...and still more on foreclosure...
I have received numerous e-mails from people about my foreclosure posts. Here's an answer I drafted this morning to one of them, from an Arizona resident who informed me that the legislative proposal for a 7 year waiting period to foreclose has been cut to 3 years. She is against it and she's right--it's still a bad idea. Here's why:

---as I said this morning to my correspondent from AZ...

There certainly need to be limits on the power of foreclosure, but they should not be arbitrary or overly burdensome. This three year time limit is both. This time limit proposal puts the burden for correction on the homeowners who pay their assessments. That is just plain ridiculous, because they are not the problem. The highly-publicized disastrous examples that spawned this legislative reaction are the result of procedures that allow for abuse. The problem is not that HOAs foreclose too soon--the problem is that there are lawyers who abuse the process. I would prefer a monetary limit rather than a time limit, along with other procedural reforms (see below).

This 3 year limit would be very hard on the conscientious owners who pay, and especially in the small developments (fewer than 100 units) that form the bulk of recent development. For small associations with few members, waiting three years means that for the entire term, those who pay are carrying on their backs those who don't. That is a lot to ask of people who are, after all, usually of the same general economic status as the non-payer.

And if there is an emergency that requires a special assessment, the burden gets much worse--not only do they have to come up with a big lump sum for their own unit, but they have to pay a share of their neighbor's as well. The "snowballing" or "tipping" or "critical mass" nature of this is obvious--it will increase the likelihood that more and more people will go into arrears, increasing the burden on those who remain, etc., until the whole financial capacity of the association collapses.

The timing of these proposals couldn't be worse. This is absolutely the worst possible time to start limiting the powers of associations to meet their financial obligations. Here's why.

As association property ages, the need for major repairs becomes a certainty--it is literally just a matter of time, and the clock is ticking on an enormous amount of common interest housing constructed in the 1980s and 1990s. There are usually insufficient reserves to pay for these major repairs. That means special assessments and borrowing become necessary. The biggest "sleeper" issue facing common interest housing is unlimited "bottomless pit" financial liability for major repairs that would fall ultimately on the individual owner--I repeat: on the individual owner.

The Le Parc case and the Oak Park Calabasas case in California are great examples of this, where association boards incurred multi-million dollar liabilities (in the form of contract and tort judgments) in disputes with contractors over major repairs, and then the HOA corporation files for bankruptcy because they can't pay. The bankruptcy judges said that the creditors can proceed directly against the assets of the individual owners for the liabilities of the corporation.

This is potentially a huge problem. If associations can't foreclose for three years on those who don't pay, the ultimate burden falls on those who are paying--without any limit, because these massive association liabilities can't be discharged in bankruptcy.

Who would want to buy a unit of common interest housing knowing all this? Knowing that you are not only agreeing to limits on the use of your property, and to pay your share of assessments--but to pay a share of your neighbor's as well, and that it could end up costing you everything you have? Of all the times to impair associations' financial capabilities, this is absolutely the worst. What next? A law mandating that all these possible financial obligations--for neighbors who don't pay, and for association culpability--be disclosed to prospective purchasers? Is the intent to kill the market completely? I know that's what many HOA activists want, but does the legislature want that, too?

The other main reason legislative blocking of foreclosures is a bad idea has to do with the banking and mortgage insurance businesses. These proposals would make common interest housing a riskier investment for mortage lenders and mortgage insurers, because the association's ability to maintain the common property (which is of course part of the value of the mortgage) would be greatly reduced. Most associations run on a shoestring as it is. Increased risk means increased costs for the owners.

The real problem is not the existence of the foreclosure power--it is abuse of the process by some unscrupulous attorneys who can't get people into foreclosure fast enough.

I think a better set of reforms would include:
1. Eliminating nonjudicial foreclosure, leaving only judicial procedures; it is in the NJF process that most of the abuses have been uncovered. Judicial supervision would prevent most of this. Taking people's homes away is serious business, and it should be approved by a judge before it happens.
2. Limit attorney fees, especially for trivial, automated tasks like sending a computer generated letter
3. Allow foreclosure for the amount of the assessments and late charges only, not the attorney fees. Let the attorney go after personal assets. The justification for allowing foreclosure is to keep the association solvent, not to make the lawyer rich.
4. Monetary limits, rather than time limits, to prevent foreclosure for tiny amounts of assessments and thousands in attorney fees. What should the amount be? I would think at least $1000 in assessments should be at stake, but that would need to be talked about.
5. Procedural restrictions to guarantee that this is a real, good-faith, non-payment situation and not a ripoff, such as requiring the HOA to prove up due diligence in offering a payment plan before foreclosing, and proving that it is not one of these cases where the delinquent owner was turned away when he/she tried to pay because the check was off by fifty cents or some such nonsense.

I could go on, but the point is that foreclosure should be reformed--just not with this time limit approach. The problem is a small number of predatory lawyers who abuse the process, and sleepwalking boards of directors who do whatever the lawyer tells them to do. Fix that problem. Change the procedures to make them fair.