage on a Miami-Dade County property. And now, the strategy has worked in adjacent Broward County, where final judgments have been entered against Wells Fargo and Deutsche Bank.

In the Wells Fargo case, the Palm Aire Gardens Condominium Assn. had foreclosed on the property and taken title to it in late December. But even though its borrower had been dispossessed from ownership, Wells, the first lien holder, was not foreclosing on the property.

On behalf of the association, Association Law Group sued the lender to force it to either initiate foreclosure proceedings or give up its ownership rights. And when Wells Fargo failed to act in defense of the suit, Judge Dale Ross entered a default final judgment in favor of Palm Aire.

Among other things, the judgment provides that the lender "is declared to have abandoned its mortgage and any claims it may have on the property" and that "it has no estate, right, title or interest in the property."

The law firm's strategy is a "quiet title action" that requires a lender to prove it owns a property free and clear by foreclosing or give up its lien. And since there is little equity left in these distressed properties, it often makes more financial sense for banks to walk away than it does for them to take the title.

Solomon believes the tactic has widespread application, especially in states such as Florida, where lenders are liable for at least a portion of past-due assessments and real estate taxes plus future dues and taxes.

"It may not work every time," the attorney says. "But at least it's certainly better than sitting there doing nothing. And if the association is successful, it helps stop the hemorrhaging."

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Posted by Lehel S. on November 15th, 2010 10:23 AM

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