By the time lenders foreclose on individual condominium units, monthly association dues may have already been in arrears for months or even years. Condominium budgets can generally tolerate up to a 10% default rate when buildings are new, but an older building’s budget may not have the same flexibility. In a tight credit market, having a delinquency rate of more than 7% to 10% in dues assessments can downgrade the condominium’s Fannie Mae/Freddie Mac ratings. 15% or more is a complete deal killer. As these entities make the majority of first mortgages nationally, losing a good rating will make financing and selling individual units difficult.
Condominiums, cooperatives and co-housing are sustainable residential communities but the housing crisis and recession have combined to create cash-flow problems for many of the estimated 100,000 homeowners associations governing these complexes. Foreclosing lenders can compound the problem by ignoring the dues obligations unless legally compelled to pay them by a court or they need to clear title to complete the sale of the property. With many people out of work, managers are also having problems collecting dues from residents. Under normal circumstances these delinquencies could be tolerated, but many complexes had neglected to raise dues. To meet their increased expenses over the last couple of years, Boards have dipped into their reserves. Now with depleted resources and a high delinquency rate, managers and board members are scrambling to meet the minimal needs of their residents.
Some are raising dues to cover the delinquencies, but an option-of-last-resort is a condominium association loan. Although there is no lienable real estate title - the common area is owned equally by the homeowners and has no lendable value – the loans are secured by the monthly homeowners’ association dues. Currently funded by private investors or insurance companies and few banks, the loans are categorized as commercial and do not have the protections consumers normally expect. They carry an adjustable interest rate with a term of 3 to 5 years and the interest rate is not particularly competitive because of the perceived higher risk. The association is the borrower and makes the payments on the loan. They also assign the lender the right to collect homeowners’ dues if they default.
This type of financing may be necessary in an emergency, but it increases future risk for the homeowners. Some restrictions apply in states like California which requires that any dues collected first be applied to pay insurance premiums.
Under-funding of reserves can often be blamed on the intial developer, but today’s challenge for a homeowners’ association or manager is to correct the under-funding by creating a realistic operating budget and a projection of needed repairs and replacement reserves and then… gasp… biting that bullet and raising the homeowners’ dues.
