By MICHAEL BRAGA, The Herald Tribune – January 3, 2010

The continuing foreclosure flood is creating severe financial problems for condominium associations across Florida, and members are complaining that banks and mortgage companies are doing nothing to help.

Rich DiBello is the sales and rental director for Villagio Condominiums in Sarasota. Condo associations are facing financial difficulties, and many say lenders aren't doing enough to help.

In fact, condo owners say that many lenders are delaying foreclosures to avoid paying association dues. That is requiring associations to slash costs and cut amenities, and forcing owners to fork over more cash to keep complexes humming.

In something of a Catch-22, the financial problems at condo complexes also are prompting banks to tighten restrictions on lending.

Banks will not lend in complexes that have not set aside 10 percent of their budgets for reserves. They will not lend when more than 50 percent of the units are rented. They also will not lend where a few owners control too many of the units or where too many owners are in default on their mortgages and dues.

Those restrictions only make the crisis worse by driving condo values down and prompting more people to bail on their units, said Perry Corneau, a Sarasota real estate agent who specializes in condos.

“Banks are doing the exact opposite of what they should be doing,” Corneau said. “Instead of loosening lending restrictions, they are tightening them. Instead of paying dues to pay for the upkeep of their collateral, they are doing the opposite.”

A recent study conducted by Becker & Poliakoff, a Fort Lauderdale-based law firm specializing in homeowners organizations, shows rising pessimism among condo residents. More owners think that foreclosures will get worse in 2010, and that more assessments and further budget cuts will be needed.

But in the midst of the gloom, some condo owners and associations are fighting back. They are taking legal action to force banks to pay dues, and are attempting to alter legislation that will make banks act more swiftly in the future.

“The bank lobby has more money and are fighting us tooth and nail,” said David Muller, an attorney with Becker & Poliakoff in Sarasota. “But we represent real live people who actually vote.”

For their part, bankers say they are sympathetic to the plight of condo owners, but say that forces beyond their control are dictating their actions.

Regulators are requiring them to be more conservative in making loans, and the court system is so clogged with foreclosures that banks cannot take title to properties any faster.

“We understand the frustration on the part of people who have to pay more,” said Anthony DeMarco, the Florida Bankers Association executive vice president for government relations. “But banks are losing money, too. We lose money every time we foreclose.”

Condo blues

Not every condo complex in Southwest Florida is suffering from the crisis to the same degree.

The majority — as many as 75 percent — are older, more stable complexes that did not experience a direct blast from the boom-and-bust cycle.

The ones hit hardest were those that came out of the ground from 2004 to 2007, or were converted from apartments during the same period.

These complexes experienced heavy speculative buying during the boom and are now facing the most foreclosures.

Some, like Watercrest in Lakewood Ranch, have been able to resell foreclosed units in an orderly fashion and have maintained adequate reserves.

But most of the new or converted condos are reeling from a drop in dues collections. And where fraud occurred, those problems have been compounded.

Both the Condominiums at Waterside in Charlotte County and the Bermuda on Osprey complex in Sarasota were the targets of groups of speculators who bought large blocks of units and then defaulted on mortgages shortly after.

At Waterside, 74 percent of the buyers in the 42-unit complex walked away from their mortgages, leaving just six owners to cover $8,000 in monthly expenses and a $16,000 annual insurance bill.

Despite raising monthly dues from $350 to $500 and imposing an $1,800-per-person special assessment, the six owners have not been unable to make ends meet and have relied on the kindness of vendors and others that do business with the complex to tide them over.

Meanwhile, the two banks that foreclosed on 27 of the units in the complex — Citibank and JPMorgan Chase — only began to help after the Herald-Tribune wrote stories about their inaction, Waterside owners say.

“Now Chase has cleaned up mold in four of their units and has promised to provide $10,000 to help pay for insurance,” said Steven Haber, who owns one of the units in the complex. “Citi has not done anything yet, but at least they are returning phone calls.”

Other complexes in the region may not be in as deep a predicament as Waterside, but many were hit by speculation fueled in part by the actions of banks and mortgage companies.

At Villagio, a 320-unit complex in Sarasota, buyers were offered special deals from Countrywide Mortgage, allowing them to buy units with little or no money down, said Rich DiBello, an investor who owns two condos in the complex.

With no skin in the game, more than 40 buyers walked away from their obligations when the market plunged. As a result, the condo association ran short of money, but by cutting costs it has managed to avoid raising dues or charging special assessments.

“We renegotiated all our contracts with vendors, everyone from the pool service to the landscaping company,” DiBello said. “Instead of paying someone from outside to do something, we tried to do it ourselves.”

As at other complexes across the state, banks have been slow to foreclose on units at Villagio.

Under state law, banks only need pay six months in back condo association dues or 1 percent of their original mortgage — whichever is lower — when they foreclose. That means banks can avoid tens of thousands of dollars in costs, DiBello said.

The more they postpone foreclosure, the more costs that banks can avoid.

“Units are often empty for one or two years, but the bank only has to repay six months,” DiBello said. “We have to eat the rest and that really stinks.”

“Banks are driving good complexes into the ground, and the ones who are getting hurt are people with low to moderate income,” he said. “The little guy is getting shellacked on the whole deal.”

DiBello said the values at Villagio also have suffered because banks will not lend to buyers because of the high number of rental units and foreclosures.

“Eighty to 90 percent of potential buyers cannot buy in here because of the restrictions,” DiBello said.

But DiBello said his association is actively pursuing banks and delinquent owners to get them to pay their bills. The association also is offering to help delinquent owners rent our their units so they can pay their dues.

Wendy Bamford, the vice president of the Admirals Walk Condominium Association, said her Sarasota complex is taking similar steps.

Since 2007, nearly one third of condo buyers have defaulted on mortgages in the 249-unit complex, causing a $200,000 shortfall. But the association has not had to raise dues or levy special assessments because its bylaws permit it to to collect dues directly from renters if owners are delinquent.

In addition, Admiral’s Walk prohibits bank representatives from entering the premises until the institution take ownership. “They try to change the locks on the doors, but we don’t let them in unless they show us a certificate of title,” Bamford said.

The legal route

Though using lawyers to chase banks and delinquent owners is expensive, attorney say an increasing number of associations are moving in that direction.

One new strategy is to file a lien against a delinquent owner and take title to the property, said Dan Lobeck, whose Sarasota firm represents 500 condo associations in the region. The association can then prepare to deed the property to the bank. If the bank does not respond within a certain time frame, the association will simply treat the bank as the new owner and charge it dues on an ongoing basis.

Another tactic is to force banks to expedite foreclosures by asking judges to speed the process along, Lobeck said.

But Becker & Poliakoff believes the real answer to the problem is legislative.

“Banks have no incentive to move forward on foreclosures,” said Muller, an attorney in the firm’s Sarasota office. “They don’t want to take title before they absolutely have to, because — God forbid — they get hit with a $50,000 extra assessment.”

The way to stop that, Muller said, is to force banks to pay a year of back dues when they foreclose instead of just six months, and to allow associations to collect rent from properties when banks delay foreclosure.

DeMarco, the Florida Bankers Association executive, said giving associations the right to collect dues directly from renters is a good idea. But he is opposed to forcing banks to pay more than they currently pay.

If the law is changed, it could increase lending costs for future borrowers, DeMarco said.

In the meantime, the crisis is not likely to go away until banks start lending again. But all the problems at condo complexes are scaring them off, said Corneau, the Sarasota condo specialist.

Even the strongest complexes have been impacted.

Corneau recently had a client who wanted to buy a town house in The Landings, a well-established community in Sarasota that did not experience high levels of speculation during the boom. Despite the fact that his buyer had an 800 credit score, the bank declined to make the loan because The Landings had not set aside 10 percent of its budgets for reserves.

Corneau and his client tried to renegotiate and put more money down, but the bank had already identified a problem and would not proceed.

“The banks are being so arbitrary that it is affecting values,” Corneau said. “The only ones who can buy units are cash buyers and they always want discounts.”

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