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Possible State Attorneys General Plan to Make it Harder for Banks to Foreclose to Further Damage Community Associations

By David J. Byrne

Five of the country's largest banks recently received a list of demands from state attorneys general with respect to their defaulted mortgages and resulting foreclosures. Unfortunately for community associations, if the banks give in to the government's demands, these community associations will only be further burdened by homes and units that are typically behind or not paying assessments and/or maintenance fees at all. A bank's foreclosure and then sheriffs/judicial sale is a tremendous benefit to a community association as that bank is thereafter responsible for the payment of assessments and/or maintenance fees accruing from that date forward. 
 

If these banks meet these government demands, they would be prohibited from commencing a foreclosure while a borrower was actively trying to lower the interest rate or alter other mortgage terms (i.e., 'mortgage modification'). Additionally, per the demands, any borrower that made three payments pursuant to a trial mortgage modification would then receive a 'permanent modification'. Further, any bank denial of a borrower's modification request would trigger a 'review' by an 'ombudsman' or independent review panel. These demands appear to rise from the federal government's new Consumer Financial Protection Bureau. The banks would have to alter internal processes, potentially slow new lending and employees would have to provide the government with formulas and reports documenting all efforts related to modifications. Employees would be rewarded for pushing modifications and not foreclosures. 
 

None of the banks involved (including Bank of America and JP Morgan Chase) have publicly stated whether they will meet these demands.  
 

Currently, it is estimated over 2 million American households are in active foreclosure, with another 2.2 million households considered 'severely delinquent' vis a vis their mortgages. Experts fear that a plan like this would further slow the overall foreclosure process, burdening their communities and neighbors with the consequences. Many experts believe that the faster all of these foreclosures are finished, the faster the properties will 'turnover', stabilize the market and then eventually lead the real estate market back to normalcy. Foreclosures already take, on average, approximately 400 days from start to sheriffs/judicial sale. We all know that community association units and homes in 'foreclosure' almost always fail to pay assessments and/or maintenance fees, with the completion of the foreclosure (i.e., sheriffs sale/judicial sale) resulting in the first regular payments from that particular unit for perhaps years.
 

Hopefully the federal government and/or the state attorneys general will consider the needs and interests of our communities suffering from bank foreclosures when pressing demands like these.

Full post as published by New Jersey Law Blog on March 29, 2011 (boomark / email).