Unpaid Condo Fees on the Rise

Calculated Risk pointed us to a Washington Post article that highlighted the sharp increase in member defaults in condominiums and other homeowners’ associations. It’s yet another sign that the troubles we are seeing in the housing market aren’t simply subprime related, but indicative of the unwinding of a broader phenomenon, namely, the unwinding of a housing bubble. We quote from it more extensively than they did:

In a sign that the turmoil in the subprime mortgage industry is affecting entire communities and not just individual homeowners, condominium association officers, property managers and real estate lawyers throughout the region say they are noticing more delinquencies in monthly fees.

“If someone is not paying their mortgage, they’re not paying their condo fee, and the condos need money to pay bills,” said Jeffrey van Grack, a community association lawyer with Lerch, Early & Brewer in Bethesda.

About one in six Americans live in a community run by a condo or homeowners association. Fees pay for such services as water, garbage removal, cleaning and repairs.

“When times get tough, either because mortgage terms start to weigh in or the economy takes a dive and people are not making enough money, you do see an uptick in delinquencies,” said Joe Douglass, a community association lawyer at Whiteford, Taylor & Preston in the District.

Millions of Americans financed their homes in the past few years with nontraditional adjustable-rate mortgages. Many of these were subprime loans, mortgages offered to people with poor credit or insufficient cash for down payments. Now, many are struggling to keep up as the interest rate adjusts and their payments climb. Their escape hatches are few. They cannot refinance because their properties are worth less than they used to be. If they sell, they would still owe money to the bank.

When mortgages become too burdensome, the bill from the condo association becomes easier to ignore.

Phil Ochs, a lawyer who represents about 40 condo and homeowners associations in Montgomery and Prince George’s counties, said he has seen 10 foreclosures since January. In the past 45 days, 15 people living in communities he represents have declared bankruptcy to stave off foreclosure. Most of them bought their condos in the past two years, he said.

Normally, Ochs said, he may see one or two foreclosures and one or two bankruptcies a month. But now, that’s changed. “Something’s going on,” Ochs said. “This is historically out of line.”

Delinquencies are also increasing on investor-owned units, lawyers and property managers said. At the height of the real estate boom, investors bought properties with the intention of selling for a quick profit. When the market turned, they couldn’t sell. Now, they are renting the units out, sometimes for less than the monthly mortgage. To make up for the shortfall, some choose not to pay condo fees.

“We’re starting to see delinquencies where they’re not owner-occupied. It’s not just a matter of a subprime borrower,” said Thomas Schild of Thomas Schild Law Group in Rockville, which represents many community associations. “They were counting on increased equity. That equity is not happening.”

Note that a marked number of borrowers needed the price of their house to go up for the deal to work financially. Betting on appreciation is speculation, and is also how many economists define a bubble.

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