August 28, 2009

FHA Loans Will Soon Require Ongoing Approval of Entire Condominium

Loans insured by the Federal Housing Administration (FHA) are the best financing option for many prospective condominium buyers. FHA loans have the smallest down payment required in the industry (3.5%) and flexible qualifying standards. The availability of FHA loans makes it easier for condominium owners to sell their units and enhances property values. Unfortunately, ensuring continued access to FHA loans is about to get more complicated.

A condominium unit is currently eligible for FHA financing if the entire condominium is FHA approved or if a unit owner successfully completes a “spot approval” process. Since most condominiums in the Puget Sound area are not FHA approved, the spot approval process has been the only way that most condominium buyers can take advantage of these types of loans. However, the FHA spot approval process is being eliminated on October 1, 2009. Potential buyers of units at most condominiums will soon have no access to FHA loans unless boards take action to secure and maintain FHA approval for their condominiums.

The FHA approval process typically takes a few months to complete. Numerous documents must be produced, and the agency must evaluate eligibility requirements like percentages of delinquent and rental units (must be no more than 15% delinquent and at least 50% owner-occupied) and the age of the association’s reserve study (must be no more than 12 months old). Attorneys, property managers, and other real estate professionals can help condominium associations understand whether they can obtain FHA approval and how to apply if they are eligible.

August 21, 2009

Electronic Media and Association Business

Electronic media like email, Facebook, and Twitter are becoming the primary way for condominium and homeowners association board members to communicate with one another. Board members should be careful when using those types of media to discuss association business. Electronic messages may eventually be considered association records subject to review by the owners.

According to the Washington Condominium Act, association records must be made reasonably available to owners for examination and copying. This law applies to older condominiums as well. According to the Washington Homeowners’ Associations Act, all records of the association, including the names and addresses of owners and other occupants of the lots, must be made available to owners for examination at the office of the association or its manager. Homeowners associations are prohibited from releasing the unlisted telephone number of any owner in response to a request to review association records. Those associations may impose a reasonable charge for copies and costs incurred in providing access to association records.

Washington courts have not yet decided if electronic communications between community association board members about official business are records of the association, and the relevant state statutes are also silent regarding this issue. It is a good practice for board members to assume that electronic messages are potentially subject to review by the owners and strive to communicate about sensitive matters over the phone or in person. This will reduce the odds that a rash message from a board member will come back to haunt the association in future litigation.

August 14, 2009

Bankruptcy 101 - Chapter 7 vs. Chapter 13

I recently read a magazine article about the capital crime of fraudulent bankruptcy in England. This crime was committed when a debtor intentionally concealed assets from creditors during a bankruptcy. John Senior of York, the last person known to have been executed pursuant to this law, was convicted and executed for fraudulent bankruptcy in 1813. The law was amended to eliminate the death penalty for this crime in 1820. Washington condominium and homeowners associations have been dealing with more owner bankruptcies lately, and as a result it is helpful for board members to be familiar with the two major types of bankruptcy they may encounter.

Under Chapter 7 bankruptcy, a trustee takes possession of all of the debtor's non-exempt property, liquidates it for cash, and uses the proceeds to pay creditors according to the priorities of the bankruptcy code. There are frequently not sufficient assets to satisfy obligations to creditors. The trustee then usually abandons the property to the creditors. Associations may begin an action against delinquent units at that time if they have obtained relief from the stay or the bankruptcy has been dismissed. Associations will often receive no payments from owners or trustees during Chapter 7 bankruptcies.

Under Chapter 13 bankruptcy, debtors with regular incomes repay debts over a three to five year period according to a court-approved plan. This can result in associations eventually receiving payment for all delinquent assessments. After the court approves a plan and an owner begins submitting funds, an association should receive periodic payments to be applied towards pre-petition assessments. The association should also receive payments from the debtor for post-petition assessments.

Bankruptcies may result in negative consequences for associations, but they are not complete safe havens for delinquent owners. It is true that discharges relieve owners of the personal obligation to pay delinquent pre-petition assessments. Associations can not file personal lawsuits against owners seeking garnishment of wages or funds to pay discharged pre-petition assessments. However, associations can pursue foreclosure of their liens for the entire amount they are owed if they have obtained relief from the stay or the bankruptcy has been dismissed.

August 7, 2009

How to Garnish Delinquent Owners' Wages and Assets

Filing lawsuits directly against delinquent owners and attempting to garnish their wages and assets is a collection option that is usually available to community associations. If the debt is less than $5,000, small claims court is a quick and inexpensive way to seek a judgment. A board member typically presents the association’s case at trial. If the debt is substantially more than $5,000, then pursuing collection in superior court is a better choice. The association’s attorney presents the case in that forum.

Once a judgment has been obtained against a delinquent owner, the association must seek garnishment of the owner’s wages or bank account funds. If an owner’s employer is known, up to 25% percent of his or her wages can be diverted to the association until the judgment is paid. It is a good practice to request employment information from new owners. If a delinquent owner’s bank account is known, whatever funds are present can be diverted to the association. It is a good practice to keep copies of owners’ checks.

In some cases, a delinquent owner’s employer or bank account can not be identified. If an association lacks this information, it can try to serve an owner with written questions requesting information about his or her assets. If an owner fails to answer the association’s questions, he or she can be held in contempt of court. This sometimes motivates delinquent owners to cooperate.

The ultimate success of personal lawsuits depends to a large extent on the delinquent owner. If an owner is unemployed and has little money in the bank, a personal lawsuit is not likely to result in a full recovery in the short term. Some associations decide to cut their losses and end such lawsuits at that point. However, there is value in obtaining and recording a judgment against owners that currently have no assets. Judgments are valid for 10 years in Washington and can be renewed. Persistent associations can direct their attorneys to periodically reopen unpaid judgment matters to investigate whether circumstances have changed and proceed with garnishment if this is the case.