Sunday, January 23, 2011

The Cheerleading For State Bankruptcies And Municipal Defaults Is Downright Ghoulish

The Cheerleading For State Bankruptcies And Municipal Defaults Is Downright Ghoulish:

Maybe. But this underscores one of the main differences between real governments and CIDs. Real governments have a support network in the political system and in a wide range of public and private institutions. CIDs don't. The difference isn't theoretical. It has huge consequences for the millions of people who own HOA and condo units. For example, there is a profession called "public administration" that trains people to serve in government jobs, and it includes university departments, academic journals, a hundred years of published research, and major professional organizations in nations all over the planet. CIDs have the Community Associations Institute. Cities do national searches for the best city manager they can find. HOAs take their chances in their local area and may end up with a real winner, or they may get a crook or an incompetent. I could go on, but I think you get the point.

One of those consequences is clear from the current discussion of municipal bankruptcy. Cities and counties can go bankrupt under Chapter Nine, and now Republicans are agitating to include states within that provision as well. If they win big in 2012, you can bet that this will happen. When a government goes bankrupt, they can restructure their debts, including their agreements with their employees and their unions if any. That includes their employees pensions, which are a gigantic liability that has resulted from public officials making incredibly stupid sweet deals with public employee unions. But if you are a taxpayer in one of these cities, you get out from under what would otherwise be a crushing tax increase. You, as a citizen, can be relieved of a burden that your elected officials put on your shoulders, if whoever is overseeing the Chapter Nine proceeding decides it is the only way to keep the city going.

Compare that with a CID. When the HOA or condo association goes belly up, the owners remain liable for the debts of the association, including multi-million dollar judgments resulting from bad decisions made by the BOD. The limit of any individual owner's debts? The equity they have in their unit. If the board refuses to levy a special assessment to pay the debt, a judgment creditor can have a court appoint a receiver. The receiver levies the assessment and secures it with liens on the units. Owners who don't pay lose their homes in foreclosure. (Sound familiar?) See the Le Parc, Oak Park Calabasas, and Kingsbury Court cases for a description of how these judgments are handled.

So, while people certainly have lost their homes for not paying their property taxes, just like they lose them for not paying their assessments, there is a floor, or a safety net for them. How about for all these millions of CID residents? Not so much. HOA bankruptcy really doesn't accomplish much for the owners, who remain financially responsible, in most cases right up to the point of their own fiscal ruin.


Fred Pilot said...

Excellent points in the first paragraph. All of these add up to an established culture the supports good governance and best practices in local government that is absent in mandatory homeowner association governance.

Instead, there is only a trade association comprised of HOA managers, attorneys and others who provide services to HOAs whose main mission is to preserve local government privatization as public policy and fend off any reform efforts that could harm their business interests.

gnut said...

The dangers of "owning" a property in an HOA is something that Tyler Berding, much to his credit, has been warning us about for several years now.

Of course, I disagree with Mr. Berding's analysis of the cause -- the owners are to blame for everything -- and recommended solutions -- more power for HOA corporations and less rights for the owners.

As has been said before, the problem with HOAs can be summed up as:

HOAs have the power of small governments but are shielded as corporations. As a corporation, HOAs are a defective product.

This danger illustrates why HOAs should be abolished. The problems are simply too fundamental for mere reform.

For single family housing -- even in existing HOAs -- I don't believe abolishing HOAs would be much of a problem at all, although I'm sure the Professor disagrees.

Condos, of course, have real shared infrastructure issues that have to be addressed. I'm not going to pretend to have the answers there. I will just observe that the benefits of the co-op model over the HOA model has been discussed on this site in recent months. What it would take to convert existing condo HOAs to co-ops is beyond me, but I'm sure it would be disruptive for a lot of homeowners.

But it doesn't matter. What will happen is that there will be some efforts at legislative HOA reform. Conservatives and libertarians will gnash their teeth about government interference with private property and "contracts", while liberals will twiddle their thumbs and serve their civil tort lawyer constituency. Neither wing cares about the individual home owners.

Any "reform" that actually passes will end up being purely symbolic, or make the problem worse.

There will be another wave of foreclosures, with millions losing their homes -- either as HOAs go bankrupt, or the HOAs foreclose. The HOA property managers and HOA law firms will make out like the bandits they are, before moving on to milk other pastures (or would a locust analogy be more appropriate?).

Anonymous said...

Isn't it interesting that one fundamental principle of corporation law is to provide that shareholders are not personally responsible for the debts of the corporation. Yet, through the use of "servitudes" such shareholder protection is eviscerated. So exactly what is the benefit to the homeowner shareholders in these corporations? Perhaps one clue is that shareholder status is involuntary.

Now if it was a good thing, wouldn't the owners WANT to be shareholders? Obviously it is not a good thing and that is why shareholder status is involuntary. The idea of "member" is a euphemism for a non-profit corporation. This isn't a club were membership has privileges. Instead membership has nothing but liabilities.

Martha Stewart said...

It's not a good thing.

Anonymous said...

CAI represents the HOA vendors, not the homeowners and not the HOA corporation itself. CAI's "education" and public policies are unquestionably geared towards brainwashing gullible board members into conduct that is profitable for the HOA vendors to the great detriment of the actual owners.