A letter from a Kauai condominium owner to his state senator is calling attention to “a serious flaw in Hawaii law that is causing unfairness and hardship to condominium owners throughout the state.”

When condominium owners get into financial trouble and stop paying mortgages and maintenance fees, it can often take years for the foreclosure process to run its course. During that time, neither the owner nor the banks pay the monthly maintenance fees, and the delinquencies have to be covered by the remaining owners in the condominium. With the record pace of foreclosures over the past couple of years, this has created major problems for some condominiums.

The situation is described in aMarch 2, 2012 letter from Nicholas Blonder to Sen. Ron Kouchi that is now making the rounds among condominium owners associations, management companies, and condominium advocates such as the Community Associations Institute Hawaii Chapter.

There are 7,167 condominiums in Hawaii registered with the state, according to online records of the Real Estate Commission. And many of those condominiums are struggling financially as more apartment owners fall behind in paying their monthly maintenance fees and mortgage payments, eventually facing foreclosure.

In more normal times, few condominium owners fell behind in paying their maintenance fees.

But these are anything but normal times. Blonder points to his own condominium’s experience, which is repeated in other projects across the state.

…the recession has halved many units’ value and, consequently, several owners stopped paying their assessments. Over the last twelve months, Kaha Lani’s AOAO has lost approximately $100,000 revenue, roughly 14% of its annual operating budget due to unpaid assessments.

The letter explains:

In most cases, these circumstances arose with new owners, who purchased at or near the top of the market. Their units are now worth substantially less than their mortgage balance (“underwater”), which has caused some owners to stop paying both their association dues and their mortgages. It is likely that most condominium projects around the state are experiencing similar conditions.

The real problem arises when a condominium unit goes into foreclosure proceedings. By law, the condominium association’s claim is subordinate to that of the mortgage lender. During the often long and drawn out foreclosure process, condo maintenance fees go unpaid and the added costs have to be covered by the remaining owners.

Banks and other lenders often delay foreclosure proceedings for their own reasons, and in the meantime the condominium associations, and their owners, continue to be squeezed.

Currently, even after the foreclosure process ends and the unit sold, the amount a condominium association can collect under the current law is artificially capped at $7,200, while the amounts owed frequently run into the tens of thousands.

Bloder wrote:

It should also be noted that the AOAO’s hands are completely tied. There are no remedies or “work arounds” an association can use to mitigate these losses. Moreover, all of the affected properties are or were the subject of bankruptcy and/or foreclosure proceedings. These proceedings are rife with delay. So while the banks “slow walk” the foreclosure process (with no obligation or incentive to contribute to the property’s upkeep), the assessment meter keeps running. Once the $7,200 ceiling is reached, the AOAO has no practical avenue of recourse. Personal money judgments against tapped-out former owners are rarely worth pursuing. And foreclosing the association’s subordinated lien would do no more than place the association into the shoes of the displaced “underwater” owner.

“When a unit is in foreclosure,” Bloder wrote, “both the delinquent condominium owner and the bank directly benefit from the continuing maintenance expenditures made every day by a community association.”

And that, he says, is clearly unfair.

I’m still trying to figure out how bills still alive at the legislature address this issue, if at all. Related bills that cleared the House this year are described in this Maui TV News story, while the recommendations of the Mortgage Foreclosure Task Force are described in a video posted on the Senate Majority Blog.

I’ll try to track down more info on the condo foreclosure issue and follow up later.