March, 2009

Unpaid member fees are hurting most associations to one degree or another. Actions by the government may end up hurting community associations even more. This update is from the Community Association Institute.

Helping Homeowners, Hurting Associations?
by Tom Skiba, Chief Executive Officer at 03:41PM (EST) on March 2, 2009

After passage of the stimulus bill, Congress and the President have now turned their attention to addressing the ongoing housing crisis. In fact, shortly after he signed the $787 billion stimulus bill into law, the President announced his three-point plan to stabilize the housing market called the Homeowner Affordability & Stability Plan.

The plan as announced has three broad goals. First is to provide refinancing for homeowners who are current in their mortgages, but whose loan to home value ratio may preclude them from qualifying for refinancing. Second, and potentially more problematic, is the plan to address those homeowners who are upside-down in their mortgages. That is that they currently owe more than the market value of their home. And finally, efforts by the government to shore up Fannie Mae and Freddie Mac to help ensure lower mortgage rates.

While many parts of the proposed plan attempt to help the most and harm the least, one pending concept—judicial mortgage modification—holds the potential to drive up assessments and needlessly hurt responsible homeowners in community associations across the country. Under the proposal currently before the House of Representatives, a homeowner whose home value is less than their outstanding mortgage (so called 'upside down' mortgages), could petition a federal bankruptcy court to 'modify' their mortgage. The bankruptcy court could rewrite this person's mortgage and lower their payments and even reduce the principle balance to more 'affordable' levels. In other words, the court could 'cram down' both the homeowner's monthly paymentsand the overall principle balance on their mortgage. Proponents argue that this approach is the best way to address the unprecedented decline in housing prices and keep as many people in their homes as possible. Critics contend that allowing the courts to rewrite private contractual agreements will increase interest rates for all homeowners and reward irresponsible homebuyers who relied on exotic mortgages to gamble on rising housing prices.

For community associations there is an added element of urgency to this proposal. As written, the mortgage cram down legislation could allow the courts to bypass state laws related to assessment liens, priority liens or other tools associations use to collect past due assessments. Because bankruptcy law is a complex mix of federal and widely differing state statutes, the actual impact could vary from state to state, but generally there is a concern that as written, the Cram Down legislation could allow bankruptcy courts to discharge past due assessments regardless of any lien or priority lien levied by the association. This would result in irresponsible homeowners getting a free pass on their past due assessments, raising the burden for everyone else or resulting in cuts to community maintenance and reserves. In addition, the possibility exists that judges could arbitrarily lower future assessment payment obligations for such homeowners. As a result, CAI feels that this proposal will have the perverse impact of hurting home values in community associations by leaving gaping holes in associations' budgets. Holes that will have to be filled by the the rest of the communities residents, putting further pressure on them and causing additional homeowners to fall behind on their mortgage, assessment, and other payments. Clearly an outcome that no one desires.

The current federal bankruptcy code under Chapter 11, section 523(a)(16) recognizes the unique nature of community associations and provides that a homeowners assessments to their community associations cannot be discharged in a chapter 11 bankruptcy proceeding. If Congress's goal for the so-called “Cram Down” legislation is to reduce the mortgage payments on upside down mortgages to manageable levels, without harming responsible homeowners, then they must revisit the legislation and expressly limit the authority granted to bankruptcy courts solely to addressing the principle balance of the primary mortgage, while preserving the ability of associations to collect past due assessments on such property. Failure to do so could:

Impact an association's ability to recover delinquent homeowners' assessments and potentially affect future assessment obligations to the community.
Bypass state statutes that provide a priority lien or assessment lien for past due association assessments.
Cause additional strain on the housing market by forcing non-foreclosed homeowners to pay higher fees to cover mandatory operating expenses, pushing more homeowners into financial distress.
Cut funds available to maintain common areas of the community, resulting in a spiral of deteriorating infrastructure, lower property values and ultimately, higher financial burdens on state and local governments.
Undermine, if not unravel, the benefits of common ownership communities by exempting some homeowners from the obligation to pay their fair share to support common elements of the community.

CAI has taken our concerns to the leaders of the House of Representatives, and we will soon be asking you to make your voice heard as this issue moves through the legislative process. Each year, community associations save taxpayers close to $80 billion, by assessing themselves for the provision of services and amenities in their communities. Any approach to helping distressed homeowners must take into consideration the impact to the 1 in 5 homeowners who live in community associations and assure that the limited means available to associations to collect past due assessments are not thrown aside to the detriment of the vast majority of responsible homeowners in associations across the country.

June, 2009
February, 2009

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