HOA Law Blog
By: David C. Swedelson, Esq.,
Senior Partner at SwedelsonGottlieb
Community managers have been telling us over the last year that much of their time has been consumed by matters relating to delinquent assessments. And they are not just referring to the basic mechanics of the collection process. They are also referring to the many questions that come up, the calls and emails from owners and board members, the foreclosure notices, the bankruptcies, and the list goes on. They lament that this is taking them away from doing their core responsibilities relating to maintenance and repair, etc.
Managers and board members alike are concerned about the impact that this recession is having on the communities they govern or manage. They are concerned about the deficit in the budget that is caused by their associations not receiving all of the revenue that was expected when the annual budget was prepared and the resulting lack of money to do all of the maintenance and repair that is required.
Because of the impact the recession is having on our client base, I have been monitoring articles and reports from experts regarding when we might reach the end of what is now being called the “Great Recession.”
Over the last several months, many economists have reported that the United States economy has bottomed out and that we are at or near the end of the recession that has so severely and pervasively impacted our country over the last year. Several months ago, Newsweek magazine featured a cover story suggesting that the recession was over. However, while certain sectors of the economy had by that time begun to see some improvement, it has become clear that this is not the case for most of us, as evidenced by the wave of articles on the subject that have since been published and the steady flow of owners losing their homes through foreclosure.
Many thought that the foreclosure problem was limited to the subprime morgages. They were wrong as reported in a July 4, 2009 article the Los Angeles Times published entitled “Another Wave of Foreclosures is Poised to Strike.” That article reported that mortgage defaults had by June surged to record levels amid rising unemployment and falling home prices. The article went on to state that lenders are expected to move quickly to clear up backlogs as moratoriums on foreclosures expire. That did not happen. Click Here for the article.
The July 4, 2009 Los Angeles Times article also reported that all of these foreclosures will further decrease home values, pushing more homeowners under water. At the time that article was published, it reported that one in five of those homeowners with first mortgages owed more than their homes were worth. While this does not necessarily mean that all of those homeowners have or will let their properties be sold through foreclosure, it does mean that those homeowners will be more inclined to let their properties go. This is especially true if these owners are also unemployed.
On July 31, 2009, the Los Angeles Times reported, in an article entitled “California’s Default Rate Soars to 9.5%,” that about “1 in 10 Californians with a home loan was in default, and there’s growing evidence that the mortgage meltdown is spreading to commercial real estate.” The article went on to state that:
[t]he staggering number of home mortgage defaults probably will lead to large numbers of foreclosures through at least this year, housing experts say. ‘It is probably a given we’ll see a high number of foreclosures in the next couple of quarters due to the level of defaults plus the recession and jobs lost. There’s plenty more pain to come,’ said Andrew LePage, an analyst for real estate research firm MDA DataQuick of San Diego. Click here to read the article.
LePage was further quoted as stating that in the first part of the year, “about 60% of California mortgages in default ended up foreclosed.” This is important information. It means that not every delinquent homeowner who is upside down or under water on their mortgage (meaning that they paid more for their homes then they are currently worth) are going to let their homes be lost to foreclosure. Many of these homeowners know that with their credit tarnished by the foreclosure default notice, it is unlikely that they will be able to obtain credit for a new home in the near future. Many of these owners will try to keep their homes in the hope that they will increase in value over time. But this is not going to be possible if they are unemployed and cannot pay their bills!
The number of properties going into foreclosure continued to increase. On August 13, 2009, CNNMoney.com published an article entitled “Foreclosure Plague: No Cure Yet.” The article stated that “the housing market is still sick, with a record number of foreclosure filings posted in July.” That article (Click Here to read more) reported that there were more than 360,000 foreclosure filings in July 2009 (which included default notices, scheduled foreclosure sales and/or bank repossessions), which was an increase of 7% from June and a 32% increase from July of 2008 (relying on records from RealtyTrac). “In fact, one in every 355 U.S. homes had at least one filing in July.” RealtyTrac was further quoted as saying that “July marks the third time in the last five months where we’ve seen a new record set for foreclosure activity…. Despite continued efforts by the federal government and state governments to patch together a safety net for distressed homeowners, we’re seeing a significant growth in both the initial notices of default and in the bank repossessions.”
Then on August 21, 2009, the Los Angeles Times published another article with the headline “Mortgage Defaults Soared to Record 13%”. That article reports that:
[i]n the second quarter, the number of homeowners behind on payments or in foreclosure rose along with the jobless rate, with California among states leading the way.
Widespread joblessness is causing more Americans to fall behind on their house payments, triggering a new round of foreclosures that some analysts fear could delay the nation’s economic recovery.
That article went on to report that:
…more than 13% of the nation’s mortgage holders were delinquent on their mortgages or in the process of having their homes repossessed during the second quarter this year. That’s the highest figure since the tracking began in 1972. California’s rate, 15.2% was among the highest of all states.
The numbers underscore a worrisome trend. A spate of foreclosures – which began with speculators who walked away from their souring investments, then spread to high-risk [subprime] borrowers who couldn’t make their payments when their low-interest mortgages reset – is now hitting unemployed homeowners with good credit scores, clean financial histories and conventional home loans.
The Los Angeles Times article (Click Here to read the entire article) further stated that “[t]he U.S. has shed 6.7 million jobs since the recession began, employment losses that have left even high-quality borrowers struggling. One in three new foreclosures from April to June was from a prime, fixed-rate loan, up from 1 in 5 a year earlier.”
The LA Times article quoted Mark Zandi, co-founder and chief economist of Moody’s Economy.com, as forecasting that, “[t]he broadening of the foreclosure crisis to include prime loans due to high and rising unemployment will delay a bottom in the housing market and threatens the economic recovery.” Additionally, this article quoted a spokesman for the Mortgage Bankers Association, who predicted that U.S. job losses would continue at least until the middle of 2010, saying “[W]e would expect delinquencies and foreclosures to peak sometime after that, probably at the end of next year [2010].”
On August 22, 2009, the Los Angeles Times published an article “Unemployment in California Hits Post-WWII High” where it reported that the state’s unemployment rate jumped to 11.9% in July, even as the rate throughout the U.S. declined to 9.4%. (Click Here to read the entire article). These statistics seem to show that while the recession may be nearing its end in some parts of the country, California’s “employment woes are far from over”. These numbers are apparently worse than analysts had expected, rising from 11.6% in June.
The news did not get any better in August, with the unemployment rate moving up to 12.2% (Click Here for the LA Times article). The Los Angeles Times reported that “though the state may be in the early states of an economic rebound, the latest figures underscore what many economists fear: there is no obvious engine of job growth to put California’s more than 2.2 million unemployed residents back to work quickly.” Experts also say that the 12.2% unemployment rate is deceiving as it does not include those that are under employed, those that may be working part time but seeking full time work, etc. The real unemployment rate is probably closer to 17% or more!
On September 16, 2009, Federal Reserve Chairman Ben Bernanke said that the recession was “very likely over” in response to reports that consumers were spending again. But he went on to say that “[e]ven though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time as many people will still find that their job security and their employment status is not what they wish it was.” Click Here to read the Wall Street Journal article. While certain sectors of the economy may be improving, foreclosures and unemployment (and the combination of the two) continue to impact the economy and in particular California community associations. This statement further indicated that it is certain that California community associations will continue to experience assessment collection problems in 2010.
In November, Nouriel Roubini’s Global EconoMonitor published (for the Daily News) a news article entitled “The Worst is yet to Come: Unemployed Americans Should Hunker Down for More Job Losses.” The article stated, “Think the worst is over? Wrong. Conditions in the U.S. Labor markets are awful and worsening. While the official unemployment rate is already 10.2% and another 200,000 jobs were lost in October, when you include discouraged workers and partially employed workers, the figure is a whopping 17.5%.” The article also went on to state that we should remember that “the last recession ended in November 2001, but job losses continued for more than a year and a half until June of 2003; ditto for the 1990-91 recession.” Click Here to read that article.
On November 19, 2009, the Huffington Post published an article by Alan Zibel (AP Real Estate Writer) which stated, “The foreclosure crisis likely will persist well into next year as high unemployment pushes people out of homes, pulls down housing costs and raises concerns about the broader economic recovery.” The article went on to say, “[T]he latest evidence was a report … that a rising proportion of fixed rate home loans made to people with good credit are sinking into foreclosure. That is a shift from last year, when riskier subprime loans drove the housing crisis.” Click Here to read that article.
Many people were thinking that the Federal Government’s Loan Modification Program would curtail some of the foreclosures. The problem is that there is no loan modification that can be made which will address the fact that one or more of the wage earners in a household is unemployed and therefore unable to pay even a modified mortgage.
The LA Times reported that on December 5, 2009 that about 25% of borrowers helped by the “foreclosure prevention plan” have already fallen behind on their new mortgage payments.
On December 9, 2009, USA Today published a report by Alan Zibel, AP Real Estate Writer, that stated that only 10,000 homeowners had received permanent loan modifications, which was “harsh proof of the continual woes of the government’s efforts to stem the foreclosure crisis….” The article reported that only 2% of the 650,000 homeowners enrolled in the program had their mortgage payments permanently lowered to more affordable levels. And only one in three homeowners who had signed up for the modification program had actually sent back the necessary paperwork. Many of these homeowners have purposely defaulted on their home loans and are failing to pay their homeowner assessments because unless they are in default, they cannot be considered for the modification program. As a consequence, these owners are going into collection and are incurring fees and costs. Click here to read the article.
Until recently, as James R. Hagerty recently wrote in the Wall Street Journal, “the supply of foreclosed homes listed for sale has dwindled largely because of government-mandated efforts to save as many borrowers as possible from losing their home. That campaign has gummed up the foreclosure process, slowing the flow of houses into bank ownership – but only temporarily.” Hagerty reported that it is expected that millions of homes will find their way into foreclosure in the coming years. Statewide, the percentage of homes on which notices of default have been recorded, which is the first step in the foreclosure process, is 18.5%. But that is deceiving in that the rate across much of southern California is much higher. In Los Angeles County, it is currently 28%, 30.60% in Orange County, 23.20% in San Diego County and 28% in Ventura County.
What does all of this mean for California community associations? Clearly, the worst is not over yet and many (if not most) associations will have some sort of bad debt, meaning that they will not be able to collect all of the assessments that are due. As a consequence, these associations will not be recovering all of the assessments that were calculated as part of the association’s income when it distributed its last annual budget. In addition, the boards and managers will continue to be distracted by delinquent owners, foreclosures, payment plans, short sales, etc.
It is important that associations now factor in potential bad debt in their budgets (we have been suggesting a bad debt allowance in the budget for more then two years), of perhaps as much as 10% or more depending on many factors including historical data, location, the date most units were sold, etc. While the increase in the rate of assessments to address bad debt will not go over well with the owners who are timely paying their assessments, there is no other choice. It is a fact that associations will not be receiving as much income as they expect and this will likely continue through at least 2010.
As stated in the title, for California community associations, the Great Recession continues and won’t likely let up until unemployment subsides.
David C. Swedelson, Esq., can be reached at dcs@sghoalaw.com.