Association Lien Services has been successfully collecting delinquent assessments, non-judicially, for over twenty years and has weathered a few economic downturns along the way. However, never before have we encountered such a perfect storm of economic turmoil. In the past, as now, when there has been a burst in the real estate bubble (and there have been two others in the past 20+ years), we have seen many owners let their properties go back to their lenders (or in some cases to their associations) because they were not worth what they paid for them. We are also seeing some owners that want to keep their homes, as they believe that they will eventually rise in value.
The “perfect storm” is the unprecedented sub-prime crisis coupled with a stock market collapse, accompanied by a significant increase in unemployment. Several commentators have reported that we would see different waves of foreclosures, and that is exactly what ALS has been experiencing. Starting in September of 2008, ALS experienced the first wave of the “sub-prime” owner defaults, assessment delinquencies and resulting lender foreclosures.
Now, we are seeing a new wave of foreclosures because of the huge increase in the number of recently unemployed owners. The Los Angeles Daily News recently reported a 60% increase in home foreclosures in Los Angeles County saying that the increase comes “after moderating for several months, a sign that mounting job losses are exacerbating the market’s woes.
The Los Angeles Times recently reported that California has lost 62,100 jobs, pushing the unemployment rate to 11.2%, the fourth worst in the nation. Another report indicated that Los Angeles County’s jobless rate was at 11.4% in March, the highest level since the end of World War II. The rate of unemployed is even higher in other areas of the state.
ALS has received a number of inquiries from board members and managers as to what associations are supposed to do when faced with the possibility that an owner is going to (or has) abandoned their home and the senior lender is poised to foreclose. They are concerned with proceeding non-judicially because so many of these unemployed homeowners have no way of paying their mortgage or keeping their homes. We continue to recommend that associations proceed non-judicially, as the costs and fees that an association will incur are less than the judicial process and obtaining a judgment may, in any event, be a waste of time. A judgment has little value if the owner has no money or assets available for collection.
This perfect storm of economic problems is, of course, increasing the number of foreclosures. But this whole situation, at least for community associations, is further complicated by government action designed to help these homeowners. Earlier this year, there was a federal government moratorium on foreclosures. During that 90-day period, a lot of board members and managers were unsure as to how to proceed, if at all, with collection. ALS always hopes that an owner will pay off or refinance with their lender. With the 90-day delay, however, we could not make a determination of what senior lenders were going to do with the properties, and as a result, boards were uncertain on whether to foreclose on their association assessment liens.
Now, we have learned that the State of California has imposed a new moratorium to help owners work out deals with their lenders. The California Mortgage Banker’s Association sent out a newsletter last week, advising that Governor Schwarzenegger had, in February, signed into law new California Civil Code Section 2923.52, which requires an additional 90-day Notice of Default moratorium period in addition to the first 90-day period before a Notice of Sale can be delinquent. This gives homeowners time to pursue loan modifications to prevent further foreclosure of loans meeting certain criteria identified in that statute.
This new law only applies to trustee deed foreclosures and not to the assessment collection process. Nonetheless, this new law is going to create some additional concerns for boards as they will not know whether to proceed or not proceed with their own association’s foreclosures while some homeowners are purportedly trying to work out a loan modification. The only way to find out is by proceeding!
A recent article in the L.A. Times indicated that there are many owners with the ability to pay who are not paying their home loan because they want to be delinquent so they can be considered for a loan modification. We have learned that these owners are not paying their home loans or their assessments or fees to their associations, and their lenders are so far behind and so unequipped to deal with the situation that they are concentrating on those owners who are closer to, as the article stated, “going down the drain” which probably refers to being close to foreclosure. These other owners are just coasting, and in many cases, their lender has not even started collection or foreclosure process. There is nothing an association can do except to move forward with collection and the non-judicial process to compel the owners to pay.
Some board members and managers are considering the judicial route. The attorneys at SwedelsonGottlieb tell us that although they will proceed judicially when instructed to do so by their association clients, they are not a fan of this process, because although it may not be difficult to get a judgment, it is frequently difficult to find an asset or property to collect on. Some of our clients have gone to small claims court following the senior foreclosure on a property which has wiped out their association’s lien. While they have been successful in obtaining judgments, they have not been too successful in collecting on those judgments. Typically, an owner who has lost their property in foreclosure has no other assets. Even if they have a job, California law protects those individuals from collection on their salaries or pay from their jobs based on their expenses. Most of these homeowners have very little, if any, equity in their cars, making execution on same largely a waste of time and effort.
Community associations are small businesses. Some are smaller than others. All businesses, from time to time, have “bad debt”. There is only so much an association can do to try and collect these delinquent assessments, and if all reasonable efforts have failed, the board needs to come to the realization that it might have to write off that debt. There are no other easy answers.
Contact Association Lien Services (now with ARMS, our Assessment Recovery Management System) if you need assistance with collecting your delinquent assessments. Call 800-825-5510 x208.