Condo hui on the hook for fees

George and Shirley Snead dutifully pay the monthly maintenance fee on their Kauai condominium. But recently they had to help pay such fees for other owners as part of what some call an unanticipated consequence of recent amendments to Hawaii foreclosure law.

The Sneads own a unit at the Kaha Lani condo between Lihue and Kapaa, yet their situation is an issue facing other condos and their owners across the state.

The problem, according to condo associations, is that dramatic changes to state foreclosure law in each of the past two years have prolonged foreclosures — a period during which delinquent owners typically don’t pay maintenance fees needed to maintain or repair buildings and common areas.

What’s resulted are some gaping maintenance fee holes for condos with significant numbers of owners facing foreclosure.

State law, however, limits homeowners associations on what they can recover from new owners of troubled units after foreclosure. And often those new owners are the lenders that initiated foreclosure.

Edward Taylor, a Kaha Lani condo owner, calls the situation a “major consumer and citizen protection flaw” in Hawaii foreclosure law, which lawmakers amended with the aim of protecting homeowners.

Hawaii island Rep. Cindy Evans (D, Kaupulehu-Waimea-Halaula) introduced a bill to fix the problem this year.

House Bill 21 would let homeowners associations collect all unpaid association fees in foreclosures before lenders get their proceeds from a sale.

About 50 people, many of them condo owners, submitted written testimony in support of the bill. Three mortgage industry organizations opposed it. Two testifiers, the director of the state Office of Consumer Protection and a homeowners association attorney, expressed concerns with aspects, but not the intent, of the bill.

The bill was passed by the House Consumer Protection and Commerce Committee on Feb. 13.

Historically, condo associations didn’t have too much trouble with foreclosures because cases proceeded fairly quickly in an out-of-court, or nonjudicial, process. Relatively short durations of foreclosure cases limited maintenance fee delinquencies, and the associations typically were allowed to collect enough of the deficiency ahead of a lender’s claim under prior law.

Homeowners associations for many years were limited to collecting six months of maintenance fee delinquencies ahead of a lender’s claim in foreclosure. The Legislature in 2011 increased the limit to 12 months with a $7,200 cap, but last year reset the limit at six months and no dollar amount.

Meanwhile, other changes to the foreclosure law led lenders to file all cases in court, where they can spend 12 to 18 months or longer.

Nicholas Blonder, a Kaha Lani condo board director, said the average length of foreclosure cases on Kaha Lani units is three years, including two units that remain in foreclosure after four years.

“When this (six-month cap) was adopted, the time necessary to complete a foreclosure was measured in months, not years,” he said in written testimony.

Blonder said his condo association has accrued about $100,000 in lost revenue, representing close to 14 percent of its $700,000 annual operating budget for the oceanfront complex with 74 units.

To compensate for the loss, last year Kaha Lani’s board levied special assessments ranging from $1,006 to $1,859 on all units. Blonder said more special assessments are almost certain because of the problem.

It’s not just Kaha Lani in this situation. The Hilo Lagoon Centre on Hawaii island is owed about $200,000 in uncollected maintenance fees on foreclosed units, according to property manager Al Inoue.

“Eventually, these (fees) will have to be collected from the other apartment owners, many of whom are on fixed incomes,” he said in written testimony. “We need to correct this problem.”

Jill Briley, a member of the Banyan Harbor Condominium Association on Kauai, said she finds it extremely difficult to justify asking owners to pay higher fees because lenders don’t pay for the same services while foreclosing.

“Our maintenance staff performs the same duties for each unit, thereby maintaining the value of the property on which the bank forecloses, yet the expense is passed on to owners who have paid their mortgages as well as their maintenance fees,” she said in written testimony.

Dante Carpenter, chairman of the Hawaii Demo­cratic Party and president of the Country Club Village II condo association on Oahu, testified on the issue, calling it a “miscarriage of justice” that is putting numerous condo associations in serious financial trouble.

“We’re now at the mercy of the foreclosure process, which can take upwards of many, many years,” he said.

The Hawaii Bankers Association, the Mortgage Bankers Association of Hawaii and the Hawaii Financial Services Association oppose HB 21 and suggest that the changes sought will hurt condo owners and condo buyers as well as lenders.

The two bankers associations testified that lenders will respond to the bill, if it becomes law, by requiring larger down payments to make it more difficult for buyers to qualify for loans. They also said that Fannie Mae, which helps expand mortgage lending by buying loans, will quit doing so if homeowners associations can collect more than six months of maintenance fees ahead of lender debts.

The Hawaii Bankers Association said homeowners associations should use the quicker, nonjudicial process to file their own foreclosure cases to repossess units before lenders complete their foreclosures, and then rent the units in the interim to generate revenue to make up for maintenance fee losses.

Blonder, the Kaha Lani condo board director, referred to the lender testimony as a scare tactic and said pursuing foreclosure can cost at least $5,000 with no assurance of recovering the full maintenance fee delinquency, especially if units were damaged by former occupants.

“Foreclose-and-rent is a high-risk investment strategy,” he testified. “Is there any assurance that the association will recoup its investment in the unit before the (lender) completes its foreclosure, thereby divesting the association’s interest?”

John Morris, an attorney representing homeowners associations, said lawmakers should carefully consider whether lenders will make loans more difficult to obtain if HB 21 becomes law.

The state Office of Consumer Protection’s director, Bruce Kim, said lawmakers should consider how lenders might alter how they proceed with foreclosures if the bill passes.