Saturday, March 13, 2004

More on foreclosure
Some people in the anti-HOA activist ranks are angry because I said yesterday that, although I think nonjudicial foreclosure should be banned, associations need to have recourse to foreclosure to collect unpaid assessments (but not fines--that's a different issue). That means judicial foreclosure, where the association has to file a lawsuit and a judge makes the final decision after hearing from both sides. I'm talking about a last resort, with procedural protections against abuse and with limits on attorney fees.

Some of these anti-HOA activist comments make good points about issues like homestead protection, how long should statutes mandate before foreclosure is allowed, and so forth. All good points. They have answers, and in many states such protections and time limits already exist. The problem with NJF is that there is no lawsuit and no judge and no protections--it is a draconian practice that should be banned because it can't be fixed to make it fair.

But the loudest complainers, as usual, show the same characteristics. One is the typical tone--uncivil rage, peppered with insults and vulgarity. Another is the refusal to deal with inconvenient facts or arguments, better known as "reality." A third is the lack of any alternative that would allow HOAs to continue functioning, and advocating instead for positions that would almost certainly destroy common interest housing and leave millions of people in major financial trouble. That, of course, is the hidden agenda of some of these folks.

Here are some of the inconvenient facts: (1) The vast majority of associations are under-reserved already. (2) As housing built during the 1980s and 1990s ages, the need to maintain, repair, and replace commonly owned property is increasing every day, leading to major special assessments (see below) all over the nation. (3) People typically spend as much on a house as they can possibly qualify for, which means more house than they can really afford, so they are often house-poor. (4) We are in a soft employment market that could last for years, in which white collar workers are losing jobs and staying unemployed longer than before. (5) When money gets tight, the first homeowner expense people try to shirk is their HOA assessments. If push comes to shove, they will make their house payment and their property tax payment and their homeowner insurance payment (both of the latter often escrowed into their house payment anyway), and not pay their HOA assessment. (6) When people don't pay their assessments, the rest of the owners get stuck paying in their stead. That makes the non-payers "free riders" on the backs of those who are paying. (7) Real property deteriorates quickly if it isn't maintained--the cost of necessary repair snowballs fast when water starts coming in.

All the above is basically simple math and common sense, and everybody who knows anything about common interest housing knows it is all true. Property and debt collection laws vary from state to state, but all I can say is I don't think associations can remain solvent if all they can do is go after people's wages and personal assets--cars, boats, bank accounts, and so forth. Like it or not, there are people who get very good at not owning things that can be attached by judgment creditors. HOAs would end up competing with all the other creditors--credit card companies, tax collectors, etc.--for the money they need to fix the roof this month. Net result: the existing owners bear the burden for the non-payers.

That is a completely unsustainable situation. The owners who pay would go deeper in the hole covering for those who didn't, and then more of them would stop paying the increased assessments, increasing the burden on those who still do, who would then stop. This is what we call a "tipping" or "critical mass" phenomenon, and you can cound on it happening.

So, knowing all this, why do people say that associations should not be allowed to foreclose, no matter how far in arrears an owner goes?

Simple. The obvious intent some people have is to create a legal environment in which HOA owners can ignore all the obligations that are contained in their governing documents, tell their board to sod off, and live exactly as they would if they had bought conventional single family housing. No assessments to pay, no rules to follow. They would make association obligations voluntary instead of mandatory. If you have no commonly owned property to maintain, that might be just fine with most owners and that's why some associations with no common property have just sort of disappeared. But if you do have common property, it's not fine at all.

That situation would, of course, leave the entire burden of paying assessments and following rules and maintaining commonly owned property to those who voluntarily chose to do so. They would carry the burden--in this case, the assessment burden--for all the unit owners. That would never work, for the reasons described above. Soon nobody would pay or obey because it would be economically irrational to do so.

I've always been against associations having dictatorial power. I'm also against going to the opposite extreme and leaving them powerless. If we go from banana republics to failed states, most people won't like the latter any better than the former, and somebody will have to pick up the pieces of failed CIDs. Who will that be?

But maybe that is exactly what will happen. Maybe this will be the year when associations take their biggest hit in state legislatures. It is an election year, and legislators have proven themselves to be capable of most anything at such times. There have been so many outrageous and highly publicized abuses of the foreclosure power by unscrupulous lawyers that there may well be a kind of legislative over-reaction. I have been warning the industry about this sort of reaction for years, with very limited success, but it's not something I want to be right about at long last, because a lot of ordinary HOA residents may be the ones to suffer.

I don't want to be right about assocation abuses leading to bad reforms. I also don't want to be right about what those reforms will bring about.

Friday, March 12, 2004

How about "Lexusville"?
L.A. Considers Selling Its Name
Friday, March 12, 2004

LOS ANGELES — It’s home to fun, sun and Hollywood glamour -- and now the city of Los Angeles may be lending its name and image to the highest bidder.

Leaders of the cash-strapped city are considering selling the naming rights for Los Angeles to a variety of products. Coke or Pepsi could be the city’s official soft drink, for instance, and Lexus or BMW the official automobile.

Lawmakers say the choice for a budget-crunched city like Los Angeles comes down to raising taxes or finding other ways of raising necessary funds. New York and San Diego are already in the sponsorship game and are making millions.
Read the rest so you won't think I'm making this up.
The plain truth about HOA foreclosures...
Homeowner Association Foreclosures: California Senate Housing Committee HOMEOWNER ASSOCIATION FORECLOSURE HEARINGS

(My comments on foreclosure follow this is except from a BACKGROUND PAPER on
by Mark Stivers - Chief Consultant - California Senate Housing & Community Development
-----------------excerpt begins----------
Statistics show that homeowner associations foreclose on members homes for relatively small amounts of delinquent assessments in comparison to non-CID creditors. A 2001 study done by Sentinel Fair Housing conducted an evaluation of foreclosures in Alameda, Contra Costa, San Mateo, Santa Clara and Sacramento counties. The analysis reported that median amount owed in homeowner association foreclosures was $2,557; the median amount in all other cases was $190,000. The recent example of the Copperopolis family who lost their home for $120 could be seen as a extreme example but it demonstrates the legal authority that associations posses to foreclose for negligible amounts.

Associations primarily use non-judicial foreclosure which does not require review by a court. The California Civil Code stipulates that non-judicial foreclosure must be afforded basic due process and must be conducted "with fairness, openness and scrupulous integrity and the trustee must exercise sound discretion to protect the rights of all interested parties and obtain the best possible price." Several legal cases have asserted that the courts will scrutinize all non-judicial foreclosure sales for fairness and for a gross inadequacy of price . Although there are existing legal protections for the homeowner, in reality it is difficult for individual property owners to challenge the actions of the homeowner associations through the legal process after the fact.

Individuals who lose their home via the CID non-judicial foreclosure process often lose a significant amount of their equity due to the small amounts at which the homes are sold in auction. The minimum bid at sale is the amount owed to the homeowners association, regardless of how much the home is worth. In contrast, the judicial foreclosure process mandates that the minimum bid at foreclosure sale cover the amount owed, any junior liens, and the homestead amount which ranges from $50,000 to $150,000.

Alternatives to Non-Judicial Foreclosure

CID non-judicial foreclosures are unique in comparison to the process that most creditors must follow to collect on debts. Most creditors must go through the judicial process in a attempt to garner a judgement; once a judgement is obtained the court has the sole authority to stipulate the appropriate recourse to collect. Claims that are less than $5,000 could be handled in small claims courts which alleviates many of the legal and monetary obstacles to using the judicial process. Judgements can then be enforced through wage garnishments, liens on property and, ultimately, by judicial foreclosure.

In a judicial foreclosure the lender must file a lawsuit in the superior court of the county in which the property is located. The property owner must be served with a copy of the summons and complaint for foreclosure; a judicial foreclosure can take up to three years to complete. Foreclosure on a property under these provisions is subject to the homestead exemption, which protects the homeowner's equity in the property. The homestead exemption equals $50,000 for an individual, $75,000 for a family, or $150,000 for a person who is a senior or disabled.

----------------excerpt ends--------------
My comments:
So, what should be done? In my opinions, HOAs should not be allowed to use nonjudicial foreclosure. The practice is being abused by a small number of collections attorneys who have invaded the field of community association law but who in reality wouldn't recognize "community" if it walked up and bit them on the butt. These folks are community destroyers--the HOA version of divorce lawyers. Their goal is foreclosure, not collection of delinquent assessments.

But I do believe that HOAs need to have recourse to judicial foreclosure as a last resort. Associations need to get paid. They must be able to defend themselves against chronic deadbeats, or disaster will result for those who are paying their assessments as they are forced to carry the load for the free riders. Associations don't have the resources to cushion them for years of non-payment by a significant number of residents.

Leaving associations only with recourse to debtors' personal assets--garnishment, attachment, and so forth--will crush many innocent, dues-paying members, and eventually lead to association insolvency. At least, that's the way it looks to me.

Bad day in Druid Woods...
Condo residents get sticker shock
Druid Woods board assesses owners $7,650

The Atlanta Journal-Constitution
Published on: 02/29/04

Connie Hansard Perry stopped to pick up her mail Christmas Eve and saw a 77-year-old neighbor in Druid Woods condominiums, open letter in hand, sobbing.

Though Perry had a houseful of Christmas guests to attend to, she took time to try to comfort her friend.

Perry herself soon would need comforting. The letter was from the condo association board.

It said the 140owners in the Decatur complex owed the association $7,650 each. The association needed the money to repair water damage to one of five buildings, and owners had until the end of January to pay.

(Thanks to Shu Bartholomew for sending this along)

Thursday, March 11, 2004

Disneyland becomes a gated community? Say it ain't so, Mickey!
Security Gates Going Up at Disneyland

By Associated Press

March 10, 2004, 6:29 PM EST

ANAHEIM, Calif. -- Reality is coming to Disneyland's fantasy world, in the form of permanent security gates. Bowing to terrorism fears, the Walt Disney Co. plans to build the gates at the Disneyland Resort next fall. The company had resisted security gates around Disneyland and the California Adventure theme park next door, believing the sense of fantasy would be spoiled.
Read the rest.