Wednesday, October 21, 2009


As published in Condo Vultures on October 21st, 2009

Our condominium housing stock in Florida is stuck in quicksand.

While the sinking feeling is lightening up, most of the market is stuck at the bottom of the bust cycle where units are difficult to sell or finance and associations are struggling to afford basic services and there's no end in sight.

The main reason why condos are stuck in downward spirals is lien-holder and bank resistance to realizing losses. The micro-workout policies promoted by banks will prolong the pain indefinitely at current rates of progress, which may have been acceptable 20 years ago, but now threaten to sink any recovery's long-term prospects.

The lack of mortgage money is intensifying the pain by wrecking valuations across the board. Furthermore, these types of events create recognized paradoxes. Ultimately, removing some of the current condominiums - the uninsured, poorly managed, or flat out falling-apart projects - must be effected to restore equilibrium to the greater market as a whole.

Banks are attempting to spread their losses over many years rather than realizing them immediately, which is only causing broader losses as the market flags and more loans in neighboring associations slide away as foreclosures slowly sap the value from entire communities.

Banks want to avoid paying monthly maintenance and reserves - as well as the state's new mandate for condo contents insurance - landlord's insurance, management fees, repairs, etc. Many lenders are negotiating each loan individually based on borrower's income and solely looking to modify the terms rather than take write downs on principal balances - which is just another creative way to kick the can down the road and avoid realizing losses that are inevitable.

Without new mortgage money available, condominiums are dropping to all cash pricing throughout Florida. Condo valuations have been destroyed in the far more prevalent garden style apartments well beyond the depreciation seen in new construction high rise buildings. The current method of banks dealing with the issues is a recipe for endless distress. For many projects this could mean a decade of distress and low prices while lenders work things out in court, one unit at a time, project by project, until 100% of garden style apartments statewide have been turned over.

The condo law that "protects" banks from paying maintenance greater than 6 months condo dues or 1% of the loan amount is now providing a Perverse Incentive to delay foreclosures and losses. In essence, we are seeing play out a known phenomina - The Tragedy of the Commons - which is brought about by the management of a shared resources by a group of individuals all acting in rational self-interest. As individuals gain use from the commons, it is gradually destroyed for all until nothing remains. In many ways, it is a fractal microcosm of our current financial dilemmas.

A real recovery in the Florida market will require condominium stake holders (primarily lien-holding banks at this point) to recognize the destructive result of their self-interested actions and agree to collective solutions within individual projects. Florida's condominium law provides for methods to wind down condominium associations and satisfy stakeholders through the Condominium Termination process.

The market recovery will accelerate by providing benefits to all parties. For local governments there will be improvements to local tax bases and unjamming of our courthouses. For residents, better housing stock available for renters and a way out for thousands of homeowners who are paying loans that amount to debt slavery and cannot afford legal representation or have no hope of reducing balances without short payoff. For lenders, realizing savings through quicker, cheaper - most importantly - non-judicial resolutions which don't require direct investment for repairs or interim expenses or payment of ongoing assessments prior to sale of mortgaged property.

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