Sen. Fasano wants to close loophole on homeowners associations foreclosures

Article Courtesy of The St. Petersburg Times

By Kris Hundley and Susan Taylor Marti

Published June 30, 2011

Despite repeated efforts, real estate agent Colleen Tuttle had no luck swinging a short sale on behalf of a client who offered the bank $800,000 in cash for an Apollo Beach home with a stunning view of Tampa Bay.

So Tuttle was frustrated and angry that an investor group got title to the house for just $10,010 in February after the homeowners association foreclosed.

"It may not be illegal, but it's immoral,'' she said.

Tuttle was among those reacting to a St. Petersburg Times story Sunday that showed how loopholes in the law have allowed the investor group, which includes three men with prison records, to get title to dozens of Hillsborough County homes and collect rents before the lenders foreclose. Several tenants said they were never told that the homes are still subject to first mortgages and that the bank could kick them out.

State Sen. Michael Fasano said Tuesday that the story was "very disturbing'' and shows the need for change.

"I couldn't help but just shake my head when I saw that these unscrupulous characters were profiting off the backs of people who are struggling,'' said Fasano, a New Port Richey Republican. "I guess they dream these things up as they sit in jail.''

Fasano said he plans to propose legislation that would require homeowners associations to notify lenders when they start to foreclose, thereby giving the bank a chance to pay the delinquent fees or kick-start its own foreclosure action.

The Times reported that one association lawyer advocates a "race to the courthouse'' to beat the bank because a bank foreclosure generally wipes out an association lien.

"That was surprising that (associations) move so quickly to foreclose,'' Fasano said.

Fasano backed the recent change to state law that allows associations to foreclose on residents who don't pay their assessments. In a tough economy, some associations say that as many as 40 percent of homeowners are delinquent on assessments needed to insure and maintain common areas.

"It's terribly unfair of those who pay their maintenance fees to have to see an increase in fees because of others who don't pay them,'' Fasano said. "The laws were changed to try to help those communities that were struggling, but I believe that even they would agree that we need to take another look at what we've put in place.''

After associations foreclose on delinquent homeowners, the property goes to public auction and anyone willing to pay off the association's lien can get title. If no one bids at auction, the home is taken back by the association, which can sell it to a third party through a quit claim deed.

In return for paying off a few thousand dollars in unpaid association dues, plus court costs and legal fees, an investor can get title to houses worth hundreds of thousands. That's meant some unbelievable deals for the group led by Tampa marketing consultant Ralph Chancey and his son Michael.

The group, doing business as Prop Inc., F.Y.M., F.Y. Mortgage and P&D Resources, has bought 71 HOA foreclosures in Hillsborough County in the past eight months. The companies have paid just over $220,000 for properties with a total market value of $8.2 million.

Among their purchases: A 3,700-square-foot home in north Tampa for $8,090 and an average of $4,000 each for dozens of houses in Brandon and Riverview.

The Chancey companies rent the properties as is without doing background or credit checks on the tenants. Several tenants said they signed one-year leases but were never told there were outstanding mortgages on the properties. It can take years for banks to foreclose and regain title; in the meantime, the Chancey companies can collect rent or transfer title again.

This week F.Y.M. deeded the title to a 4,000-square-foot house in Brandon to Ed Pruse, an associate of the investor group who has served years in state prison for crimes ranging from trafficking in stolen goods to robbery with a deadly weapon.

Tuttle, an agent with ReMax Realtec in Palm Harbor, learned first-hand the problems with homeowners association foreclosures when her client tried to buy the Apollo Beach mansion.

The owners had essentially abandoned the house, which was mortgaged for $2.6 million. Wells Fargo, as trustee for Bank of America, started foreclosure proceedings in May 2010.

Tuttle repeatedly tried to contact a law firm representing Wells Fargo to see about a short sale for $800,000 cash. She got no response.

Earlier this year, Tuttle discovered that the homeowners association, Andalucia Master, had won a final judgment of foreclosure although the bank foreclosure was still pending. The house went to auction and F.Y.M. got it with a bid of $10,010.

"This is unbelievable!'' Tuttle wrote in an e-mail to the chief executives of Bank of America and Wells Fargo. "Why didn't Wells Fargo know that a final judgment was given to the homeowners association in the courts?''

Although she thinks Wells Fargo should have done more due diligence, she also thinks the homeowners association should have notified the bank when it started foreclosing. Since Wells Fargo paid almost $25,000 in property taxes on the house last year, it presumably would have paid the $3,700 in delinquent fees to keep the title from being transferred to a third party, Tuttle said.

Tuttle said her client wanted to live in the 6,000-square-foot house and was prepared to make needed renovations.

But because of association foreclosures, she said, that house and others are going to individuals who are "buying properties for minimal amounts of money, retaining the rental income and leaving the property in deplorable condition down the road at substantial loss to the lender.''

Bush Ross, a Tampa law firm that represents Andalucia Master, said associations are moving against delinquent homeowners because banks are taking so long to foreclose.

Eric Appleton, a lawyer with the firm, said associations can't notify the banks when they start foreclosing because that would violate federal law barring communication with a non-party about a debt. Because the bank doesn't owe the assessments, it's not a party to the association's foreclosure action.

One solution, Appleton said, would be to make banks responsible for delinquent fees.

"At the end of the day,'' he said, "banks are the ultimate beneficiaries of associations and their efforts to maintain the common areas and amenities.''

Real estate investors beat the banks to profit on foreclosures