News and Resources

Sub Prime Lending, Foreclosures and Delinquencies - Oh My!

By: Linda J. Schiff

Well, you’ve read several articles on the bad news and some folks are already tired of hearing about it and ready to move on…
 
But you can’t.  Most of these articles have not addressed the real day-to-day realities of what this debacle means for community associations.  Instead they have thoroughly covered:
 
* This or that builder filing for bankruptcy
* New home sales are down – again
* Market prices are down – again
* Foreclosures are up
* Mortgage companies’ earnings are plummeting
* The stock market trembles with a tougher credit crunch
 
Does this mean that the bubble everyone talked about months ago finally burst?  Some thoughts to consider: 
 
* Buyers got greedy
* Sellers got greedy
* Mortgage bankers got greedy
* Investors got greedy
* The market got greedy
 
KABOOM!
 
What is that saying about pigs getting fat and hogs getting slaughtered?  What happened to 20% down to save the private mortgage insurance? 

Ok, let’s take a breath and circle the wagons for a moment.  First, markets do go up and down and not everyone in every situation was a greedy jerk.  There are many examples where folks got caught either not knowing any better or simply making a mistake.
 
The reality is that we do live in the strongest economy in the world.  We are also extra fortunate to live in the Midwest which will not feel as much pain as the coasts.  Nevertheless, we need the job market to stay steady, along with interest rates, and believe it or not, this too shall pass.
 
In the meantime, associations need a reality check on their cash flow.  For years professionals have recommended establishing:
 
* Operating contingencies
* Delinquency reserves
* Raising assessments
* Funding reserves

Yes, we all know that but how much is it going to cost me?  Well, of course “it will depend on your specific association…”  That by the way, is the appropriate answer most professionals will give you.  However, most people still want to know a number – at least a starting point.  So how about reaching for some reasonable benchmarks, such as:
 
* Operating contingencies 
   1.5% of operating assessments – Or even better yet, how about the amount you went over budget last year?
* Delinquency reserve 
   3% or more – What is your delinquency ratio?  If you don’t know, you need to find out and fast.
* Raising assessments
   7% or more - Oh my, that is in writing!  Sure the cost of living is what you should do every year, but you haven’t!  So you’d better start catching up now. 
* Funding reserves 
   10% of operating assessments – Ok that is a total guess – Instead don’t guess, follow your reserve study.  Don’t have one?  Get one!

Some of this may appear a bit blunt – So many folks are used to talking around these issues that they don’t get any where.  This is not the year to short change your budget.  This is not the year to cut back on the increase in assessments.  This is the year that will test your cash flow and you can do something about it.
 
While some associations will feel the crunches more than others, no one will be immune.  The market doesn’t care right now if you live on North Lake Shore Drive or Elm Street.  It is slow and cheap.  Units will take longer to sell and for less.  Assessment income will slow down as handing accounts over to the collection attorneys will speed up.  In the meantime, the bills have to get paid.
 
As Robert Baden-Powell, founder of Scouting, said, “Be Prepared.”
 

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