Weinberg says the collection problem in states like Colorado almost guarantees HOAs get wiped out when lenders foreclose
Changes to condo lending regulations being made by Fannie Mae and Freddie Mac have been one of the biggest headlines of the year, but it’s hardly the only thing going on when it comes to condo lending.
A recent Wall Street Journal story showed an increase in homeowners associations (HOAs) foreclosing on residents. The story cited data from ATTOM showing HOA foreclosures up 40% over the last two years.
The headlines about HOAs foreclosing aren’t just about badly run associations and problem properties. One veteran lender who has been watching the underlying conditions develop for years said there could be big problems on the horizon.
The combination of underfunded reserves, rising insurance costs, aging buildings, and state collection laws that protect delinquent owners over associations has one industry veteran concerned, and he is warning brokers about what he sees coming.
Glen Weinberg (pictured top), COO and partner at Fairview Commercial Lending in Colorado, said the roots of the crisis go back to how most of these associations were built in the first place.
"If you look at how these HOAs came out, a number of them came out in the '80s and early '90s," Weinberg told Mortgage Professional America. "A lot of what they were doing is they were taking Class C apartments, making them condos, and selling them off. They were inexpensive housing. Sounds great.
“But nobody wants to pay higher HOA dues for something 10 or 15 years in the future. That’s why they were affordable housing, because they couldn’t buy a single-family home. All of that has led us to where we are today."
How the math stopped working
That reluctance to fund reserves is now colliding with several forces at once. Aging buildings, rising insurance costs, and new Fannie Mae and Freddie Mac requirements are all arriving at the same time.
"Almost the overwhelming majority of HOAs are enormously underfunded in their reserves for elevators, roofs, and everything else," he said. "And how they got away with it before is they wouldn't do replacement costs. They'd do these half policies basically saying, ‘Well, it's probably not likely the whole complex will go down.’ Now Fannie and Freddie are saying you've got to have increased reserves. All of these costs are hitting at the same time."
He said the buildings themselves are compounding the problem. In Crested Butte, Colorado, he walked through condo complexes untouched since the '80s and early '90s, the same facades, aging roofs, and elevators still in place. The deferred maintenance bill is arriving now as special assessments on units that cannot support them.
"You've got a property assessed at $50,000 for roofs and all of that, but units in there are only worth $200,000," he said. "How do the numbers work?"
The collection problem
In states like Colorado, the HOA's ability to recover unpaid dues is severely limited, and Weinberg said those limits are what take a cash flow problem and make it unfixable.
Getting a judgment against a non-paying owner in Colorado takes 180 days by law, and the legal cost of pursuing that judgment often exceeds what the HOA can recover.
"Dues are rising, people can't pay the dues, and then dues have to rise further," he said. "It's just this negative feedback cycle that there's no solution to."
The situation gets worse when a first mortgage lender forecloses, because in Colorado mortgages are senior to HOA liens. If a borrower stops paying both, the lender forecloses first, and the HOA is likely out of luck.
"A lender can foreclose quicker than the HOA can because of these regulations," he said. "So they almost guarantee that the HOA is going to get wiped out."
Weinberg said the issue divides among high-end communities and what would be considered affordable housing.
Associations in affluent communities, where owners have the resources to absorb rising dues and special assessments, will survive, while the lower-priced older complexes built as affordable housing will not.
"The wealthy HOAs, yeah, they'll make it," he said. "It's the affordable housing, the lower-priced condos, that you've got a disaster. You've got some of these like Class C and D properties in Denver — how can you afford at any level to replace all the elevators, all the roofs, the boilers? There's no money for that clientele."
He said the worst part is that the most obvious solution makes things worse.
"Somebody wealthy comes in and says, okay, I'll pay to fix all this stuff," he said. "Well, these aren't going to be affordable housing anymore, because if they're going to spend that money to fix it, they're not going to rent it out or sell it for cheap anymore. They're going to want to get their money back."
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