By Matthew A. Gardner, Esq.
The current pandemic is presenting similar warning signs that many community associations experienced during the housing crisis in 2007. With the ‘Stay at Home’ order in place to slow the spread of the virus, we recognize that people who cannot work have to start making hard decisions. As it relates to community funding through assessments, people will prioritize where their money is going and which bills to pay.
A recent report from a financial services company focusing on real estate and mortgages confirmed what many had already suspected: the financial impact of a shut down economy would be felt months (if not years) after the ‘Stay at Home’ orders took effect. Results from May 2020 indicate that almost 4.5 million homeowners were late on mortgage payments. That surpasses the 3.6 million homeowners from the end of April, which then represented the largest number since 2015. There is some neutral news in those awful numbers. Those figures include homeowners who are in approved payment arrangements with their lenders. It also reflects decisions made by some lenders to allow individuals to defer payments and add months to their mortgages. We won’t know when or if any of those accounts will reverse into positive territory now that some states are re-opening, but we do know that we should prepare our communities for similar results.
We know that homeowners tend to pay their mortgages before they pay their assessments. Therefore, communities who have not already experienced missed payments need to be ready for delinquencies. The national offices of the Community Associations Institute (CAI) have provided valuable reminders about how to approach assessments and delinquencies here.
It is important to remember that boards are there to serve their communities and balance the competing interests of operating funds and necessary services for its owners. But each community needs to consider their own finances when deciding on how best to proceed with delinquent owners. Boards should find a way to work with owners who are willing and able to pay, and factor in whether an uncompromising approach will benefit or hurt community finances.
Below are four strategies boards are being asked to consider, both by their management and by their owners:
- Return to Enforcement
Even boards who want to assist their owners cannot simply let every account remain delinquent. If owners cannot come to an arrangement for repayment, boards may have no choice but to protect the Association’s interest and secure the claims to ensure a better chance at assessment recovery.
The best strategy is to record a lien. A lien ensures that lenders, owners, and interested buyers are aware that there are financial claims tied to ownership of the property. Before an Owner can sell or refinance their mortgage, a lien secures the Association’s claims to the balance owed on the account. Civil Code Section 5655 permits an Association to record a lien, even if there is an approved payment plan with an Owner. Therefore, take that essential first step and make sure that a lien is properly and timely recorded.
Once the lien is recorded, there is some security, but what action can the Association take if the lien does not encourage an Owner to repay? Keep in mind that California has encouraged a temporary ban on evictions, and even foreclosures, that result from the declared state of emergency by Governor Newsome. So while those accounts ready for foreclosure in March may attempt to proceed with enforcement, those whose delinquencies arose after March may assert the Governor’s s state of emergency as a defense. If liens cannot be enforced, or at least not right away, the Association may want to consider alternatives until both the picture is clearer for owners and for community enforcement rights.
- Waiver of Penalties and Fees
Like lenders, communities are being asked to consider waiving parts of the overdue balance. Owners who know they are going to have problems keeping up with assessments now, understand that additional amounts (fees and penalties) will only delay repayment or increase the likelihood of default.
California law permits adding late fees, interest, and reasonable costs of collection on top of delinquent assessments. However, those are to encourage timely payment and discourage extended delinquency. Communities can consider the circumstances of the owners in pursuing the delinquency balance. It makes sense to consider whether cooperating with willing owners will produce better results than foreclosure.
- Assessment Forgiveness vs. Delay
Some owners are asking for consideration during this forced economic shutdown. Owners with mortgages saw the lenders approach and are asking boards to consider similar accommodations.
Most communities’ budget based on income and need. Since there is no expectation of surplus funds (or profit like for banks), most communities cannot operate without regular monthly income from assessments. Forgiveness of monthly assessments, or even a temporary reduction, is not an option unless boards can find costs to cut. The budget is a place to look for some breathing room if boards want to consider reductions. As communities are likely seeing costs increase, there are few communities that could accommodate that option.
Owners have also suggested delayed or deferred payments. Like lenders adding on payments at the end of the mortgage, owners ask for those missed payments to be added to future months, due in full in 6 months, or spread out until they can return to work. This approach should be familiar to most communities, because it essentially acts as a board approved payment plan. Pro-active owners are more likely to remain on track than non-responsive collection accounts. Unlike forgiveness, delay can be a useful tactic to ensuring that owners and communities stay in contact and work toward the same goal.
Ultimately, some communities will see the uncertainty and decide to wait. But that is the wrong strategy. Inaction will negatively impact the community, the delinquent owners, and those owners who are current. The longer a delinquency goes without action, the more possibilities there are for a negative result. The more time passes, the bigger the assessment loss is for the community, the more penalties an owner has to overcome to bring their account current, and the more the other owners see an incentive to take the same approach and skip assessment payments.
In conclusion, every community will have different needs, but every community needs a plan. Start with a realistic review of the current state of community funds. Have the Association reach out to the owners who are behind and offer a plan before collection costs start to build up. Offer incentives (like a temporary penalty holiday) if owners can commit to a pay-off date. The sooner your community association establishes communication, the better chance you have of stabilizing the situation. Being proactive shows all owners that the board is aware of the challenges everyone faces, but is also prepared to handle them with compassion and commitment.
Just as community associations survived the housing crisis in 2007, we will get through the impacts of COVID-19 together. Stay safe and healthy. If you have any questions or we can be of further assistance with your assessment strategy, please contact us.