Foreclosures and Nonpaying Owners Creating Perfect Storm in Condos, Co-Ops and HOAs
The worst housing crisis and economic crash since the Great Depression have created a dangerous financial storm that threatens to destroy thousands of shared ownership communities (condos, co-ops and HOAs) throughout the United States. The danger is quiet, but staggering—over 60 million Americans live in SOCs, or almost 20% of the population.
SOCs rely on maintenance payments from owners to pay for a host of municipal-type services provided to residents, including landscape maintenance, security, infrastructure improvements and even social services. But many owners, hit hard by the financial crisis, have chosen not to make these maintenance payments, pushing the responsibility for this “bad debt” onto their neighbors. As a result, maintenance costs in some neighborhoods have doubled or even tripled, forcing a small, hard-hit cadre of well-meaning residents to cover the costs of operating an entire community. This problem is being exponentially worsened by lax federal and state rules regulating bank foreclosures, which allow banks to sit on potential foreclosures, and even actual judgments, for years, during which time they have no obligation to help cover the costs of maintaining the community. And in many states, even once a foreclosure is finalized the bank is only responsible to pay a tiny fraction of past due assessments, again requiring other, more responsible neighbors to write off the debt and cover the difference. Court efforts to compel banks to expedite their foreclosures have largely failed, with most courts claiming they have no power to make such requirements.
Like their larger municipal cousins, shared ownership communities require funds to operate a host of essential life services, and these costs are often fixed, regardless of whether one or many owners choose not to pay their bill. As a result SOCs (and the community volunteers that serve on their boards) are scrambling to find ways to compel owners to pay their share of the common expenses. In desperation, many have investigated extreme solutions such as cutting off delinquent owners’ electricity or water, or preventing them from parking in the community, though many of these potentially effective motivations are blocked by state laws and court rulings.
Based on their total lack of movement on these issues, federal and state governments appear blissfully ignorant of the danger that this “SOC storm” presents to all citizens. The collapse of shared ownership communities, which currently provide a large percentage of common municipal services, will place a potentially insurmountable strain on the ability of state and local governments to provide these services to the millions of Americans who have been paying privately through their SOCs. As community associations dissolve their empty and abandoned homes will become large blights on even higher income municipalities, atrophying the property tax base and putting the government in further financial difficulty.
It is critical that our legislators take immediate actions to prevent this collapse, beginning with tying bank bailouts to mandatory funding of assessments on units for which lenders hold mortgages; even while foreclosure proceedings are ongoing. Similarly, restructured mortgages should mandate that unit owners bring their assessments current to be eligible. To help heal the damage, small business loans should be made available to community associations suffering financial stress.
And finally laws must be passed that give associations the authority to deny nonessential services, such as cable television, Internet and telephone services to nonpaying owners, along with the right to restrict access to recreational and social amenities. Without this relief, scores of the nations SOCs will become blighted neighborhoods, hampering economic recovery for the entire nation. Gary A. Poliakoff and Ryan Poliakoff are co-authors of “New Neighborhoods: The Consumer’s Guide to Condo, Co-op and HOA Living.” For more information, please visit, www.NewNeighborhoodsPublishing.com.