hoa defaults

Foreclosures put county's HOAs in financial bind
Mortgage meltdowns have cut into homeowner association budgets, prompting fee hikes and delays in repairs.
By JEFF COLLINS
THE ORANGE COUNTY REGISTER
Comments 64 | Recommend 11
Correction: The Robinson Ranch Community Association in Trabuco Canyon is not considering asking homeowners to volunteer to provide basic maintenance such as mowing lawns. Nor has it taken steps to negotiate lower water rates with the Trabuco Canyon Water District. Due to incorrect information provided to the Register, an earlier version of this article reported incorrectly that it had done so.
LAGUNA HILLS Hard times have hit Aliso Meadows hard.
The Laguna Hills condo complex had at least 23 foreclosures in the past six months, resulting in months of unpaid homeowner association dues.
Now, Aliso Meadows is so short on cash that it has deferred roof and termite repairs, can't fix rotten wood siding and must wait to fix potholes "big enough for your families to make Jacuzzi's of," association officials said.
"In some cases, we're doing (repairs) piecemeal. A fence here, a piece there," said Art Recalde, president of the Aliso Meadows Condominium Association. "We can't afford more."
Aliso Meadows is one of many HOAs in Orange County and around the state that are having trouble coming up with the money they need for maintenance and services because of rising foreclosures.
While most HOAs in Orange County are able to ride through turbulent times, many – mainly newer ones and ones catering to first-time home buyers – are reeling from mushrooming delinquencies.
Examples of HOA troubles include:
A Lake Forest condo complex plagued by at least five dozen foreclosures and mortgage defaults had to defer all but the most urgent repairs, leaving termite and wood repairs undone.
A Placentia complex with at least 33 homes in foreclosure or default ended up raising monthly fees and levying a $1,000 special assessment. The increases were caused in part because of prior financial problems, but foreclosures were "the icing on the cake," the association president said.
The HOA for a Huntington Beach senior complex has limited its tree trimming services to trees that are in most need because of safety concerns.
Experts say that problems like these are most pronounced in the Inland Empire and Central California where there were more new buyers stretching their finances to afford a home.
In the more extreme examples, lawn mowing, street sweeping and window washing are cut from three times to one time a week. Pools go unheated in the winter. Security has been curtailed.
Industry officials say that the majority of Orange County homeowners associations have the resources to overcome increased delinquencies.
But even financially sound HOAs must budget for bad debts or, at the very least, pick up expenses for one or more neighbors who have abandoned homes in the face of foreclosure.
"It isn't all about destitute homeowners associations," said Robin Owens, managing agent for Affinity Property Services Inc., an HOA management company that oversees about 1,200 units in Orange County.
But, she added, "Am I going to budget for bad debt? Absolutely. Everybody's going to budget for bad debt. I don't know what's coming down the line."
Mini-governments
HOAs are like mini-governments set up to maintain commonly owned property in a housing development. They maintain private roads and care for community pools, clubhouses, landscaping, roofs and elevators.
To pay for those services, they levy monthly dues on each property owner in the development and can require owners to pay special one-time assessments for emergency repairs, like cracked foundations or leaky roofs.
Even a few foreclosures can eat giant holes in an HOAs finances.
Associations must maintain "zero-balance budgets," meaning they can raise just enough money to cover expenses and build up reserves for future maintenance, industry officials say.
Homeowners facing foreclosure often stop paying dues for a year or more before losing their home, so the unpaid dues mount up.
"When some homeowners aren't paying their fair share, it puts a burden on the other homeowners," said Karen Conlon, president of the California Association of Community Managers.
Orange County has 4,400 HOAs, the third-highest number in the state, after Los Angeles and San Diego counties, according to Conlon's trade group.
More than 61 percent of Orange County's residents live in an HOA, with more than 750,000 homes belonging to those associations.
No one tracks how many associations are facing financial problems. But Aliso Viejo-based Merit Property Management reported almost a ten-fold increase in the percentage of delinquencies in the 140,000 units it manages statewide.
Merit reported that 2.4 percent of annual dues were 90 days or more delinquent as of June. That's up from 0.25 percent in June 2003.
Those numbers are skewed upward somewhat since Merit added newer HOAs in recent years that are more prone to delinquencies, said Andrew Schlegel, Merit's vice president of finance. Without the addition of the new HOAs, he guessed the delinquency rate would be around 1.5 percent – still a six-fold increase.
In addition, Schlegel projects that Merit will file liens on 4.8 percent of the units it manages this year for not paying HOA dues, up from 1.2 percent in 2005.
Dues first thing to get cut
Schlegel said delinquencies began rising as recent homebuyers using creative home loans began to get in a financial bind.
As home values dropped and mortgage payments adjusted upwards, many of those new residents "are throwing up their arms and walking away," he said.
The HOA dues are often the first thing such residents stop paying.
When lenders foreclose, the HOA liens get wiped out, and going after the residents in court often amounts to throwing good money after bad, he said. The residents can't be found, and when they are, they're often broke.
In Orange County, however, most HOAs are older and have built up reserves to cover the problem. They have fewer new residents who bought at the top of the market.
And the newer communities here, such as Talega and Newport Coast not only see fewer foreclosures, but also were put on a sound financial footing by the developers who built them, Schlegel said.
Less common, but still pervasive, are associations like Aliso Meadows, where HOA delinquencies swelled to around $150,000 – up from around $35,000 two years ago – as foreclosures mounted, association officials say. The HOA raised fees by $10 to $240 a month to make up for that loss.
Elsewhere, "For Sale" and "Bank Owned" signs dot units throughout the Aliso Creek Villas in Lake Forest, which had 63 units go into foreclosure or default, according to ForeclosureRadar.
Association President Ginny Dunn said those foreclosures created a financial burden for the Aliso Creek HOA, which had to defer wood and termite damage repairs and concentrate on the most urgent items.
"We take care of anything that's a dangerous situation," Dunn said. "But those things that aren't, we put to the side and will get to them when funds are available."
At the Cinnamon Tree condos in Placentia, more than 30 foreclosures and mortgage defaults have aggravated the complex's existing financial troubles and disputes.
Foreclosures, and HOA delinquencies, mushroomed after prices there fell from around $300,000 a unit to as low as $150,000, helping to push the board into raising fees and levying a $1,000 special assessment, property owners there said.
Even in developments where foreclosures are rare, HOAs still have been forced to step in and care for vacant units – at the association's expense.
At Threewoods, a Fullerton community of $1 million homes, owners abandoned one unit under the threat of foreclosure, leaving the association to water and mow its lawn during the months it sat vacant. The association also was forced to act after a 100-pound beehive was discovered inside the home.
Conlon, president of the state trade group, noted that her own association in Laguna Hills discovered 14 squatters had taken up residence in one of four foreclosed units.
While four foreclosures may not seem like a lot out of the 133 units in the complex, Conlon noted that those unpaid fees add up.
"We're not talking about one month or two months. We're talking about a year to 18 months," she said.
"It's going to take us a long time to recover," Conlon added. "I think it's going to take a good two to five years to fully financially recover from all the things happening in the community."
Register staff writer Mathew Padilla contributed to this report.
Contact the writer: 714-796-7734 or jcollins@ocregister.com