Homeowner defaults at 6-year low in California

I recently met with a board where the Big Question was, “How do we force a bank to foreclose on this no-good so-and-so of a delinquent owner?”  I didn’t have an answer.  Harumph.

Then yesterday, I saw this article in the San Diego Union Tribune.


It was no surprise to me to learn that banks are recording Notices of Default in record low numbers, as the real estate crisis in California appears to be stabilizing, albeit at a sorry level.

The recording of a Notice of Default signals the commencement of the foreclosure process, whereby a bank may sell or buy back property from an owner delinquent in making his or her mortgage payments.  The “foreclosure sale” is the event some four months after initiation of the foreclosure process where title transfers from the delinquent owner either to a third party or back to the bank.

That banks are unwilling to initiate foreclosure comes as no surprise, since distressed properties are so “upside down” that ownership is economically untenable.  A property is more or less upside down depending on how much greater the mortgage is compared to the fair market value of the property.  Like an individual buyer, the bank does not want to own a property worth less than the debt accrued against it.  Unlike an individual buyer, the bank will never occupy the property or even rent it out in order to receive some return on investment.  A bank’s purpose in foreclosing is to re-sell the property to a mortgage-paying buyer.  From the bank’s perspective, initiating the foreclosure process is throwing good money after bad.

For homeowners associations, this means that upside down properties exist in limbo.  The bank has no incentive to initiate foreclosure, let alone complete a foreclosure with a transfer of title to itself.  No third party is going to pay the bank what it is owed to obtain title if the property is worth far less than the bank’s mortgage.  All the while, the owner is not paying his debts, including his mortgage payments, and the owner is not paying his assessments either.  The owner has abandoned the property, literally or figuratively (i.e., the owner has either given up and moved out, or given up and filed for bankruptcy protection on the way to moving out.)  “No one” owns the property, as a practical matter, and therefore assessments are not being paid.

Which brings us to the original question, more or less: “How can an association get the bank to complete a foreclosure?”  There doesn’t appear to be any way to force a bank to do it.  At best, the association can foreclosure its own assessment lien and take title, then try negotiating with the bank to take back title — a process known as “deed in lieu.”   The association tenders the title to the bank, who may or may not accept it, only after incurring the cost of its own foreclosure and “eating” the delinquent assessments and all costs attendant to the prosecution of the lien.  Double Harumph!

If the delinquent owner is living in the property “for free,” an association can sue him in Superior Court.  (Forget small claims!)  If your association finds itself in a particularly sticky position, call me.  I’ll be happy to help you work your way out of the quagmire.

Lauri Croce