Associations need to face troubled times square on

In the 1992 presidential election, one of the slogans that seemed to strike a cord with most people was, "It's the economy, stupid...".

Sixteen years later, it seems like the slogan is the same, but for different reasons. The media these days, is filled with sad and scary stories about how nervous people are about what is happening with the dollar, inflation, recession, sub-prime mortgages, etc., but for people who live in associations, there are real problems looming that can be addressed with some proactive decisions and short and long-term planning. If you own a home in a townhouse or condominium association, or an HOA, or serve on the board, and you fail to take into consideration what could possibly befall you without careful planning, you could be facing a financial crisis that could cause property values to crash, in your community.

My point is not to come off like the Greek heroine, Cassandra, the foreteller of gloom and doom, but rather to make a call for sensible thought and direct action. In consideration of what is happening in the marketplace and with record numbers of foreclosures being filed, these matters need to be considered and addressed:

Without presenting a lecture on economics, every property owner and potential seller and purchaser must be aware of the tightening of credit and the end of readily available no-money-down mortgage money. Lenders and underwriters who have taken a hit by large numbers of loans defaulting, are requiring bigger down payments, A+ credit ratings, guarantees and other factors which will disqualify many potential purchasers. How this affects community associations is the imposition of another layer of qualifications for these types of loans.

Recent articles have indicated that there is going to be a credit squeeze on mortgage money available for condominiums, and to a slightly lesser degree other types of associations. The giant government-backed investors, Fannie Mae and Freddie Mac, who underwrite a huge amount of money available for mortgages, have imposed severe new restrictions on loans and even re-financing older ones.

Large private mortgage insurers, the companies that write coverage for private mortgage insurance that is required for all loans greater than 80 percent, will no longer write coverage for certain ZIP codes, which have shown declining market conditions, even in what may appear to be healthy real estate markets. This ban has gone into effect regardless of a potential borrowers credit scores or other assets.

How this impacts your community, directly, is when mortgage money dries up, even with an abundance of willing buyers and sellers, deals cannot be consummated.

Property values freeze or even decline. Due to a large number of defaults by condo-converters who merely walked away from their projects under development, the new guidelines specify that applications from buyers in communities with 30 percent or more of the units owned by investors, will be rejected. This is a return to the bad old days of the late 1970s to early 80s, when owner financing and contract sales had to fill the gap. This presents additional problems for associations.

However, as I have written previously, between legislative attempts (currently on hold) and other reasons stated below, if your community is considering adopting an amendment to restrict or eliminate leasing, this should be done sooner than later.

One final comment about financing. An old player who has been quiet for many years due to an over-abundance of readily available cash, is now returning to the forefront; FHA. The Federal Housing Administration offers low cost/interest loans to qualified buyers. Several hurdles need to be considered before making an application for an FHA loan, however.

First, the community association needs to qualify. It may not be a problem if an experienced Realtor or mortgage broker knows the proper procedure and seeks approval for an association. However, FHA will not qualify a property with a right of first refusal, without certain guarantees and affirmations.

Most associations whose declarations post-date the early 1980s do not have this problem, but if you have a pre-emptive right in your documents, you will have to jump through hoops to get FHA qualified. Also, sometimes to amend it out, takes unanimous consent of the membership.

Another element to the "new" real estate market is answering the question, what are the lenders doing with all those properties they have in inventory that they had to foreclose? At first glance, a reasonable person would think it was a good time to pick up a bargain. Consider the difficulties in getting a loan as stated in the previous section. Most of the lenders holding these properties, do not actually use their own money to finance these deals, so buying a property in foreclosure does not necessarily mean that the bank is going to finance it for you.

For association board members, a bigger problem hangs over your respective heads. Recent articles in the national press have indicated that many of the larger lending institutions are not going to flood the market with bargains, that may or may not sell. Rather, they are going to fix up these properties and rent them out. Talk about a vicious cycle! You can't get a loan for a condominium in an association with more than 30 percent investor owners and by the way, the biggest investor-owner in that property is a lender. This will create one of the biggest nightmares most board members fear -- an overabundance of rental units.

Also, consider whether a lender who for years qualified anyone who could fog a mirror for a sub-prime mortgage, will exercise any more diligence or restraint in qualifying a prospective tenant and who is going to actually manage the portfolio with any care or concern for association sensibilities.

Lastly, in consideration of all of the above, the growing foreclosure epidemic could wreak havoc on an association budget. Illinois state law obligates purchasers of properties at foreclosure sales to pay assessments from the first day of the month following the sheriff's sale. Unless a third party outbids everyone, or the association buys the property (which is particularly risky in this market) an association may wind up writing off thousands of dollars in assessments, cost and fees.

In 2006, a new law took some of the sting out of this by requiring the buyer from a lender-purchased foreclosed property to ante up six months of assessments.

To add insult to injury, recent surveys by the Community Association Leadership Lobby for the State of Florida have shown that most boards fear that they will need to raise assessments to compensate for all these losses and banks and mortgage lenders are not paying regular fees or assessments after they take title. This requires the association to either wait until the property sells to collect this money, or worse, commence yet another legal action to now collect the fees from the lender.

As you can see these are important issues and a board and even the ownership cannot afford to hide in the storm cellar until the tornado blows over. By then, it may be too late to save the farm. Serious issues such as this requires consultation with professionals, thoughtful planning and development of proactive policies.