Debra McGarry and her husband, a disabled veteran, are trying to maintain the eight-unit condo building they live in after two condo owners stopped paying condo fees and vacated the property.

The Providence Journal / Kris Craig

When Debra McGarry and her husband, Bernard, a disabled veteran, bought their condo at the corner of Huron Street and Regent Avenue in Providence 18 months ago, they thought it was an “affordable” housing choice.

McGarry said the condo in the Valley neighborhood “is not in the best area of the city,” but it is near the Veterans Administration hospital where her husband, who is 55, gets medical care.

Her husband is retired and McGarry, 50, works as an administrative assistant in the surgical department at Miriam Hospital. Their condo at 30 Huron St. is the first home they’ve ever owned.

The building is an eight-unit, flat-roofed, garden-style apartment house built in 1970, and it was converted to condos by real estate investors John Sahagian and Richard T. Chaffee.

All 8 of the 745-square-foot condos sold at prices of $108,000 to $120,000 in 2006 and early last year, according to Providence records.

But since March, two of the eight owners have stopped paying their monthly condo fees and abandoned their property, according to McGarry. The Bank of America has foreclosed on one of the condos, but the association has not received any fees from the bank, she said.

When McGarry took over as condo association treasurer in April, she quickly learned that the association had been in financial trouble even before the two owners defaulted. Although monthly fees had been raised from $195 to $225 in November, there was no money in reserve, and water, heat and electric service were about to be shut off.

McGarry raised the condo fee to $275 and obtained a personal credit-card loan of $4,800 to pay past-due bills and retain a lawyer to help her collect back fees.

“I was the only one who could get a loan,” she said.

McGarry’s situation is extreme, but it’s not uncommon. Other condominium associations are facing problems because of owners who can’t or won’t pay common expenses, according to state Rep. Patricia Serpa, D-West Warwick.

Many owners who get into financial trouble stop paying condo fees months before they default on their mortgages, according to Edmund Allcock, a lawyer representing the New England chapter of the Community Association Institute.

When condo owners don’t pay monthly fees, the rest of the owners usually have to pay higher fees to cover common expenses, Serpa said.

“I have seen situations in which that’s a pretty big issue,” said James J. Caruolo, a Warwick lawyer whose practice includes real estate law. Caruolo said small condo associations — those with 15 or fewer units — are most vulnerable when a few members stop paying fees. With a smaller pool of owners to absorb the loss, they are more likely to see monthly fees increase significantly, he said.

McGarry said her association’s expenses include heat, hot water, water and sewer service, maintenance of the fire alarm system, electricity for the common areas, trash pickup and building insurance.

Current state law allows condominium associations to foreclose on units for delinquent fees, but their liens are subordinate to the lien of the first recorded mortgage, and there is a $2,500 limit on the compensation for foreclosure costs. These restrictions effectively make foreclosure by a condo association a fruitless enterprise, according to Allcock. No one would buy a condo at auction if it was subject to the first mortgage lien, he said.

Serpa said requests from constituents led her to sponsor legislation (H 7512 Sub A), to increase the amount condominium associations can collect to compensate for the costs of foreclosure, including advertising and auction costs, to $5,000, and up to $7,500 when legal fees are included.

The bill would also strengthen condo associations’ so-called super-lien to allow associations that foreclose to extinguish the first mortgage holder’s lien on property, although first-mortgage lenders would have the right to retain their lien by paying the association’s costs and up to six months of back fees within 30 days of the foreclosure sale.

This change would effectively force lenders to pay the back condo fees unless they want to lose their rights to property in which they often have a significant investment.

The Rhode Island Mortgage Bankers Association fought the bill’s “super-lien” provisions, and is also unhappy with the increase in recoverable foreclosure costs, according to Terrance Martiesian, a lawyer for the bankers’ group.

“We feel that it’s going to change the lien priority…,” he said. “A bank is not [willingly] going to take second place… in the chain of liens against the property. They want to be first.”

And “the collection fees are excessive,” he added. “To go from $2,500 to $7,500 … we’ve contended from day one that that’s excessive.”

Martiesian said the change could make lenders less willing to make condo loans in Rhode Island.

But Allcock said 15 other states have given condo associations super-lien status, and “it’s been great because it’s stabilized the condo markets” in those states. With added financial security, condo associations will be able to take out loans themselves, he added.

The legislation passed unanimously in the House (June 10) and the Senate (June 19), according to Allcock.

James Hahn, legislative counsel for RIMBA, said the lenders’ group has asked Governor Carcieri to veto the measure.

“It really moves them ahead of us,” in the line of lien priority, Hahn said. “It’s basically picking the lenders’ pockets, at the end of the day.”

A spokesperson for the Carcieri’s office on Thursday said that the governor has taken no action on the bill.

For her part, McGarry has no empathy for mortgage lenders. “I have no patience with the banks. They’re taking advantage of poor people,” she said.

The banks “were really pushing people to get mortgages they couldn’t afford…,” McGarry said. “If you’ve got someone foreclosing within a year of buying, you know they couldn’t afford it.”

McGarry’s association is faced with the prospect of even more losses: one owner, a man who is battling brain cancer, is moving out next month, and he has informed her he cannot pay condo fees after this month, and another owner was laid off recently.

“This is yet another wrinkle in a very complicated problem,” said Brenda Clement, director of the Statewide Housing Action Coalition, a collection of 70 groups that advocate for affordable housing throughout Rhode Island. She said it is one more example of foreclosure having effects beyond the individual homeowner.

Foreclosures often drive down surrounding property values, and an uptick in vandalism and other criminal activity in abandoned homes can lead to increased insurance rates in a neighborhood, she said.

McGarry said that her association is still “not taking in enough to cover our expenses,” let alone save money for repairs and other unexpected costs. For instance, the association is paying $100 a month to pay off a $1,500 boiler repair because there was no money to pay the entire bill at once, she said.

The association had a professional property manager for a few months, but members decided the monthly cost, $325, was too high and they could manage the building themselves.

McGarry said stress and illness led the previous volunteer treasurer to quit. “She couldn’t take it anymore,” she said. “I was the condo association secretary.”

Even now, McGarry said she is paying hundreds more than her $275 monthly fee to keep the association afloat. She knows many of her neighbors are already in financial distress, and she wants to avoid raising the condo fees yet again.

When she told one neighbor, a young woman with three children, including a new baby, that the fee would have to be raised to $275, “she started to cry,” McGarry remembered.

Without collecting the unpaid condo fees for the abandoned units, “we’re not going to make it,” she said.

“My husband and I dreamed of having a place of our own,” McGarry said. “But this is a nightmare.”

cdunn@projo.com