While some people struggle to keep their mortgage payments current, others are living in their houses for free. Not only are they not making mortgage payments but they are being offered incentives when they don’t. The Federal government has pressured lenders to work out foreclosure alternatives because of the larger number of foreclosure activity. There are also both Federal and state foreclosure moratoriums extending this “live free” courtesy.
The media outlets continue to show hard working families with five or six kids being ‘forced’ to leave their home. It makes for good emotional ‘news.’ There is another side to the story. Sadly, the taxpayers (and future generations) end up paying.
Last week Citigroup announced plans for a pilot program. Delinquent borrowers who don’t qualify for, or decline, mortgage relief would be allowed to stay in their homes without making payments for up to six months. In return, the owner/tenant are to keep the property in good condition. Let’s look at this a different way. Hypothetically, say the monthly payment is $1,900. Can the bank not get a gardener and a security service for MUCH less?
Who will make the property tax, insurance, and utility payments? In the case of condominiums and planned communities, who pays the monthly homeowners dues? My first post on this topic: New California Law Offers Free Living for Many Homeowners was published on 6-6-09.
In San Diego, and probably all of California, many of the foreclosures involve condominiums or communities with homeowner fees. Typically, if after a number of months a homeowner is delinquent in their dues, the Association files a lien notice. In severe cases the Association will foreclose on this lien. Now with all the ‘underwater’ homeowners, many homeowner associations are not even incurring the expense of filing a lien. Since there is negative equity the associations are rendered impotent.
If that is not bad enough, the California legislature in its infinite wisdom passed two new laws last year that effectively more than double the time before a lender can think of a foreclosure. If they had added a provision that moratoriums only applied to homeowners who kept up with their tax, insurance, and homeowner fees it wouldn’t have been so bad. In my opinion a portion of the regular monthly mortgage payment should have been included.
Perhaps that is too much common sense to expect from the government. Unfortunately, this has created a problem for California homeowner associations. Had the government stayed out of the process and not pressured lenders, the normal foreclosure time frames would not have hit the homeowner associations as hard.
In California, a foreclosure previously took 90 days plus a 21 advertising period. If there are no buyers, the property reverts back to the lender. Once the lender owns the property the monthly expenses, including the homeowner’s fee became the responsibility of the lender.
In California and many western states, on a first loan to purchase your principal residence, the lender’s ONLY recourse is to take back the property. They are barred by law from any other actions against the troubled homeowner (liens, pay garnishments, personal property repossession, etc.). Whether the owner is $100,000 under water or stays rent free for another year and becomes an additional $25,000 under water, it really does not matter. The credit rating is going to take a toll for normally 7 years. With the extent of the current housing problem this credit hit will likely have a lessened impact. Even with the negative hit to credit, many are deciding walking away/staying without paying is an easy way out of the substantial negative equity position.
It's becoming common for troubled Californian homeowner to live payment free for a year and possibly longer. Unfortunately for the paying members of homeowner associations, they will have to cover the delinquent dues. Adding insult to injury, they have no hope of recovering these additional costs without raising dues or imposing special assessments.
Read more of Bob Schwartz's 'tell it like it is' real estate opinions & subscribe to his free RSS feed at: San Diego California real estate market blog.
