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NONPERFORMING
BANKS
 QUESTION: I was informed that banks that
hold defaulted mortgages while the occupants still reside in the units do not
collect dues and are not obligated to pay assessments on defaulted homes. This
means that the association has to absorb the revenue losses and pass the losses
on to the other members of the association. This has become a substantial
problem. Can the delinquent dues be added to the mortgage liability so that when
the house is sold the delinquent dues will be satisfied?
ANSWER:
You cannot make a bank responsible for an owner's delinquent assessments. Banks are obligated to pay
only those assessments that come due after the bank takes ownership of a unit. That explains why some banks drag their feet on
foreclosures. With a defaulting owner, a bank loses mortgage income. If the bank
forecloses, it not only loses income, it must also reach into its pockets and pay
the association's assessments. As a result, many banks sit on their hands and do
nothing. This leaves a delinquent owner in possession of the property and the association
without assessment income.
Options. Since banks
are not responsible for an owner's delinquent assessments and they can
indefinitely delay their own foreclosure actions, associations are left with two
options. The first is to sue the
owner for the delinquent assessments. Unfortunately, this often produces a
meaningless judgment because the owner has has no assets. The second option is
to move as quickly as
possible to foreclose
on the delinquent owner.
Foreclosure. If the association
forecloses and someone buys the unit, the new owner starts paying assessments. If no one buys
the unit, the association takes ownership subject to the mortgage. Once it has ownership, the association can
either pay the mortgage (a further drain on resources) or refuse to pay and
invite the bank to foreclose on the association.
Rent. If the bank continues to sit on
its hands, the association can rent out the unit. Then it does not matter how long the bank
sits on the sidelines. The association can receive rental income until such
time as the bank finally wakes up and forecloses on the association or takes a
deed in lieu of foreclosure.
RECOMMENDATION.
No matter which course of action an association follows, it will have bad debt
that will ultimately need to be written off. This will continue until the
economy gets back on track--probably another two years. In addition to budgeting
for bad debt and filing liens as quickly as possible to protect the
association's position, boards should record a "Request for Notice" as described
below.
REQUEST FOR NOTICE
In the event a lender actually
forecloses on a
defaulting owner, a change in the law that went into effect on January
1 requires the trustee to mail to the the association a copy of the
deed within 15
days of recordation. This speeds up the process of billing the new
owner
for assessments as they come due. To take advantage of the law,
associations
must record a "Request for Notice" as described in Civil Code ยง2924b. Boards should contact legal counsel for the proper form and recording
procedures.
BAD DEBT DEFINED
QUESTION: My
question is regarding bad debt. Our association has not deposited the entire
money budgeted for our reserves. Can we claim this as bad debt or does bad debt
pertain only to the amount lost specifically from non-payment of dues?
ANSWER:
Unfunded reserves
do not count as bad debt. Assessments (regular and special) which are unlikely
to be repaid, either because the debtor doesn't have any money or because the
debtor cannot be found, are classified as "bad debt."
COMMENTS ON SMOKING
BAN
 The
following reader comments concern the recent case on smoking in
the common areas.
#1
Ah Civil liberties - how many have I had to give up because of other people's
children? They should be careful about expecting the world to accommodate them
while clamping down on other's rights, that is a slippery slope. I must say
condo living does give us lots of behavior-science experiments. I am single,
own my own business, pay for my own mortgage, employ folks, pay lots of taxes
for schools, et al. and I smoke occasionally. I will stay out of your playgrounds
and away from your fast food mania world (fat will kill faster than anything) if
everyone will let me smoke a cig every once in a while in peace. I say set up
areas with huge ventilation systems and make everyone else pay for it! -Rose C.
#2 Very timely
newsletter in regards to some recent events at the Association that I am
president of. However, the question we have is: Can smoking be banned in
'exclusive use' areas, specifically outdoor patios? -Mark D.
ANSWER: Yes.
#3 Banning smoking in all "indoor units"!? I
do not smoke and I think that is ridiculous! That would never hold up in court.
-Steven N.
COMMENT: It would probably hold up in court.
#4 Very timely. Our board is about to
consider a draft resolution with respect to smoking. The issue we face relates
to smoking inside a condominium apartment. The smoke penetrates into neighboring
apartments to the annoyance of other residents. -S.F.
#5 This is most interesting as my HOA
sells cigars in their Golf Pro Shop, provides pedestal ashtray's outside bar
area for smokers as outside Public is allowed into our facilities as well.
-Connie B.
#6 Here, the city [of Novato]
has done it for us.
Trudy Morrison, CCAM
Very truly
yours,
Adrian Adams, Esq.
Adams Kessler PLC
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