More than ever before, community associations are coping with financial shortfalls. Two issues which associations frequently encounter are short sales and foreclosures. This Blog post will discuss the implications of short sales and foreclosures as each relates to the community association.
Short Sales
A short sale occurs when a home is sold for less than the amount of the outstanding mortgage on the home, with the explicit agreement of the bank. In other words, the purchase price of the home is “short” of the remaining balance due on the existing mortgage.
Short sales are being used by owners in an effort to avoid foreclosure and possibly preserve the owners’ credit rating. While the home that is being sold via a short sale is not bank owned, the bank must approve (and ultimately determine) the sale price of the home as they are agreeing to reduce the amount owed on the mortgage. Banks generally prefer short sales over foreclosures because a short sale is accomplished in a much shorter period of time than a foreclosure and because the cost of a short sale is far less than that of a foreclosure.
Because community associations can possess a statutory lien on a particular property for past due assessments (which are usually present if the unit gets to the point of short sale), the association will be asked to approve the short sale. As a general matter, when a short sale is proposed and the association is contacted about the outstanding account balance, the association is offered only a percentage of the total amount it is owed so that the short sale can be accomplished (sometimes, the association is offered the full amount owed, but this generally occurs only when the total amount owed is proportionately very small when compared to the short sale price, and even then, such an occurrence is a statistical rarity). At this stage, the association must decide if it will accept less than the entire amount owed on the account or if it will “hold out” for the entire balance (it is noted that the amount the association ultimately accepts can and should be negotiated as the first offer provided is usually a “low ball” offer).
In making this determination, the association should consider the fact that after the short sale, a new owner will be present in the unit and will begin to pay assessments; therefore, the financial “bleeding” the association is facing will ultimately come to an end. Should the association refuse to accept a compromised offer on the amount owed, the likely result is that the short sale will not be consummated and the unit will end up in foreclosure. In a [Pennsylvania] foreclosure situation, the association is statutorily entitled to receive unpaid assessments, fees and costs that come due during the six (6) months immediately preceding the date of judicial sale of a unit. All other amounts owed to the association are divested in the foreclosure. Thus, community associations may actually end up in a more favorable financial position if a unit is sold in a short sale rather than in foreclosure. Of course, because each situation is factually unique, outcomes will vary. Associations should therefore seek the advice of a qualified property manager and/or counsel when they are faced with a short sale in the community.
Foreclosures
In general terms, a mortgage loan provides that the mortgagee (lender, usually a bank) possesses a security interest (lien) in a home purchased by the mortgagor (borrower). The foreclosure process begins when the mortgagor defaults on the loan, and the mortgagee begins legal proceedings to repossess the property.
As it pertains to community associations, and as previously indicated, in a [Pennsylvania] foreclosure situation, the association is statutorily entitled to receive unpaid assessments, fees and costs that come due during the six (6) months immediately preceding the date of judicial sale of a unit. All other amounts owed to the association are divested in the foreclosure. Once an Association learns that the property has been listed for Sheriff’s Sale, the Association should contact the Sheriff’s office to advise of the (1) existence; (2) nature; and (3) amount of the Association’s statutory lien. This being said, the association should always seek out the advice of counsel in order to determine a legally permissible course of action as Fair Debt Collection Practices Act (FDCPA) issues may arise in this setting.
Associations should also be aware that if the foreclosure process is completed and the foreclosing bank takes title (or if the bank takes a deed in lieu of foreclosure), the association should verify if a Sheriff’s deed has been issued to the bank and, if so, contact the bank and request payment of the prior assessments and other charges the association is entitled to receive. The association should also ensure that the bank, as [new] titleholder of record, will be promptly paying assessments going forward, as required by the community’s controlling documents. As a general matter, associations should stay on top of their collections efforts and apply them uniformly to all owners, including banks.
Associations should also be aware that federal law and federal programs have provided borrowers with additional options to be utilized in response to foreclosure proceedings and/or in an attempt to avoid foreclosure altogether. As a result of all of this, the foreclosure process is taking longer than ever before to get from start to finish, and Associations are waiting longer than ever before to see some sort of finality with respect same.
For example, the Home Affordable Modification Program (HAMP) provides borrowers with the possibility of lowering their monthly mortgage payments to make their homes more affordable. The population of homeowners that may be eligible for HAMP was expanded to include:
• Homeowners who are applying for a modification on a home that is not their primary residence, but the property is currently rented or the homeowner intends to rent it.
• Homeowners who previously did not qualify for HAMP because their debt-to-income ratio was 31% or lower.
• Homeowners who previously received a HAMP trial period plan, but defaulted in their trial payments.
• Homeowners who previously received a HAMP permanent modification, but defaulted in their payments, therefore losing good standing.
Moreover, other federal agencies, such as the Consumer Financial Protection Bureau (CFPB) and the Department of Treasury’s Office of the Comptroller of the Currency (OCC), are involved in the residential mortgage market from a regulatory perspective and can get involved on behalf of a homeowner whose home is in foreclosure. Accordingly, associations should be educated in and made aware of the various programs that exist and how each may impact the financial position of the association.
Finally, “other” issues occur during the foreclosure process that associations must handle in the best interest of the association. For example, when a unit is in the foreclosure process and the owner abandons the unit (and the foreclosing bank has not yet taken title), the association must examine its controlling documents and/or other legal requirements to determine what duty the association has to ensure that the unit is kept in good repair. It is noted that a foreclosing bank will often take similar action when a unit is abandoned by its borrower in an effort to protect its investment; however, the bank’s concern about preserving its collateral is different than the association’s potential responsibility in this regard because the association must examine its duty to keep the unit in good repair as it relates to the potential impact of the abandoned unit on all of the association’s owners/members and their units, not just the abandoned unit itself.
Because of all of the complicated financial and legal issues involved with short sales and foreclosures, and because each situation may be factually different than the those which have preceded it, associations dealing with these situations should seek the advice of both a qualified property manager and counsel to determine the best course of action for each specific situation.
Edward Hoffman, Jr., Esq.
* The content for this Blog post is based upon the prior written work of the author as originally published in the July/August 2012 issue of the CAI PA-DelVal’s Chapter’s Community Assets magazine.
Chances are, your community association has a virtual presence on the Internet. Whether your association runs its own website, has a site run by a management company or some other third-party vendor, or is active on a social media site, association leaders and Managers should take some steps in order to protect the community association from potential legal problems.
Step one: Have a plan.
All too often, communities go “online” without really having a plan. The end result is usually a disorganized free-flow of ideas and information that serves no real purpose aside from being able to say that the community is online. Instead of simply throwing content on a website, the community’s leaders should determine exactly why they want the community to be online. Determining why the community is going to be online will then automatically serve to determine what gets put online. For example, if the community’s main purpose in going online is to disseminate information relevant to the community to its member-owners, then the content that is posted should be specifically tailored to that audience. Posting content about topics unrelated to information about the community will only distract from the purpose of the association’s website and may lead to unexpected problems down the road.
Step two: Limit content.
From a liability perspective, the Achilles heel for most association websites is the failure to limit content. Content should be limited, by the association, to matters that benefit the community. A community should never allow unrestricted content to be posted to its website, whether it comes from members or non-members. In other words, the official association website is not the place to allow people to post their gripes about the association, its leadership, other owner-members, the municipality, the landscaper, the Manager or a host of other unsuspecting victims. The association website should therefore not contain an “open-posting” forum, bulletin board or other area where people can freely post anything they want to the website. Remember, this content gets posted to the association website, which means that the association can be held responsible for its content. If owner-members want the community to have an online “bulletin-board” to post garage sales, items for sale, recipes, a community calendar and other events, the community should encourage members to submit this information to the designated contact person for the community website, either by email, mail or in person. This person can then compile the information, edit if necessary, and post it to the website.
• Public v. Private Content
With respect to any content that is posted by the association to its website, the difference between public and private content must be examined very carefully by the association. In a nutshell, public content is content that the whole world can see, for example, the association name, the location of the community, amenities and photographs of common areas. Public content is generally included in an association website to show people why that community is, in fact, a great place to live. Some associations post association documents, like committee forms, budgets, meeting minutes and other items as public content. Generally, associations should post these items to a designated “owners-only” area that requires a username/login and a password for access. While people who do not live in the community might, for some odd reason, want to read the association’s budget or check out last month’s meeting minutes or a blank architectural review committee application, they are not entitled to have access to these documents. These types of documents are relevant to those who live in the community and access to them should therefore be limited to residents.
An association’s controlling documents might provide the association with the ability to post information on a community bulletin board, electronic or otherwise, including the names of owners that are more than 90 days delinquent on their assessments. This information should not be posted to the “public” portion of the website because of privacy concerns and fair credit issues. For instance, if Mrs. Jones in unit 2B is 120 days in arrears on her assessments, a quick Internet search of “Mrs. Jones, unit 2B, town of XYZ” might provide this information to a potential employer, creditor or other person that might wrongly or illegally hold it against Mrs. Jones. Sometimes sharing information becomes a problem not only for those whom are the subject of the information, but also for those who are innocently providing the information for some good-faith purpose. Remember, the general rule is that once information is out in cyberspace, it can’t be taken back or permanently deleted. Therefore, it is better to ensure that the content that is posted on the association website is really content that is safe for public consumption.
Dealing with private content is a bit trickier since there are two levels: (1) private content which all members of the community have access to; and (2) private content specific to each individual owner. All members might have access to association forms and documents. If an association wants to post its various community documents online for the benefit of its owner-members, the association can easily set up a designated area that requires a login and password to gain access to this downloadable information. The designated website administrator should be the only person able to upload documents to the website, so that the association can control which documents are posted.
Associations should also include the community’s online bulletin board, calendar and contact information for the Manager in the private members-only area rather than on the public portion of the website. While this is “private” content which only members of the community can view, associations should limit the content that goes in this area just as they limit the content that goes in the public area of the website. For example, while the association might be allowed to post the names of owners that are more than 90 days delinquent on their assessments, it doesn’t mean that the association should do it— even on the “private” portion of the website. Common sense should come into play and an evaluation of why the association is posting this information should be undertaken. Moreover, if it decided that this arrearage information will be posted to the private portion of the website, the association must uniformly apply this standard to all members of the community on a consistent basis, and not just a handful of people in a piecemeal fashion. Otherwise, the association might find themselves defending an “unequal enforcement” or defamation to reputation lawsuit brought by the owner that feels like they were singled out by the association.
The second level of private content, content that is specific to each individual owner, is an area that is ripe for potential legal problems if the information were to get into the wrong hands. This content includes, but is not limited to, banking and account information for electronic assessment payments by owners, the owner’s account history and other Personally Identifiable Information (PII) like Social Security numbers, vehicle license plate numbers, birthdays, private telephone numbers and an owner’s age. Therefore, if an association chooses to post this content on the Internet, it must do so with the understanding that this information is confidential in nature and every possible precaution must be undertaken to protect this information. Aside from the normal login & password requirements, the portion of the site should also utilize a secure connection (usually Transport Layer Security, or TLS, in the form of an “https” page over the Internet) to protect the information. Associations should use a qualified, professional management company to provide such a service or a third-party vendor that specializes in this area of information technology. Retaining a third party to handle managing and protecting the private content is a good idea, but this may not completely absolve an association from liability should there be a breach of information. However, every association should strive to be proactive when it comes to protecting private content. A failure to be proactive can lead to potentially devastating consequences for an affected owner and a strong likelihood that the association will face some sort of legal liability for the breach.
Step three: Monitor, monitor and monitor some more.
If an association decides that it wants to allow some level of interactivity or unrestricted posting on its website, then it is imperative that the association monitor what is being posted on the site. Monitoring the content that is posted to the site should be done on a consistent, timely basis by a designated moderator. The moderator should enforce the ground rules that must be listed on the site as it pertains to posting. Ideally, the association should have a policy for posting that the site visitor must agree to prior to being able to post any content to the website. Any violation of the policy can be grounds for removal of the post and a ban on all future posts on the association’s website. This type of content monitoring and moderation can also be performed on social media websites like Facebook, so long as the association sets up and runs the social media page on behalf of and in the name of the association. Never allow an owner or some other person to set up a social media page on behalf of or in the name of the association, because (a) others may think it is the official association page and (b) the association won’t be able to manage/restrict the content on the page. The future trend is for the association to create an acceptable use policy for members who want to post to an “open” association website as well as a social media policy identifying the association’s social media pages as the official page.
Finally, while implementing acceptable use and social media policies and monitoring posted site content is surely proactive behavior, these actions can’t completely relieve an association of potential liability for improper, damaging, false, inflammatory or defamatory content that is posted to the association’s website or social media page. The key is to never acquiesce, either by way of action or by a failure to act, to potentially harmful postings on the association site.
Step four: Be on the lookout for the association in cyberspace.
Cyberspace, like outer space, is a seemingly endless place. Just as exploration of outer space is possible, so is exploration of the Internet. However, rather than using spacecraft, all we must do to explore the Internet is log a few keystrokes. In other words, we can utilize the myriad of search tools available on the World Wide Web to pinpoint the exact information we need. Using sites like Google and Yahoo!, for example, we can search most of the information that is publicly available on the Internet for free and with very little effort.
Thus, my advice is to perform a search, every so often, on the association’s name. This is due to the prevalence of copycat websites which purport to be the official association site, as well as an increasing number of “anti-association” sites created by disgruntled owners, former owners, non-community member neighbors or others that have an axe to grind with the association. An association should act quickly to remove a website which purports to be the official site. This is no easy task, and it usually involves litigation against the copycat site operator.
Similarly, should an “anti-association” website be located which contains negative, inflammatory, defamatory, false, confidential or damaging information on the website, the association must take affirmative steps to try and have this website taken down or at least have the harmful information removed from the site.
On social media sites, associations may discover unofficial pages run by owners, former owners and others, related to the association. If run by current owners, the association should ask the owner to remove the non-official page and ask all owners to join, “like,” or follow the official page for the community.The situation is a bit more problematic when groups of owners maintain their own page. These members of the community may use the social media page, which is sometimes public in nature due to a lack of privacy restrictions set up by the page administrator, to vent about issues of concern to the community. Association leaders or Managers should try to monitor these pages, if at all possible, and do the best they can to have the social media users limit their comments about the community or other owners. Of course it’s not always possible find every page that is somehow related to the community, but if one is found efforts should be made to try and protect the interests of the community.
Finally, community leaders, Board Members and Managers should avoid connecting with association members on social media sites. By limiting their virtual relationships, they can avoid issues surrounding favoritism and ever-present fiduciary duty issues. If not “friending” others in the community is simply not possible, then the community leaders and Manager must refrain from posting comments about the community or community issues on any website that is not designated as an official community site. Similarly, even if the community leaders and Manager are not posting comments about the community or community issues on their own or their friends’ social media walls, they have an obligation to look out for the best interests of the association when reading comments that are made by others about the association.
Associations must be proactive in cyberspace, in order to preserve the “virtual brand” of the association and protect the best interests of the association. When there is doubt as to what to do, association leaders and Managers should seek the advice of qualified legal counsel so the association can stay in control and stay out of court.
By Edward Hoffman, Jr., Esq.
* The content for this Blog post is based upon the prior written work of the author as originally published in the November/December 2011 issue of Community Assets magazine and the May/June 2012 issue of Common Ground magazine.
