Five of the country’s largest banks recently received a list of demands from state attorneys general with respect to their foreclosures due to mortgage default. If the banks give in to the government’s demands, common interest community associations will only be further burdened by owners of homes and units that are delinquent on paying their monthly special assessment fees, HOA fees, and/or maintenance fees. A bank’s foreclosure due to an owner’s mortgage default and the resulting sheriffs/judicial sale are tremendous benefits to a community association, as the bank is thereafter responsible for the payment of the NJ realty transfer fees, the HOA transfer fees, and any monthly special assessment fees, HOA fees, and/or maintenance fees that would accrue from that date forward.  

If the banks meet government demands, they would be prohibited from commencing a foreclosure while a borrower was actively trying to lower the interest rate or alter other mortgage terms (i.e., ‘mortgage modification’), even if they practiced a strategic mortgage default. Additionally, per the demands, any borrower that made three payments pursuant to a trial mortgage modification would then receive a ‘permanent modification’. Further, any bank denial of a borrower’s modification request would trigger a ‘review’ by an ‘ombudsman’ or independent review panel. These demands appear to rise from the federal government’s new Consumer Financial Protection Bureau. The banks would have to alter internal processes, potentially slow new lending and employees would have to provide the government with formulas and reports documenting all efforts related to modifications. Employees would be rewarded for pushing modifications and not foreclosures.  

None of the banks involved (including Bank of America and JP Morgan Chase) have publicly stated whether they will meet these demands.   

Currently, it is estimated over 2 million American households are in active foreclosure, with another 2.2 million households considered ‘severely delinquent’ vis-à-vis their mortgages. Experts fear that a plan like this would further slow the overall foreclosure process, burdening their communities and neighbors with the consequences. Many experts believe that the faster all of these foreclosures are completed the faster the properties will ‘turnover’, stabilize the market and eventually lead the real estate market back to normalcy. Foreclosures already take, on average, approximately 400 days from start to sheriffs/judicial sale. In addition to their mortgage default, owners of community association units and homes in ‘foreclosure’ almost always fail to pay monthly special assessment fees, HOA fees, and/or maintenance fees, and although the completion of the foreclosure (i.e., sheriffs sale/judicial sale) results in regular payments of these fees by the banks or new title holders, the association may not see any payments from that particular unit for perhaps a few years  The federal government and/or the state attorneys general should consider the needs and interests of communities suffering from bank foreclosures when pressing demands like these.

Chris Florio is Chair of Stark & Stark’s Community Associations Group. For questions, or to discuss this post in more detail, please contact Mr. Florio at cflorio@stark-stark.com.