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Associations Must Be Proactive in Foreclosure Process

Foreclosure

Before the 2008 real estate meltdown, condominium and homeowners association collection practices seemed to work all right, and write-offs would rarely be too painful to absorb. Since 2008, however, mortgage foreclosures have overwhelmed the court system—and uncontested cases take, on average, more than three years to conclude.

Due to a combination of Florida statutes and subordination language in an association's governing documents, write-offs have resulted in associations increasing their monthly assessments, imposing special assessments, going into receivership or even filing for bankruptcy.

Under Florida law, once a bank in first lien position forecloses, it is solely responsible to the association for any unpaid fees up to 12 months of assessments before it took ownership or 1 percent of the original mortgage debt, whichever is less ("safe harbor"), plus all fees from the time of taking ownership until selling the property. Because of this, and the extended time frame it takes to foreclose, associations can no longer afford to wait for a bank to foreclose, and a new owner to take possession of the property, before expecting to receive its delinquent dues. In fact, doing so will almost certainly lead to the associations having significant write-offs, in addition to the issues mentioned earlier.

An association's goal should always be to maximize collections, while minimizing the costs and risks associated with that. It seems that many associations have not realized that aggressive collections cannot only result in mitigation of exposure to large write-offs, the same can result in a surplus (that can be used to offset other losses). Too often, we see associations that have not changed their collections practices, and the resulting losses have placed the communities in peril.

Last year, a survey by the Condominium Associations Institute, a national advocacy and lobbying group with chapters throughout the state, revealed that Florida had approximately 46,000 associations; the most in any state, accounting for 14.2 percent of all associations in the U.S.

Today, there is in excess of 185,000 pending mortgage foreclosures in Florida. According to RealtyTrac Inc., one in every 434 homes in Florida, approximately 21,000 total, have received a foreclosure filing so far this year. Odds are that a similar amount of homes are delinquent on their association obligations. There is no possible justification for an association to remain inactive on a delinquent account, let alone for over three years. Such inaction is also contrary to the fiduciary duties of an association's board of directors.

Once an association is served with a foreclosure complaint, it should immediately raise a flag that the association must be proactive with the property owner's account and ensure that the association is properly advised and represented.

Some of the things that should be done (and typically are not) include:

• Proceeding with collections once an account is three months in arrears—and not stopping unless the account is brought current or a repayment plan (preferably less than one year in duration) is entered into.

• Litigating with a foreclosing lender, as needed, over the issue of lien priority, with the goal being avoidance of the safe-harbor statutes.

• Obtaining sanction orders against foreclosing lenders where appropriate for fees and costs, or even the full amount due on the delinquent account.

• And, most importantly, collecting rents, either through a demand for rent from an existing tenant, brokering an agreement for the former owner to pay rent, or by the association placing a tenant in the unit. To reiterate, collection of rents is the most powerful tool that an association has to avoid significant losses, and to potentially earn profits.

Other matters associations should consider include pushing mortgage foreclosure cases (where appropriate) and filing quiet title actions on association-owned units if it appears that the bank has "charged-off" the loan.

All this aside, it is appropriate to review each case individually, as there are too many variables to implement a "one size fits all" process.

In short, if your association has recently been advised to write-off a significant amount of unpaid assessments and other charges, odds are your collections process likely needs to be updated. This is not 2007.

Arthur E. Lewis is a partner and Joshua C. Kligler is an associate at Moskowitz Mandell Salim & Simowitz in Fort Lauderdale. They focus on condominium and homeowners association, bankruptcy and real estate law.

 

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