Strategic Nonforeclosure: Banks Leave Condo Associations to Suffer

posted on May 13th, 2010 filed under: Financial Responsibility, Real Estate News

When a borrower defaults on a mortgage in a condo building, the borrower often stops paying not only the mortgage but also the condo association maintenance fees.  The usual remedy would be for the condo association to file a lien against the unit, or exercise a right to take title from the defaulting owner.

The mortgage, however, remains, and has priority over the condo association’s interest.  So the association has to wait for the lender to foreclose and sell the property before the association can get paid anything that might be left from a sale after covering the mortgage (doubtful), or at least get a new owner in place who will start paying the unit’s share of common charges.

But in Miami and other hard-hit real estate markets, lenders are purposely not foreclosing on delinquent loans.  Like borrowers who practice strategic foreclosure and walk away from loans despite being able to pay, lenders are practicing strategic non-foreclosure.  By not foreclosing, lenders avoid realizing losses on their balance sheets and avoid all the costs of condo ownership: taxes, insurance and condo association maintenance fees.  As a result, the unit remains empty and the remaining condo residents are left to share all of the building’s maintenance and insurance costs.

Miami Real Estate Photos -- Biscayne Bay & Miami Beach 1

A case in point, according to the Daily Business Review, is 7149 Bay Drive in Miami Beach.  The condo association waited two years for Citibank to foreclose and take responsibility for a unit.  The association finally brought a quiet-title suit to force Citibank’s hand.  The unit is worth about $45,000.  Citi evidently had no desire to pay past and future taxes and maintenance fees, or the attorney’s fees and other costs of foreclosure.  So Citi simply canceled its $166,000 mortgage, giving the association clean title.

One real estate analyst likened it to a “100% short sale.”

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posted by // This entry was posted on Thursday, May 13th, 2010 at 6:42 am and is filed under Financial Responsibility, Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed.

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