September 27, 2010

How Should Your Association Respond to Banks' Foreclosure Delays?

National Public Radio reported earlier this month about the “shadow inventory” problem in the U.S. housing market. There are currently about six hundred thousand homes that banks have foreclosed but not yet put on the market. There are millions more homes in the early stages of foreclosure or more than ninety days past due on the mortgage. RealtyTrac estimates that approximately three million foreclosed homes will enter the market over the next three years. Banks appear to be responding to this situation by slowing down the pace of their foreclosure activity. Why?

Banks own a large number of mortgages on homes that have lost a significant amount of value. However, such transactions do not appear as losses on their books until the homes are re-sold for less than the values of the mortgages. Spreading out the re-sale of foreclosed homes over a longer period of time gives banks time to raise money to cover losses and could result in smaller losses if the market improves. Banks are also concerned about flooding the market with repossessed homes over a short period of time, which would cause home prices to decrease further and could produce another housing crisis. In addition, banks may be finding it difficult to keep up with a volume of foreclosures that has increased tenfold over the last several years.

If foreclosures are inevitable, Washington condominium and homeowners associations have a strong financial interest in them proceeding rapidly. When lender foreclosures are not completed in a timely manner, community associations are faced with an unpleasant choice – endure very long delinquencies or pursue their own foreclosures. Boards may need to adjust their existing collection practices in light of the present slow pace of lender foreclosures. More extensive use of associations’ collection powers has the potential to speed up transitions to new owners and even produce income from delinquent properties until foreclosures are completed.

For more information about community associations’ use of foreclosure, please review these past posts on that subject:

New Tenant Protection Law Helps Associations Collect Delinquent Assessments
The Rising Use of Foreclosure to Collect Delinquent Assessments