View Mobile Site

Condo boards eyeing ‘mortgage termination’

Text Size: Small Large Medium
POSTED April 25, 2013 8:18 p.m.

DEAR BENNY: I am the president of a large condominium in the Midwest and have just heard about a program called “mortgage termination.” It sounds fascinating and very useful for our condo, since we have a number of delinquencies with properties that are underwater. Are you familiar with this and if so, how does it work? --Phyllis

DEAR PHYLLIS: Yes, I am familiar with this. Oversimplified, here is how it works: It started in Florida and you can get more information on the Web by searching “mortgage termination.” Basically, when a unit owner is delinquent, the association, following its rules and applicable law, forecloses on the unit. Typically, because there is a mortgage on the property (often larger than the value of the unit), no one buys at the foreclosure sale. Accordingly, the condo becomes the owner.

The law is clear: Although the mortgage loan remains on the book and must be paid off if a third party becomes the new owner, the condo association does not have to make any mortgage payments.

Once the condo becomes the owner, it asks the lender to cancel the mortgage. In at least one case that I know of, the lender voluntarily did that. The condo can then sell the unit at a price that covers its costs but will clearly be a lot less than market value.

If the lender refuses to terminate the mortgage, the condo files suit against the lender. Basically, the condo says to the judge, “We own the condo and waive all legal and procedural foreclosure requirements, so, judge, force the bank to foreclose.”

According to my information, this has worked. In the meantime, once the condo is the owner, and albeit that the property is subject to that mortgage, the condo can rent out the unit or use it for whatever it wants.

I cannot provide legal advice, so you have to discuss the specifics with your association’s legal counsel.

There is, however, a major problem facing community associations: Banks just do not want to foreclose, because they will be the owner and will have to pay condo fees, insurance and real estate taxes. Also, in some states such as Florida where banks who foreclose must pay the condo association up to 12 months of delinquent fees, banks don’t want this additional financial burden. And because the banks hold off, owners who are delinquent on their mortgage loan decide that they will also stop paying the condo association.

Accordingly, the condo board should seriously consider the “mortgage termination” concept.

DEAR BENNY: My girlfriend and I kicked around the problem of the 80-year-old time-share owner, which you recently wrote about. Without knowing whether the property and/or the owner resides in a recourse state leaves some important considerations unanswered. Regardless, the first question should be whether the potential heirs want the time share. If so, no problem!

If none of the heirs want the time share, the owner could consider donating it to a 501(c)(3) charity or the local Rotary Club, etc. Organizations such as the Rotary Club are often looking for fundraising opportunities and could hold a lottery for the available weeks each year. The owner could also take the charitable donation, subject to the 50 percent rule, if the donation is made while living or take the donation to offset other estate earnings later.

Having been the executor and trustee of my parents’ estate and trusts, I can assure you that the extra hassle of foreclosures is the last thing one needs when settling an estate and could greatly prolong the probate period! --Ted

DEAR TED: Thanks for your helpful email. I haven’t discussed with any Rotary Club member whether they would be willing to accept a time share, and especially if money is still owed on it over any above the annual/monthly/quarterly maintenance fee. However, it never hurts to try.

You mentioned the 50 percent rule. In general, you are able to deduct up to 50 percent of your adjusted gross income for charitable contributions of money or property made to qualified organizations. You must, however, itemize your deductions. And there is a limit of 20 or 30 percent in some cases. For more information, see IRS Publication 526, entitled Charitable Contributions, and Publication 561, Determining the Value of Donated Property, available at irs.gov.

And let me also explain what you mean by a “recourse state.” In many states, if a lender forecloses and the sale does not generate enough funds to pay off the entire loan balance, the lender can go back to the borrower and seek the deficiency, i.e., the difference between what the loan was and the amount received from the foreclosure sale. The lender can even file suit against the borrower for that deficiency.

DEAR BENNY: My mother had to be moved to a nursing home from her “independent living” house. This is a very small retirement community and is connected to an “assisted living” facility next-door. People who live in the independent homes can move into assisted living easily when the time arrives for more assistance in daily life; however, this home is limited to ages 55 and up.

My siblings and I have gone through our mom’s home and cleaned it, made repairs and painted so that the house shows almost like a new home (it’s 7.5 years old). We recently adding hardwood floors to the master bedroom and large walk-in closet.

Due to mom needing the funds to stay in the nursing home, we are trying to decide which would be better, since her home has not sold during the last three months on the market: Should we try to rent it out or take out a home equity line of credit on the house ? We have about seven months of funds left to keep her in the nursing home before she runs out of funds. --Jeannette

DEAR JEANNETTE: You are referring to “mom’s house.” That means that it is still in her name. While I don’t want to recommend that you arrange to transfer it to you and your siblings, you have to make sure that your mother has given you (or someone) a power of attorney. This would enable the holder of the power of attorney to sign all legal documents including a sales contract and ultimately the deed to the house.

If you don’t yet have such a document, and if your mother is mentally competent to agree and sign the power of attorney, please make sure it is done quickly. Have a local attorney prepare the document since different states require different forms.

If, on the other hand, your mother is no longer competent and you decide to sell, you will have to arrange to obtain a guardianship and conservatorship from your local court.

Getting to your question, I am not sure what you are asking. If it has to do with whether mom will qualify for Medicaid, you have to consult a lawyer in your state who practices what is known as “elder law,” since the laws differ from state to state. Depending on what your state law says, your mother may still qualify for Medicaid even if she retains the house, although there may be income limitations imposed by your state.

My strong suggestion: See a lawyer as soon as you can.

DEAR BENNY: I am involved in a dispute with a seller. I signed a contract, and he is unwilling to sell the house to me. I am considering litigation, but my lawyer told me that I would probably not get my attorney fees paid even if I win. Is this true? --Pam

DEAR PAM: Your attorney is referring to what is known as the “American rule.” Basically, this means that each side pays his or her own legal fees. There are a few exceptions: If your sales contract or a state or federal law (such as a consumer protection law) provides that the prevailing party will get an award of legal fees, then a judge has the authority to issue an order giving you legal fees. However, this does not mean that you will get all of those fees; judges look carefully at the entire fee arrangement and often will actually reduce the amount requested.

If the judge believes that one party has acted so badly that he should be punished, then that is another exception to the American rule. But this is rarely used -- the conduct really has to be outrageous.

My suggestion for the future: If your sales contract does not have attorney fee language, include this: “In the event that litigation takes place, the court shall award reasonable attorney’s fees to the prevailing party.”

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.






Commenting is not available.

Commenting not available.

Please wait ...