Following the nationwide mortgage crisis, there is a lot of concern across the  country about communities being faced with the prospect of foreclosure. Many  states have enacted legislation relating to how to handle properties in  arrears, what should happen to delinquent units and even to penalizing owners  that have fallen behind in their payments.  

 Community associations suffering from the consequences of owners not paying  their maintenance fees are now being faced with a new dilemma:  

 Deciding whether to foreclose on units with delinquent balances, or; Waiting  patiently for financial institutions holding mortgages on delinquent units to  foreclose.  

 The Question of Vengeance Foreclosures

 Recently, some have questioned boards that take action to foreclose on these  delinquent units, maintaining that they are acting out of vengeance. We ask, since when has a corporate board been criticized for properly exercising  its fiduciary responsibility to its members?  

 Given there is a powerful legal remedy available to associations, why would that  association prefer to stand idly by while financial institutions, whose  interests are not aligned with the association, determine its financial well  being? And when has a corporate board been questioned on properly exercising  its fiduciary responsibility to its members?  

 Community associations have been given the legal right to foreclose a lien for  unpaid assessments and the costs of their collection in substantially the same  manner in which a mortgage of real property is foreclosed. Everyone who purchases a property that is subject to an association is informed  of the association’s rights. In fact, in Florida, a seller is required to deliver those documents upon  closing.  

 Fees are the Lifeblood of Associations

 Maintenance fees are essential to the health and well being of associations as  they pay for vital utilities, insurance, services and amenities. If owners don’t pay those fees, the burden for the ensuing delinquency falls squarely on the  shoulders of “good paying owners.” The decision to foreclose is an important business decision, not an emotional  one as some pundits have alleged.  

 We believe there are several good reasons why an association should move forward  boldly including, if necessary, taking title to units.  

 If a delinquent unit owner continues to remain on the mortgage and title, he can  more easily mount a protracted foreclosure defense further delaying the  association’s collection of maintenance fees. Additionally, this exposes the association to  increased write-off/bad-debt as it delays when a bank takes title. Association  foreclosures are generally easier to move through the legal system as the only  defense is payment.  

 In some cases, owners continue to pay their mortgage but cease paying  maintenance fees to the association.  

 Once an association has acquired title to a unit, it is now in a strong position  to rent the unit and recoup previously unpaid assessments and generate much  needed cash flow.  

 New strategies that have been developed, including forcing the first mortgagee  to finalize their foreclosure and take title, are only available if the  association has taken title to the unit.  

 Debunking the Myths

 There are also certain myths that need to be debunked regarding actions taken by  associations to foreclose on delinquent units. An association takes the  delinquent unit subject to the mortgage but does not assume the mortgage or  become responsible for payment following its foreclosure. However, an  association should insure a unit to which it has taken title to protect the  association, especially if it plans to put a renter in the unit, generally a  minimal expense.  

 The reluctance to foreclose on delinquent units is often due to the belief that  a foreclosure is too expensive and therefore not a good business decision.  While it’s true that the business decision should include a cost-benefit analysis, some  companies will defer 100 percent of the costs and fees, and even write them off  if they are not collected from the delinquent unit.  

 The economic landscape and bank behavior are not going to substantially change  in the next two to four years. In fact, the Associated Press recently reported  that nearly 12 percent of FDIC-insured banks were at risk of failing, the  highest level seen in 18 years. Boards can’t afford to sit and wait for the financial institution to move ahead on a  foreclosure.  

 An association’s decision to foreclose on delinquent units is based on sound and compelling  business reasons, not blind emotion. Our experience has shown that in most  cases, the best course of action is for the association to take control of its  financial well being by consistently exercising its rights to lien and  foreclose on delinquent units.    

 Kenneth M. Arnold is the president and chief executive officer of Miami-based  Association Financial Services, a specialty finance, business process  outsourcing and accredited collection agency specializing in community  associations. Jeffrey M. Oshinsky, Esq., AFS in-house general counsel,  contributed to this article.