Welcome to Ungated

We have extended the Early Bird registration deadline for CAI's upcoming National Conference in New Orleans.  Register by March 30 and receive $50 off!  And don't forget, make sure you contact the Sheraton and book your room by the 30th as well. 

See you all in the Big Easy!

CAI's 2009 National Conference is fast approaching.  Scheduled for April 22 - 25 in New Orleans, LA, the conference promises to be a unique blend of outstanding education and networking, seasoned with that unique spice that is New Orleans.

This year we are continuing our efforts to reduce CAI's environmental impact through the use of a "virtual conference brochure".  Rather than print and mail a large document that requires tons of paper, ink, and foreign oil to produce, we are making the same (and even more) information available electronically.

Please take a look and feel free to forward the link to all your friends in the industry.

And don't forget the Early Bird registration deadline is fast approaching.  Send in your application by March 24th and save $50.

In an extremely unprecedented move, Federal Reserve Chairman Ben Bernanke gave a prime time interview yesterday to 60 Minutes correspondent Steve Pelley.  In the course of the interview he discussed the current recession, what went wrong with our financial system, and lessons to be learned from the Great Depression.  This is the first time that a sitting Fed Chair has agreed to such a public discussion of the economy and monetary policy. 

Definitely worth the time to see/read.  Interestingly, he pretty clearly predicts that the recession will ease by the end of this year and the economy will return to modest growth in 2010.  Good news if it proves true.

The debate on mortgage modification, aka “Cram Down” has now moved to the Senate where sponsors are lobbying for the 60 votes needed for passage. If passed the mortgage modification bill would create a process that would be an alternative to foreclosures and the current bankruptcy process. Considering the ongoing issues in the housing market, such a process may work to help stabilize housing prices and to keep more people in their homes which is certainly a laudable goal.

CAI’s ongoing concern, and one that we are watching very carefully, is that this new process does not have any of the protections for associations that exist, even in a limited way, under current foreclosure or bankruptcy laws and processes. We will continue to reach out to the Senate sponsors to gain support to amend the proposal to protect community associations ability to collect their assessments.  While we all, understandably, want to strengthen the overall market, it would only exacerbate the housing crisis to have increased costs put onto responsible homeowners through higher assessments.  

We will be sure to keep all of our members posted as this process moves forward.

As many of my friends know I have been an unabashed fan of Warren Buffett and his approach to business and investing since business school days.  I consider Buffett's letters to shareholders of Berkshire Hathaway as required reading for anyone trying to understand our economy and the market.

Earlier this week, Buffett gave an extended interview to CNBC on the state of the economy, including taking a number of questions from viewers.  The CNBC website has both a transcript and video clips (In 7 parts).  A couple of the key quotes regarding the current banking crisis that leaped out to me included:

> "No depositor of an insured deposit has ever lost a penny since 1934....Thirty-six hundred times (since 1934) the FDIC has come in....It hasn't cost the taxpayer one dime, no depositor has lost one dime."

> "...we have a system in place that can take care of the banks, and most of the banks are in pretty good shape."

> "...the Fed of New York, for example, had 9 billion of deposits from banks throughout the country a year ago. Now they have 450 billion....That is a huge change in behavior by banks."

One final Buffet thought for today from a NYTimes OpEd last October:

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.  Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month--or a year--from now.  What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.  -- Warren Buffett Op-Ed Oct. 17, 2008

"National housing price declines and foreclosures have not been as severe as some analyses have indicated, and they are not as important as financial manipulations in bringing on the global recession, according to a new analysis of foreclosures in 50 states, 35 metropolitan areas and 236 counties by University of Virginia professor William Lucy and graduate student Jeff Herlitz."

...they claim that "66 percent of potential housing value losses in 2008 and subsequent years may be in California, with another 21 percent in Florida, Nevada and Arizona, for a total of 87 percent of national declines."

Report

NYTimes Blog Commentary

We all know intuitively that there are dramatic local and regional differences in foreclosure rates and home price declines, but it is startling to see 4 states make up 87 percent of the problem.  Perhaps more important though is the observation that there was no "reverse gear" to extract non-performing mortgages from packaged mortgage securities and fairly revalue the remainder.  As a result, a (relatively) small excursion in home values and default rates has resulted in a tsunami through the financial markets.

After passage of the stimulus bill, Congress and the President have now turned their attention to addressing the ongoing housing crisis. In fact, shortly after he signed the $787 billion stimulus bill into law, the President announced his three-point plan to stabilize the housing market called the Homeowner Affordability & Stability Plan.

The plan as announced has three broad goals. First is to provide refinancing for homeowners who are current in their mortgages, but whose loan to home value ratio may preclude them from qualifying for refinancing. Second, and potentially more problematic, is the plan to address those homeowners who are upside-down in their mortgages. That is that they currently owe more than the market value of their home. And finally, efforts by the government to shore up Fannie Mae and Freddie Mac to help ensure lower mortgage rates.

While many parts of the proposed plan attempt to help the most and harm the least, one pending concept—judicial mortgage modification—holds the potential to drive up assessments and needlessly hurt responsible homeowners in community associations across the country.  Under the proposal currently before the House of Representatives, a homeowner whose home value is less than their outstanding mortgage (so called ‘upside down’ mortgages), could petition a federal bankruptcy court to ‘modify’ their mortgage. The bankruptcy court could rewrite this person’s mortgage and lower their payments and even reduce the principle balance to more ‘affordable’ levels. In other words, the court could ‘cram down’ both the homeowner’s monthly paymentsand the overall principle balance on their mortgage.  Proponents argue that this approach is the best way to address the unprecedented decline in housing prices and keep as many people in their homes as possible. Critics contend that allowing the courts to rewrite private contractual agreements will increase interest rates for all homeowners and reward irresponsible homebuyers who relied on exotic mortgages to gamble on rising housing prices.

For community associations there is an added element of urgency to this proposal. As written, the mortgage cram down legislation could allow the courts to bypass state laws related to assessment liens, priority liens or other tools associations use to collect past due assessments. Because bankruptcy law is a complex mix of federal  and widely differing state statutes, the actual impact could vary from state to state, but generally there is a concern that as written, the Cram Down legislation could allow bankruptcy courts to discharge past due assessments regardless of any lien or priority lien levied by the association. This would result in irresponsible homeowners getting a free pass on their past due assessments, raising the burden for everyone else or resulting in cuts to community maintenance and reserves. In addition, the possibility exists that judges could arbitrarily lower future assessment payment obligations for such homeowners.  As a result, CAI feels that this proposal will have the perverse impact of hurting home values in community associations by leaving gaping holes in associations’ budgets.  Holes that will have to be filled by the the rest of the communities residents, putting further pressure on them and causing additional homeowners to fall behind on their mortgage, assessment, and other payments.  Clearly an outcome that no one desires.

The current federal bankruptcy code under Chapter 11, section 523(a)(16) recognizes the unique nature of community associations and provides that a homeowners assessments to their community associations cannot be discharged in a chapter 11 bankruptcy proceeding.  If Congress’s goal for the so-called “Cram Down” legislation is to reduce the mortgage payments on upside down mortgages to manageable levels, without harming responsible homeowners, then they must revisit the legislation and expressly limit the authority granted to bankruptcy courts solely to addressing the principle balance of the primary mortgage, while preserving the ability of associations to collect past due assessments on such property. Failure to do so could:

·         Impact an association’s ability to recover delinquent homeowners’ assessments and potentially affect future assessment obligations to the community.

·         Bypass state statutes that provide a priority lien or assessment lien for past due association assessments.

·         Cause additional strain on the housing market by forcing non-foreclosed homeowners to pay higher fees to cover mandatory operating expenses, pushing more homeowners into financial distress.

·         Cut funds available to maintain common areas of the community, resulting in a spiral of deteriorating infrastructure, lower property values and ultimately, higher financial burdens on state and local governments.

·         Undermine, if not unravel, the benefits of common ownership communities by exempting some homeowners from the obligation to pay their fair share to support common elements of the community.

CAI has taken our concerns to the leaders of the House of Representatives, and we will soon be asking you to make your voice heard as this issue moves through the legislative process. Each year, community associations save taxpayers close to $80 billion, by assessing themselves for the provision of services and amenities in their communities. Any approach to helping distressed homeowners must take into consideration the impact to the 1 in 5 homeowners who live in community associations and assure that the limited means available to associations to collect past due assessments are not thrown aside to the detriment of the vast majority of responsible homeowners in associations across the country.