Despite the rebound of the real estate market and the slowdown in the filing of new foreclosure cases, community associations across Florida continue to face problems with collections. Delinquent payments and the resulting foreclosures are likely to remain an issue for the foreseeable future.
According to RealtyTrac’s Q1 and March 2015 U.S. Foreclosure Market Report™, the national foreclosure average for U.S. properties in the first quarter of 2015 was down 7 percent from the previous quarter and down 8 percent from the first quarter of 2014. This marks the lowest quarterly total since the first quarter of 2007 and is positive news for the national average, but Florida still lags behind.
March 2015 was the first month since September 2010 with a year-over-year increase in overall foreclosure activity. Florida, along with Maryland, Nevada, Illinois and New Jersey, were among the states with the highest foreclosure rates in the first quarter of 2015. This can be attributed primarily to a spike in bank repossessions which at 36,152 was up 49 percent from the previous month and up 25 percent from a year ago to a 17-month high. In Q1 2015, Florida also ranked fourth among states with the longest average number of days to complete foreclosure filings, after New York, New Jersey, and Hawaii.
Given these alarming numbers, community associations must adopt a collections strategy that best suits their particular needs. Depending upon the location and make up of each particular community, the collections strategy may differ from community to community across the state or even down the street. An association also must recognize that a strategy that best suits it now might not be the best strategy in a few months, should its financial situation or market conditions change.
Delinquent Owners and Foreclosure
Perhaps the most challenging cases for associations are those where an owner has a first mortgage and other parties (such as the first mortgage holder) have a vested interest in collecting from that owner. Oftentimes the first mortgage holder creates a situation adverse to the association’s interests.
In this framework, we have identified three different and effective collection strategies associations can pursue from a delinquent unit owner who also faces a first mortgage foreclosure.
(COMPLETELY) PASSIVE APPROACH – With this strategy, the association leaves it to the bank to foreclose, no matter how long it takes. The association pays little, if anything, out of pocket for attorneys fees and costs. However, such a strategy can result in significant financial losses to the association. Unit owners who are not paying a mortgage typically do not pay association assessments and may try to remain in their units as long as possible without paying the lender or the association. Banks typically are not in a hurry to complete their foreclosure and oftentimes intentionally take as long as possible so that they do not get stuck paying assessments should they ultimately take title to the unit. The bank will likely get back what it is owed, or close to it, either through a public foreclosure sale or taking title and then selling the unit. The amount owed to the association continues to grow over time.
Adding insult to injury, if the first mortgage holder takes title to the unit, its liability for unpaid assessments is limited to 12 months or 1 percent, whichever is less pursuant to Florida Statute § 718.116 (for condominiums) and § 720.3085 (for homeowners associations). This statutory cap frequently results in what is referred to as “bad debt” to the association, a shortfall which can be made up only by additional assessments upon unit owners. The completely passive approach lets delinquent unit owners live in the community “free of charge,” often causing resentment among other unit owners who pay their assessments yet see people living without paying and are incensed even more when assessments are raised to make up the deficit caused by non-paying owners.
ACTIVE APPROACH – Associations which use this approach pursue money owed to them through foreclosure action. This can require a significant monetary investment by the association, and to be successful should be started as quickly as possible once an owner becomes delinquent in paying assessments. If the association obtains a final judgment and ultimately takes title to the unit through foreclosure, it has the ability to rent out the unit and generate income even while the first mortgage foreclosure remains pending. Such an approach also encourages other unit owners to pay their financial obligations to the association as they see what happens if they do not.
The association’s title to a unit in such cases is “subject to the mortgage” and will typically not allow it to sell the unit. In some cases, by taking title to a unit, the association may limit its right to recover assessments from a party who takes title through a first mortgage foreclosure. Given the attorney time necessary to complete an association foreclosure, this can be a risky and sometimes costly approach, especially if no rental market exists, resulting in the association getting title to a unit that is essentially worthless. Associations interested in such a strategy should carefully look at the rental prospects for a particular unit. In addition to getting a feel for the rental market, the condition of the unit is also an important factor that should be considered. Having to purchase new appliances to make a unit rentable is not an expenditure that associations generally like to make. The association must also be prepared to act like any other unit owner, maintaining the unit in good condition and obtaining insurance on the unit and against any claims resulting from the ownership.
“ACTIVE” PASSIVE APPROACH – In virtually all first mortgage foreclosure cases, the lender names the association as a defendant so that it can limit its liability pursuant to the statutory caps discussed above. As a defendant in the foreclosure action, the association has an ability to bring matters before the Court even without its own foreclosure filing. Associations can request status conferences and even notice a case for trial where a lender is unwilling to do so. If a foreclosure sale has been cancelled, the association can seek to have it re-set on an expedited basis. Associations can greatly speed up the completion of the foreclosure process by acting at key points in the lender’s foreclosure. Doing so and reducing the time the foreclosure takes (and therefore reducing the amount of bad debt ultimately incurred by the association) serves the best interest of all unit owners.
Florida Appellate Courts have recognized the right of associations as party defendants to participate in these cases. Filing motions and appearing before the Court obviously has an associated cost which is typically less than an association would incur in pursuing its own foreclosure. In addition, associations which adopt this strategy do not need to concern themselves with owning a unit and the attendant responsibilities.
The greatest enemy Florida community associations now face with collections is time. Each monthly assessment missed represents bad debt that will probably never be collected, especially given the statutory caps and other limitations passed by the Legislature. The only way to make up for this bad debt is to assess good, paying unit owners. Accordingly, associations should consult with their management, accounting and legal professionals to adopt a customized collections strategy which best suits their needs and will maximize their recovery.