Portland Maine Owners Default, Associations Left Holding Bag

David Pitt, president of the Rosemont Condominium Association, in Maine, stands near one of the association condos on which condo fees haven't been paid for two years.

There's nothing remarkable about the four-unit condominium on Leeman Street, a tidy neighborhood in Portland's Rosemont section. But behind the walls, there's trouble.

One of the four units is vacant and for sale after going through foreclosure. The owner is long gone; he hasn't paid the $100 monthly common fee for more than two years.

"A quarter of our income has been withdrawn, and it has been now for a long time," said David Pitt, one of the owners and president of the Rosemont Condominium Association.

Condo Associations and HOAs rely on those fees to pay insurance and to maintain and repair common property. But under current law, they're hard-pressed to recover that money when an owner stops paying. The remaining owners in the association must pick up the tab.

Associations around the state increasingly are facing that burden as the recession, falling property values and a wave of troubled mortgages generate drawn-out foreclosure procedures.

Now, condo association officials are seeking some relief. They're asking for a change in the law governing condominium rules to allow them to recover some of that lost money from lenders, after the owners bail.

Banks and other lenders, which don't want to be on the hook for these fees, oppose this idea.

The two sides will offer their views during a public hearing at the State House on Wednesday at 1 p.m., before the Legislature's Judiciary Committee.

Maine has an estimated 1,500 to 2,000 condominium units, according to the state's branch of the Community Associations Institute, which represents condo associations.

Roughly 750 of them are in York County, according to Joseph Carlton, a lawyer who is co-chair of the institute's Maine Legislative Action Committee. These include a couple of developments with more than 200 units, he said, but many associations are made up of a handful of units, like the one on Leeman Street.

Small associations are especially hard hit when owners stop paying fees, Carlton said. Typical fees run $100 to $200 a month, and when even one or two units are in default, associations have trouble paying insurance premiums, keeping the building in good repair and paying for snowplowing and other services.

Many buildings also have common water and utility lines, and association members can wind up absorbing utility bills or paying for heat in vacant units to prevent pipes from freezing during the winter.

One remedy, it might seem, would be for associations to go to court and file a lien to secure the overdue payments. But in a foreclosure, the lender holding the first mortgage on the property is entitled to the proceeds from the sale, minus unpaid taxes, to retire the debt.

In today's market, when many homes are selling for less than their owners paid for them, the sale may not generate enough money to pay the entire bank loan. So, nothing is left over for the condominium association.

"That means the association is left holding the bag," Carlton said.

That's the likely situation on Leeman Street.

The former resident had taken out a first mortgage on the vacant unit for $122,000 and a second mortgage for $44,000, both with out-of-state lenders, according to court records. Now the three-bedroom unit is being listed with a local real estate agent for $89,900.

Similar scenarios are becoming common around the state, according to Jeff Martin, who owns Foreside Real Estate Management Inc. in Falmouth. His company manages properties for 30 associations. Every one has an owner who is behind in paying common fees.

"If an owner isn't paying the fee, you're out of luck," he said. "It's a significant problem."

To tackle the problem, Larry Clough, a Portland lawyer who helped write the state's original condo laws in 1983, has drafted language modeled after recent legislation in Rhode Island. The intent is to give associations a six-month priority over existing first mortgages for regular fees that would have been due during that period.

In other words, when an association files suit to enforce its lien against nonpayment, the mortgage holder would have to pay money owed six months back from that date.

The six-month time period is the maximum allowed by federal lending agencies. Advocates also expect to ask lenders to pay lawyer fees incurred in enforcing the lien, as a way to encourage negotiations. And in practice, they would file a new lien if another six-month period passes without payment, Clough said.

This plan isn't sitting well with lenders, who are expected to oppose the bill during the public hearing.

"We're the ones at risk for a large amount of money," said Chris Pinkham, president of the Maine Association of Community Banks.

Pinkham said banks share the concerns of condo owners, who don't want to see their property values erode if maintenance is deferred. But associations also need to be prudent, he said, and establish reserve accounts that can handle expenses when fees aren't paid.

Moreover, Pinkham said, bankers expected their institutions to be in the first position to be paid for primary mortgages when they lent money. Changing the law now would change the rules under which they had agreed to make the loans.

Proponents of the change, though, say Massachusetts, Connecticut and Rhode Island have similar legislation on the books. And these advocates have been rallying their troops, sending petition sheets to condo owners and asking them to show up at the public hearing.

Representatives and residents from roughly three dozen condo associations are likely to come to Wednesday's public hearing, according to Claudette Carini, executive director of the trade group's New England chapter.

Carini said the debate in Maine may echo last year's hearing in Rhode Island, where the economic downturn and mounting foreclosures created pressure on lawmakers to help struggling associations and their members.

"I'm seeing the same thing in Maine," she said. "The timing is right."

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