To Foreclose or Not to Foreclose – Issues to Ponder

Assessment collection is likely on the minds and agendas of virtually every community association board member throughout the country today. During the recent months I have worked with several condominium associations to assist them with the overwhelming decisions associated with the current economic crisis created by the real estate collapse. One only needs to listen to television and radio or read the newspaper to know that the number of home foreclosures is at an all-time high. So many homes are within community associations (condominiums, cooperatives and single-family homes), which has created an unprecedented delinquency rate for many community associations.

In an effort to provide her board of directors with the tools needed to make a decision on the manner in which to proceed with collections on several severely delinquent owners, the president of an association that I manage compiled a comprehensive list of pros and cons regarding lien foreclosure versus money judgments to deal with delinquent assessment collections. Although this president’s situation is relative to a condominium, I believe that the information is valuable and can be utilized by most board members as a tool to help with the difficult decisions which many boards face.

The questions boil down to two primary options available to community associations on collection of unpaid assessments – lien foreclosure or personal money judgment. Keep in mind that I am not an attorney and cannot offer legal advice. Just like board members, I can only ponder the questions and share my past experience related to collection of delinquent assessments.

The fundamental differences between a lien foreclosure and a money judgment is that a lien foreclosure is a legal proceeding whereby the association takes ownership of a unit or property in lieu of the past due assessments owed on the unit at the time of foreclosure. More often than not there are one or more ”superior” liens (first and second mortgage liens). The association does not typically foreclose its lien with the intention of taking on the superior liens and is under no obligation to do so.On the other hand, a money judgment is similar to that of a judgment for a credit card debt. The association sues the unit owner (a person or corporation) for the money that is owed the association. If the association wins the lawsuit and is granted a judgment by the court, the association mayfile a notice with a credit reporting agency and, in many states, among other options require that the owner assign a portion of his paycheck to the association in a process called garnishment of wages. In other words the judgment follows the owner, not the property, while a foreclosure takes the property.

Now that the differences are clarified, I have listed the pros and cons of each proceeding. Please note that the pros and cons are based on the scenario of there being superior liens (first or second mortgage liens) on the property.

LIEN FORECLOSURE: ADVANTAGES

1. Fixed cost - Most attorneys will offer a flat rate max to handle a lien foreclosure, which makes it easier to budget for the expenses.
   
   
2. Chance to recoup past due and ongoing assessments - The association can rent the unit to stop or slow the “bleeding” of association fees.
   
   
3. Many attorneys specializing in homeowner association law recommend the lien foreclosure route because it is less expensive and typically more successful than a money judgment.
   
   
4. The association typically would not loose any more money than they would if they wait for the over-riding lien foreclosure, except, in a worst case scenario, the attorney fees, since the owner is not paying anything, anyway.
   
   
5. The association typically will only get back a portion of the delinquent assessments; i. e. the maximum in Florida for a condominium association is 6 months or 1% of the original loan, whichever is less, on the debt owed when the over-riding lean holder (usually the mortgage lender) forecloses on the property -- whether it is now or 2 years from now. The association foreclosing on their lien and taking title -- and then renting the unit is the only way to stop the loss from growing bigger and bigger. Note: The association should not delay on lien foreclosures if they intend to rent the property in order to maximize on the number of months that the association can collect rent pending the lender’s foreclosure.

LIEN FORECLOSURE: DISADVANTAGES

1. The association would have to take on the job of landlord for the property, or hire an agent to do so. If the situation gets dire enough, the association or a director could be asked to volunteer to handle the rentals rather than volunteering to mow the lawn or trim the bushes like some directors and owners are now being forced to do in some areas of the country.
   
   
   
2. The association would have to hold title to the property and rent it for several months or even a year to break even, depending on the amount of the monthly assessment and the cost of the legal fees associated with the lien foreclosure.
   
   
   
3. The association is gambling that it will take in sufficient rent to offset the debt before the over-riding lien or liens are foreclosed. Remember that the over-riding liens are not part of the association’s foreclosure and will wipe out the association’s ownership position in the property.
   
   
   
4. The association loses its option of pursuing a money judgment.

MONEY JUDGMENT: ADVANTAGES

1. The owner will see an impact on his/her reputation once the judgment is filed (about six to nine months after the process is started). And the stigma of having bad credit could be made known to their employer.
   
   
   
2. The association can “attach” the unit owner’s salary if he/she is employed.
   
   
   
3. The association can send the sheriff to the door to confiscate their belongings, and then sell them in order to satisfy the association’s judgment.
   
   
   
4. The unit owner’s credit is affected – they could have difficulty purchasing a car, starting a business, buying or selling real property until the judgment is satisfied.

Please note that the above information is subject to state laws and may vary from state to state.

MONEY JUDGMENT: DISADVANTAGES

1. The legal fees associated with obtaining a money judgment are typically higher than a nonjudicial (outside of the court, requiring no lawsuit) lien foreclosure. More legal legwork is necessary to collect on the judgment especially if the owner lives out of state.
   
   
   
2. If the owner files bankruptcy, the judgment could be wiped out all together.
   
   
   
3. The “bleeding” of lost assessments will not be stopped or slowed unless the delinquent owner pays the debt or the superior liens are foreclosed, the process of which could take a year or more.
   
   
   
4. The owner's credit rating could already be in a shambles so the association’s lawsuit and judgment would not cause any more damage than already exists, leaving the delinquent owner little incentive to pay (satisfy the judgment).
   
   
   
5. In the current financial environment, having their wages garnished would not necessarily be seen as a stain on an owner's reputation, but instead might be seen as just another incidence of the nasty rich trying to take their home away from them because the “lousy bank” talked them into taking on a mortgage they couldn't afford.
   
   
   
6. Most association board members would not be interested in taking on the responsibility of selling an owner's stuff - arranging for it to be moved out of their house, sold off, etc. Nor would they be anxious to deal with the unforeseen problems involved with confiscation of an owner’s personal property.
   
   
   
7. Many state legislatures are closely monitoring community associations’ collection activities and may attempt to curtail their ability to sell a delinquent owner’s personal belongings.

Please take into consideration that no matter what route you and your fellow board members elect, you should not fail to act timely on your decision. The sooner you authorize the collection procedure, the better your chances of collecting the delinquent assessments. But, considering the current state of the housing and lending market, you must realize that the association is not going to “win” in every instance. Some folks are just absolutely not going to pay the debt to the association, no matter what. It will either be wiped out by bankruptcy or lender foreclosure. Your association should plan for an increased amount of bad debt over the next one even two years.

Boards are strongly advised to consult their association’s collection attorney for his or her perspective on assessment collections in the current financial climate and to ensure any actions are consistent with local law.

Sherrill Schafer, PCAM®
President
Community Management Concepts, Inc.
Jacksonville, FL