HOA Law Blog

The following was reported by Community Associations Institute (CAI) by Andrew S. Fortin, Esq., CAI’s vice president of government and public affairs.

The Consumer Financial Protection Bureau (CFPB), which officially opened for business in July, was created by Congress to enforce most federal financial consumer protection laws and to protect consumers from harmful financial products.

The CFPB has the authority to set standards that govern almost every aspect of the mortgage lending and closing process. Because CAI members have a keen interest in the development of CFPB’s rules and regulations that could affect community associations, CAI recently added a special section about the CFPB to our Mortgage Matters program. CAI is particularly interested in the CFPB’s actions on transfer fees, association assessments, foreclosure prevention, mortgage servicing standards and the definitions of qualified mortgage and real estate settlement fees.

Continue reading "Legislative Update: CAI Monitors New Consumer Financial Protection Bureau (CFPB)" »

By David C. Swedelson, Esq., Senior Partner, Swedelson & Gottlieb

Here is the issue: A board adopts the annual budget and notifies the owners that assessments will increase from last year by 10%. After the beginning of the association’s fiscal year, and months later, the board realizes that expenses are greater than anticipated and wants to again increase the assessments, this time by another 10% (for a total of a 20% annual increase). Some attorneys, managers and board members believe that the board has this power; others (including this writer) disagree based on the language of the Civil Code, the intent of the legislature, and common sense. Owners are entitled to know at the beginning of the fiscal year what their association’s assessments will be. The board has a fiduciary obligation to determine what the assessments will be for that fiscal year and has a right to use the remedy provided in the Civil Code if expenses are greater than anticipated. Otherwise, the legislature would not have imposed a sanction for a board’s failure to timely distribute the new fiscal year’s budget, and a board could simply send out whatever they have and finalize the budget later.

Continue reading "No, Boards Can't Increase the Rate of Assessments Mid-Fiscal Year" »

By Sandra L. Gottlieb and W. Alexander Noland, Condo Lawyers and Community Association Attorneys at Swedelson & Gottlieb

It is a sign of the times that an association’s board of directors has to consider and consult with association legal counsel on the association’s responsibilities with respect to an owner’s separate interest unit or lot to which the association obtains title through the nonjudicial foreclosure process (for purposes of the following discussion, we will refer to an owner’s separate interest unit or lot as a “unit”). As more and more California community associations are deciding to foreclose against an owner’s unit for non-payment of assessments (rather then waiting for the senior lien holder to foreclose), and with many associations taking title by reversion to units following those foreclosure sales (when third parties don’t bid on the unit at the foreclosure sale), many association boards and managers want to know what the association’s responsibilities are once it takes title to a unit through foreclosure.

Continue reading "Association Responsibility for Association-Owned Units and Lots Acquired Through Nonjudicial Foreclosure" »

By David Swedelson and Alyssa Klausner, Attorneys at Swedelson & Gottlieb, Condo Lawyers and HOA Attorneys

When a delinquent owner files for bankruptcy relief by filing a petition under either Chapter 7 or Chapter 13 of the United States Bankruptcy Code, the Code provides that an automatic stay, subject to certain exceptions, is immediately put into place. An automatic stay is like a restraining order, and it happens as soon as the bankruptcy is filed. This “stay” applies to creditors, including the association to whom the owner owes money, and it means an association can no longer collect or even attempt to collect any money (or foreclose on the property) from the owner, at least without getting permission from the bankruptcy court. The stay is intended to protect the delinquent owners who file bankruptcy. All actions to collect the delinquent assessments must stop, including lawsuits, foreclosures, as well as the suspension of membership and/or common area privileges.

Continue reading "Bankruptcy and The Motion For Relief From Stay" »

By Sean D. Allen, Associate, SwedelsonGottlieb. Edited by David C. Swedelson, Partner, SwedelsonGottlieb

So, your Association has a homeowner who is delinquent on his assessments. Before you are able to make any progress on collection and before a lien is recorded, you receive notice that he has filed for bankruptcy. What happens next?

The moment a debtor files for bankruptcy, an “automatic stay” is imposed. The automatic stay prevents creditors from taking any action to collect from a debtor. This is intended to give the debtor some breathing room and allow him to clearly evaluate his financial position without having to fend off creditors. Therefore, all collection efforts must cease until the automatic stay is either lifted or terminated.

Continue reading "How Bankruptcy Affects Assessment Collection " »

By Sean D. Allen, Associate, SwedelsonGottlieb. Edited by David C. Swedelson, Partner, SwedelsonGottlieb

We have all heard the terms “Senior Lien”, “Junior Lien”, “First Mortgage”, “Second Trust Deed” and whatever other variations of those terms are out there. Here I am going to explain exactly what those terms mean and how they relate to a foreclosure action.

A lien is simply a way to secure a debt to a piece of property so that the association has some priority especially over the delinquent owner's unsecured debts. When someone owes money to another, that debt can be secured by recording a lien. That debt is then attached to the property, and the lien must be paid before the property can be sold. The property becomes collateral for the debt. If the borrower fails to pay the debt when due, the lien holder can force the sale of the property in a foreclosure action in order to get paid.

Continue reading "Lien Priority Explained – Who Gets Paid After A Foreclosure" »

By David Swedelson, Condo lawyer / HOA and Community Association Attorney; Partner, SwedelsonGottlieb

It has been assumed by many that if a California community association holds its foreclosure sale (as part of the assessment collection process) and after the sale the delinquent owner files bankruptcy, that the bankruptcy did not impact the sale. Not so, according to the United States Bankruptcy Court for the Central District of California, which recently held that the filing of a bankruptcy petition by a borrower (in our case a delinquent owner) can void a trustee sale even where the petition is filed after the trustee sale, so long as the borrower/delinquent owner files the bankruptcy petition before the execution and recordation of the trustee's deed upon sale. [In re: Gonzales 2011 WL3328508 (Bkrtcy. C.D.Cal. August 1, 2011)].

As we know, a delinquent owner has the ability to file a bankruptcy to stay or stop a trustee sale prior to the actual sale. And many delinquent owners do. Many people believe that once the trustee sale occurs, the bankruptcy filing by the owner does not impact the sale. Wrong!

Continue reading "Record The Trustee’s Deed Upon Sale ASAP; Too Bad The Legislature Did Not Consider These Consequences Before Requiring A 90 Day Post Foreclosure Sale Redemption Period" »

By David C. Swedelson and Sandra L. Gottlieb, Condo and HOA Legal Experts, Community Association Attorneys

As we maneuver our way through the end of this recession, the words “short sale” are being bandied about more than at any other time that we can remember. Lenders are apparently more receptive to considering a discount on a mortgage rather then taking the property back in foreclosure. We wrote about short sales back in May 2011 (follow this link). Wikipedia defines a short sale as "a sale of real estate in which the sale proceeds fall short of the balance owed on the property's loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.”

Continue reading "Short Sale: Words That Should Strike Fear, or The Good Alternative to Foreclosure? You Decide" »

By David Swedelson, California Condo and HOA Legal Expert and Community Association Attorney

I came across an interesting article from a law firm in Florida (by attorney Lisa Magill with Becker & Poliakoff) that addresses the fact that after a bank forecloses, many boards are writing off the debt without considering all of the association’s collection options.

Yes, it is true that trying to collect from some delinquent owners may be a waste of time. But a board should be cautious in making that assumption without knowing if the homeowner has or does not have money or other assets. Boards should consider evaluating collection options.

Continue reading "The Lender Foreclosed and The Owner Has Not Paid; Is Your Association Leaving Money on the Table?—The New Community Association Paradigm" »

Senate Majority Leader Ellen M. Corbett (D-San Leandro) has introduced SB 561 which will, if signed into law, make some fairly significant changes to the law impacting how California community associations collect delinquent assessments. Senator Corbett has been quoted as saying that "[u]nscrupulous debt collectors are increasing the amount owed based on penalties and fees, and foreclosing on people's homes... It's a terrible practice. The penalties are just way too harsh." Unfortunately, Senator Corbett has failed to provide any examples or proof that delinquent owners are incurring anything more then the reasonable costs and fees of collection. We really have no idea what penalties or fees she is referencing, and based on our more than 20 years of experience, what Senator Corbett is quoted as saying is not accurate.

David Swedelson and Sandra Gottlieb have analyzed SB 561, and based on their many years of experience dealing with assessment collection issues, they believe that this is bad legislation based on incorrect facts and circumstances. They have written an article summarizing their analysis. This bill has been approved by the California State Senate and will soon be taken up by the Assembly. We are hoping that a massive showing of opposition will motivate the assembly to reject SB 561. We will be forwarding additional information soon.

Blog post by David C. Swedelson, Partner, SwedelsonGottlieb

How many times have you heard a delinquent condo or HOA homeowner (or their attorney) complain that the fees and costs of collection are almost as much as the amount of the unpaid assessments or fees they owe their community association? I am betting that you have heard this complaint before. But the fact that the collection and attorneys' fees are not proportionate to the amount sought to be collected is not a defense that can legitimately be asserted by a delinquent owner. Had they timely paid their assessments or not let the collection action go on for so long, the fees would not have been that much. And what do they expect their association to do? Not seek collection?

Continue reading "Attorney’s Fees For Assessment Collection Need not be Proportionate to the Underlying Claim " »

A Blog Report By Association Lien Services and Swedelson & Gottlieb

Many of our clients have been asking for our forecast as to when their assessment collection nightmares are going to end. While we don't have a crystal ball, we do monitor what the experts are saying. And this very question was addressed in an article in the March/April 2011 edition of CAI's Common Ground magazine. The article, entitled “Foreclosures, Rocky Road" (and thus the motivation for this blog post) states what we all know, that “the housing crisis has been a turbulent ride.” The article went on to state that “as we enter year four, experts predict we may finally hit rock bottom. That would be welcome news for homeowners and associations alike.” The problem is that rock bottom is so far down, it is going to take years to get back to normal.

Continue reading "Assessment Collection In 2011: We Still Have A Rocky Road Ahead" »

By David Swedelson, Esq. and Alyssa Klausner, Esq.

It should be no surprise to anyone that the Great Recession has caused a significant amount of people to fall into serious debt, and many have filed bankruptcy. This is having a significant impact on many community associations’ efforts to collect delinquent assessments.

Just how big of an issue is bankruptcy in Southern California? The Central District of California (CDC) is atop the busiest bankruptcy courts in the U.S. The CDC serves over 18 million people in southern and central California, the largest federal judicial district by population. The CDC’s mission statement is “To provide, efficiently, justice to all parties affected by bankruptcy in the most populous and diverse district in the country.” A whopping 142,407 bankruptcy cases were filed in the CDC In 2010 (a 31% increase from 2009), greatly outnumbering the 14,330 bankruptcy cases filed in the Southern District of New York in 2010. The percentage of bankruptcy filings increased nationally by 13.8% from 2009-2010. It is no wonder we are seeing so many requests from our clients seeking assistance with a bankruptcy matter of a delinquent owner and to obtain relief from the bankruptcy automatic stay so that the collection process can continue, something we were rarely asked to do before the recession. Because the recession is not really over for California community associations, as there is still a significant amount of homes that are or will be in foreclosure for some time to come, it is important that board members and association management understand the basics of what bankruptcy is all about.

Continue reading "Bankruptcy Basics - What You Need to Know" »

What happens when owners do not pay their assessments, default and then allow their property to be lost through foreclosure? The answer is clear; their former association does not have enough money to pay the bills and/or the other owners must cover the deficit. This was the subject of an LA Times article that many of you might find interesting.

By David Swedelson, Esq., Sandra Gottlieb, Esq., and Tracy Neal, Esq.

As we near the end of 2010, we thought it timely and appropriate to provide you with a report as to the status of the assessment collection problems that continue to plague many California community associations as a result of the recession. The following information and opinions come from our perspective as experts in the field and as the operators of one of the leading assessment collection services in California.

We had hoped that we would have better news to report by now. We don't! All of the reports we have seen indicate that our nation’s economy, while improving, is still a mess, and community associations (condominiums, planned developments and stock co-ops) are unfortunately suffering as a result. Unemployment remains high, creating an ongoing and significant problem. Recent government reports indicate that nationally, unemployment is now at 9.4% (increasing rather than decreasing).

Continue reading "End Of The 2010 Year Assessment Collection Report: We Still Recommend Foreclosure, as Judgments Remain Uncollectable " »

It is mid-October, and many California community associations and managers are busy working on their 2011 budgets that will need to be sent out by the end of November. In addition to the budget, however, there are several other documents and disclosures that are required by California statutes to be made on an annual basis. Most associations provide those documents and disclosures with the distribution of the association's next year's budget. As we have done every year for as far back as we can remember, Swedelson & Gottlieb has published its Annual Disclosure Checklist for 2010–2011. If you are unable to download the PDF file utilizing the foregoing link, please contact Mark Petrie of our office.

You may also wish to download my recent article on Budgeting For Bad Debt.

By Tracy Neal, Esq. and David Swedelson, Esq.

This article follows an earlier post entitled To Foreclose Or Not To Foreclose; That Seems To Be The Question. We had hoped that the economy would have improved so we would not have to revisit the issue. However, board members and managers are still asking the question: Do we foreclose or not? This question is coming up more and more as banks continue to delay foreclosing themselves as they do not want to take title to the property, adding it to unsold inventory and picking up responsibility for its maintenance and the association’s assessments and fees.

The answer to the question is that boards need to seriously consider foreclosing on the assessment liens recorded against the properties of non-paying owners in order to protect the community association — and to protect the other owners who are paying their assessments. Associations need and rely upon the timely payment of assessments to pay the bills, and to maintain the common areas and other amenities. If one owner doesn't pay, the other owners have to pay and in some instances pay more. Desperate times often require desperate measures, and it may be necessary to force the hand of a non-paying owner (and subsequently the bank) by foreclosing. The ultimate goal by foreclosing is to get a property owner who will pay the assessments; in our experience, the quickest and most efficient way to accomplish this goal is through non-judicial foreclosure.

Continue reading "Part Deux: To Foreclose or Not to Foreclose, That is the Question... So What is the Answer? " »

A recent column in the Los Angeles Times addressed an interesting issue regarding assessment collection on units or lots owned by soldiers who are serving in Iraq, Afghanistan or elsewhere.

The article referenced a community association in Texas that proceeded to foreclose on its lien recorded against a home owned by a soldier that was on active duty in Iraq. As the article indicates, while the soldier was in Iraq, his wife was in the home but “suffered from anxiety and depression over her husband’s tour of duty, didn’t open the certified letters informing her that the $315,000 home in Frisco, Texas was about to be sold to collect $977.55 in back dues [assessments] (although by the time the home went to auction, legal costs had ballooned the amount to about $2,600)."

The house was sold in a foreclosure sale, the buyer sold it to an investor, a lawsuit ensued and eventually the parties settled.

The law, the Soldiers and Sailors Civil Relief Act of 1940, was originally enacted during World War II and rewritten in 2003 as the Servicemembers Civil Relief Act (SCRA). The statute protects active-duty military families from foreclosures, evictions and other financial consequences they are not in a position to deal with while on active duty and for up to a year after active duty.

On August 13, 2010, the Federal Housing Finance Agency (FHFA) issued a proposed regulation to ban the use of deed-based or covenant-based transfer fees. The proposal would prohibit Fannie Mae, Freddie Mac and all federal home loan banks from purchasing mortgages for properties in communities with deed-based transfer fees. While the target of the regulation appears to be private transfer fees that require a payment to a third party each time a property is sold, the proposed rule, as currently written, would include deed-based transfer fees used by many community associations. Click here for a recent Los Angeles Times article that addresses this issue.

A Private Transfer Fee is defined any fee or payment required at time of sale of a property by a deed or covenant restriction.

This new rule, if adopted, could have a significant impact on those communities that have private transfer fees in their governing documents.

Continue reading "FHFA Proposes Ban on Transfer Fees" »

As we reported in April, Assemblymember Julia Brownley had proposed AB 2502, which would have made assessment collection in California even more difficult than it already is. We have great news. Because of all of the opposition she received (your letters and emails were acknowledged) and because some of those that backed the bill withdrew their support when Brownley amended parts of the bill, Brownley likely realized that compromise was impossible, the bill never made it out of committee and it did not advance to the floor for a vote. This legislation would have imposed new and unwarranted restrictions on the assessment collection process for California community associations.

Brownley had agreed and did amend the bill to eliminate the requirement that associations wait until the delinquent owner owed $3,600 or was 18 months delinquent before foreclosing. But she had left in the proposed prohibition on a waiver of the provisions of Civil Code Section 1367.1 relating to the allocation of payments, as well as the proposed prohibition on not accepting partial payments, and we learned that these issues were not only misunderstood by the legislator, but by others in the community association industry as well.

And why did the Community Association Institute's California Legislative Action Committee (CLAC), which had originally opposed the bill, then decide to support this flawed legislation?

To learn more about why the waiver and partial payment prohibition are important to California community associations, download our full article.

By the Community Association Attorneys at Swedelson & Gottlieb

So the board has done its due diligence, investigated its options and decided that chasing down the owner who has not paid their assessments for many months is likely to be a waste of time, money and association resources. The board has considered the options and opted to complete the non-judicial foreclosure process with the actual foreclosure sale on its lien. (See our prior article entitled, “To Foreclose or Not to Foreclose, That Seems to be the Question”) Because the senior lien or lien/trust deed securing the original purchase loan for the property is in an amount that exceeds the current (2010) depressed value of the property, no third party bid at the foreclosure sale and the association ended up with the property (unit/lot) after the 90-day redemption period.

Assuming that the ninety (90) day redemption period has ended (see our previous post on the homeowner’s right of redemption) and the trustee’s deed upon sale has been issued and recorded, the association is now the owner of the unit, lot/home (subject to the senior encumbrances). The board has lots of questions. We’ve got answers.

Continue reading "The Association Has Foreclosed on its Lien - Now What?" »

When it comes to enforcing obligations secured by California real estate, California is a “single action” or “one-action” state. Civil Procedure Code Section 726(a) provides in part that “[t]here can be but one form of action for the recovery of any debt or the enforcement of any right secured by a mortgage upon real property.” This “one-action” rule applies when a California community association secures, as it should, the delinquent owner’s assessment obligation by recording a lien and then exercises its remedies to recover that debt. The purpose of the one-action rule is to protect the delinquent owner from being harassed by a lot of different actions filed against it by the association.
 


Continue reading "What the Heck is the Single Action Rule?" »

As we make our way through the “Great Recession”, we find that many owners are still upside down in their units/homes, owing more to their lender than the current potential sales price. In many cases, the owners cannot afford to pay the bank and are looking to get out from ownership of their home or unit. Many owners are trying to do short sales, where they take an offer to buy their property for less than the loan amount and try to obtain their lender’s agreement to take less than the amount that is owed on their loan/trust deed. We are getting calls from community association managers and board members who are asking what to do when faced with the prospect of a short sale, where the owner is also asking their association to discount the amount that is owed for delinquent assessments, late fees, interest, collection fees and costs.

Continue reading "The Delinquent Homeowner is Pursuing a Short Sale - Help!" »

When property is sold through non-judicial foreclosure on an assessment lien, buyers (third parties or the association) take ownership subject to a 90-day right of redemption, which allows the foreclosed owner to recover the property if the owner pays the delinquency and any fees and costs (Civil Code §1367.4(c)(4); Code of Civil Proc. §729.035).

This right of redemption is unusual in that it does not apply to non-judicial foreclosure on trust deeds; it was added to the law for community associations several years ago to help owners so they do not lose their homes because they did not pay their associations assessments or fees. Owners rarely take advantage of this right.

Continue reading "What is the Right of Redemption?" »

We are seeing many associations deferring common area maintenance and repair because they are afraid to increase their regular assessments or levy special assessments because they are concerned that the owners cannot pay any more money. In many cases, associations are experiencing 20% to 30% (or more) delinquencies. This is but one additional consequence from the Great Recession. What boards and their association management need to understand is that their buildings were not designed to last forever, and their useful lives are reduced when maintenance and repair is deferred. More importantly, deferred maintenance usually results in a higher cost of repair later.

We were therefore not surprised by an article in the Santa Cruz Sentinel that reported on a 50-year-old condominium building that was yellow tagged by the city after the owners noticed the roof was sagging. Eight residents were required to temporarily relocate while repairs (including shoring) were made to the sagging roof.

While we understand that many associations are having hard times and difficulty collecting assessments, deferring maintenance is not a good idea, as it will not only increase the cost of repair later when the problem is more serious and there is damage to the structure of the buildings and the interior of units, but it will also lead to lawsuits from owners who have suffered damage to their units or a diminution in the value of their property.

Recent reports indicate that about 4 million U.S. homeowners are 90 days or more delinquent on their loans or in foreclosure proceedings. Many experts are forecasting another wave of foreclosures. Follow these links for some interesting stories from the following sources: L.A. Times, Foreclosure Pulse, and MSN Money Central

Continue reading "Assessment Delinquencies and Foreclosures will keep rising through 2010" »

David Swedelson was a speaker on a panel with this title at CAI’s recent 31st Annual CAI National Law Seminar in Tucson, Arizona. In preparation for that program, David Swedelson and firm Associate Stephanie Rohde authored an article entitled Collecting Delinquent Assessments in a Troubled Economy. Click here to download a PDF copy of that article which addresses assessment collection issues throughout the United States.

By Joan E. Lewis-Heard, Esq.
Senior Associate; Swedelson & Gottlieb

For those community associations whose CC&Rs provide for assignment of rents from a tenant in the event an association owner who is renting their unit or home is delinquent in the payment of assessments, an association may collect the rent directly from the tenant to pay delinquent assessments.

If done properly, this can be done without a court order or the expense of a court appointed receiver. In order to do this, the following is required: 1) the CC&Rs must have an assignment of rents clause; 2) a lien for the delinquent assessments should be recorded to secure the debt; and 3) a statutory Demand to Pay Rent to a Party Other than Landlord, pursuant to Section 2938 of the Civil Code, is required to be delivered by mail or by hand to each tenant of the property and the landlord/owner. Follow this link for the required text of the demand to pay rent to party other than landlord.

Continue reading "How to Perfect an Assignment of Rents Clause in CC&Rs" »

The Wall Street Journal recently reported that secured bank lenders to General Motors would get a full recovery on $6 billion in loans made to the auto maker, under the bankruptcy plan being finalized by the U.S. Treasury.

If you are asking what this has to do with California community associations, then you need to read on. California community associations have the ability to secure a delinquent homeowners assessment obligation by recording an assessment lien.

With an increasing number of delinquent homeowners resorting to bankruptcy protection, it is more important than ever that California community associations move quickly with the assessment collection process and record a lien. Keep in mind that the lien cannot be recorded until 30 days after the pre-lien letter with all the required language and attachments (association collection policy, statement of account, etc.) has been sent out to the owner(s) in compliance with the California Civil Code. Click here for more information on what is required for the pre-lien letter.

Unfortunately, many associations are taking too long to take action to collect the assessments that are unpaid and many of them find out too late (after the owner has filed bankruptcy) that as an unsecured creditor, they are likely not going to collect any of the delinquent assessments that were owed.

California law provides associations with the ability to record an assessment lien, and we encourage all association managers and board members to take advantage of the protections built into the law. For more information on recording an assessment lien, please contact Tracy Neal at trn@alslien.com.

The Wall Street Journal reports that there is another sign that California’s foreclosures could jump in 2009: Delinquencies on dues (assessments) owed to homeowner associations have risen sharply. This is not a surprise to those of us in the trenches. Many managers report to us that they can barely keep up with the maintenance and repair issues because they are spending so much of their time dealing with delinquent assessment issues and matters.

The Wall Street Journal Article suggests that "[t]he homeowner association delinquency rate can serve as a leading indicator of sorts because homeowners usually stop paying dues before they stop paying their mortgage." Click here to read the article in the WSJ.

Association Lien Services has been successfully collecting delinquent assessments, non-judicially, for over twenty years and has weathered a few economic downturns along the way. However, never before have we encountered such a perfect storm of economic turmoil. In the past, as now, when there has been a burst in the real estate bubble (and there have been two others in the past 20+ years), we have seen many owners let their properties go back to their lenders (or in some cases to their associations) because they were not worth what they paid for them. We are also seeing some owners that want to keep their homes, as they believe that they will eventually rise in value.

The “perfect storm” is the unprecedented sub-prime crisis coupled with a stock market collapse, accompanied by a significant increase in unemployment. Several commentators have reported that we would see different waves of foreclosures, and that is exactly what ALS has been experiencing. Starting in September of 2008, ALS experienced the first wave of the “sub-prime” owner defaults, assessment delinquencies and resulting lender foreclosures.

Continue reading "Delinquent Assessment / Foreclosure Report From Association Lien Services" »

Never in more than 20 years has ALS experienced a time when assessment collection has been as complicated and difficult as it is today. Many boards of directors are unsure as to what to do when an owner is not paying their association or the senior lien holder/lender is not prepared to foreclose. David Swedelson and Tracy Neal have prepared an article setting out the analysis that is required to assist boards in making what is truly a difficult decision. Follow this link to read this article, and feel free to share this with your board of directors and/or other managers.

This economic downturn and the significant increase in the number of delinquent homeowners are impacting all community associations. To be sure, some are facing more delinquencies than others. But even the most affluent communities have homeowners that bought their homes at the height of the market with adjustable rate loans that they now cannot refinance, and they are losing their properties. They are also not paying their assessments.

The website HOALeader.com (created to provide support and information to board members and other HOA leaders) recently conducted a survey of HOA leaders on how they were dealing with the problem. Comments from HOA leaders regarding their fears and feelings of helplessness on how this is impacting their communities is interesting; they show that owners are concerned as to how their neighbors’ foreclosures are going to impact the amount of assessments they pay. Follow this link to read the article.

2008 was a banner year and for all of the wrong reasons. Foreclosure activity was way up, and the experts project that we will not see a decline in foreclosures in the near future.

RealtyTrac® (realtytrac.com), the leading online marketplace for foreclosure properties, released its 2008 U.S. Foreclosure Market Report™, which shows a total of 3,157,806 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 2,330,483 U.S. properties during the year, an 81 percent increase in total properties from 2007 and a 225 percent increase in total properties from 2006. The report also shows that 1.84 percent of all U.S. housing units (one in 54) received at least one foreclosure filing during the year, up from 1.03 percent in 2007.

Foreclosure filings were reported on 303,410 U.S. properties in December, up 17 percent from the previous month and up nearly 41 percent from December 2007. Despite the spike in December, foreclosure activity for the fourth quarter was down nearly 4 percent from the previous quarter but still up nearly 40 percent from the fourth quarter of 2007.

Nevada is ranked #1 in foreclosure filings per household and California is now ranked #4 on a per household rate.

James J. Saccacio, chief executive officer of RealtyTrac, had the following to say regarding December foreclosure activity: “State legislation that slowed down the onset of new foreclosure activity clearly had an effect on fourth quarter numbers overall, but that effect appears to have worn off by December. The big jump in December foreclosure activity was somewhat surprising given the moratoria enacted by both Freddie Mac and Fannie Mae, along with programs from some of the major lenders and loan servicers aimed at delaying foreclosure actions against distressed homeowners. Clearly the foreclosure prevention programs implemented to-date have not had any real success in slowing down this foreclosure tsunami. And the recent California law, much like its predecessors in Massachusetts and Maryland, appears to have done little more than delay the inevitable foreclosure proceedings for thousands of homeowners.”

RealtyTrac believes the foreclosure numbers will go higher due to the 7% of loans that are now delinquent (per the Mortgage Bankers Association as of November) and due to the fact that more than half of the homeowners who received a loan modification in the first half of 2008 are already delinquent on their loans (per the U.S. Office of Thrift Supervision). In addition to the above reasons, more than 500,000 jobs have been lost over November and December.

Click here for more of the article and charts showing U.S. Foreclosure Market Data by state and to see how the top 100 Metropolitan Statistical Areas (MSAs) are fairing with foreclosures (for 2008).

This information means that California Community Associations should anticipate another year of delinquent owners abandoning their property with associations and the other members having to absorb this uncollectible bad debt.

With the world’s economy in turmoil and a significant increase in the unemployment rate, experts are forecasting a big increase in the number of bankruptcy filings in 2009. If your Association receives a Notice of Bankruptcy filing by one of its owners, don’t panic as there are some remedies. But you must take quick action to protect the association's rights.

Continue reading "THE HOMEOWNER FILED BANKRUPTCY; FILE A PROOF OF CLAIM" »

This article was part of a Vendome Group newsletter. Turns out that some of our clients have had squatters as well, running extension cords to common area power outlets and taking showers and using the toilet at the common area pool. Here is the article:

With the housing market in free fall, squatting in foreclosed homes is increasingly becoming a concern. A recent report from the Miami area of Florida illustrates just how bold squatters may become. Apparently, an activist in Miami is helping homeless people move illegally into foreclosed homes.

Continue reading "Rising Foreclosures May Mean More Squatters" »

Interesting news report on NPR (National Public Radio) on the effect that this financial crisis is having on community associations:

Homeowners associations across the country are being hit hard by the foreclosure crisis. Millions of dollars of monthly dues are going unpaid. Neighbors are left to pick up the tab — if they can.

Rachael Myrow reports. Listen to her 3.5 minute broadcast; it does not tell us anything we already do not know, but it is certainly interesting to see that the plight of community associations is not something that is being ignored.

Click here to read an interesting article discussing what we all know, that some owners cannot afford their homes and are not paying their regular or special assessments. They may lose their homes. And this comes from North Carolina.

Our country and most of the rest of the world are in an economic recession, and we are all suffering the fallout from the most significant and severe economic crisis since the Great Depression. Major corporations are filing bankruptcy and are going out of business, banks are being taken over by the government and record numbers of homeowners are losing their homes through foreclosure. It is no surprise that we are also seeing a steep rise in the number of delinquent homeowner’s assessment accounts and the loss of assessment income among California community associations.

While it is a fact of life that many community associations will not collect the unpaid assessments from those homeowners that cannot afford to keep their homes, or recover assessments from homeowners that have already lost their homes to foreclosure, there are some things that associations can and should do to maximize their chances of collecting and/or addressing the loss of that income.

Continue reading "Increasing Your Association’s Chance of Collecting Unpaid Assessments During the Economic Crisis" »

For the last two years, we have been recommending that California community associations add a bad debt allowance in their budgets. Since about 2000, rising home prices and the level of equity in those homes meant that few homeowners were willing to lose their homes through foreclosure for non-payment of their assessments. As a result, community associations were, for the most part, able to collect delinquent assessments and the fees and costs incurred in collecting same, and as a result, they did not see a disruption in the flow of income. Over the last year, we have seen a significant change in the economy. Many homeowners who could not really afford to buy their homes were able to purchase them with little or no money down and finance them with either subprime or Alt-A loans. They are now losing their condominiums, townhomes, and single family homes in planned developments in record numbers, as they cannot afford the increased costs of their loan and their association’s levied assessments. As a consequence, many community associations are not receiving the income that they expected when they distributed their budget for 2008. This shortfall has resulted in many associations not funding reserves. We are advised that some are not making all of the appropriate repairs and are deferring renovation and maintenance of the common area. This is NOT a good idea and could subject an association to liability if, for example, that failure to maintain or repair caused damage or injury.

The point is that if you have not yet distributed your 2009 budget, the board and management need to seriously consider adding what most businesses call a “bad debt allowance” in their budgets to compensate for the income that the association may likely not receive.

Having been in the community association business as attorneys for more than twenty (20) years, this is not the first time that we have seen an increase in homeowner defaults. We saw it in the eighties and again in the nineties, when homeowners were “upside down” on their mortgages. Now they call it “negative equity,” and already one million homes have been foreclosed on nationwide, with another one and a half million other homeowners potentially losing their homes in 2009.

Experts forecast a slow recovery through 2009. It is likely that many more owners who have negative equity will let their homes go to foreclosure. Associations need to collect as much income as necessary to carry out all of the association’s responsibilities; it is most likely the association’s only source of income. It is just not appropriate for associations to scrimp on important common area maintenance and repairs. While it might hurt financially, especially because there are so many homeowners that are seeing cutbacks or actual job losses, associations must be run like businesses and must have sufficient income to carry out the appropriate level of maintenance and repair. So, consider increasing assessments sufficient to meet an expected deficit in income from assessments.

The new laws affecting collection of delinquent assessments now require the Board of Directors of an Association to vote during an open meeting of the Board to make the decision to record a lien. S&G and Association Lien Services has developed a simple Resolution Document that details all of the steps that need to be taken during that Board meeting to ensure compliance with the California Civil Code. Just click on the link below to download the Resolution Document (REVISED January 2006)

Download bod_lien_resolution_final.pdf

Download sg_sb_137_teleconference.mp3

Download 2006_sample_collection_policyv2.doc

We are very pleased to advise you that all of our efforts were successful and the Governor vetoed AB 2598, the assessment collection bill. We agree with the Governor’s reasons for the veto. His letter to the legislators is presented below. His reasons for his veto show he listened to what we had to say. We are willing to work on compromise legislation that may help eliminate some of the problems the proponents of this legislation expressed as their motivations for this legislation while at the same time preserving the non-judicial foreclosure process. We thank all of those who worked to defeat this bill and took the time to express their opposition to the legislature and the Governor.

Letter Sent By Schwarzenegger To California State Assembly

To the Members of the California State Assembly:

I am returning Assembly Bill 2598 without my signature.

This bill makes sweeping changes to the laws that govern Common Interest Developments (CID)
and the foreclosure process for failure to pay delinquent homeowners’ assessments.

While the intent of this legislation is laudable and intended to protect homeowners from being
foreclosed upon for small sums of delinquent assessments, this bill is overly broad and could
negatively impact all homeowners living in CIDs.

This bill could unfairly result in increased assessments for other homeowners who pay their
assessments in a timely manner and may delay the transfer of real property in CIDs due to the
lien procedures set forth in the bill.

Foreclosure should be the last course of action taken against a homeowner. If there were more
open discussion between homeowners and their associations, many conflicts could be resolved.
That is why I recently signed into law AB 1836 (Chapter 754, 2004) and AB 2718 (Chapter 766,
2004). These bills establish methods to encourage more disclosure and better communication
between homeowners and their associations.

I recognize that additional clarification in the foreclosure statutes is necessary. However, this
change should be made incrementally working together with all impacted parties. Therefore, I
am directing the State and Consumer Services and the Business, Transportation and Housing
Agencies to work with all of the interested stakeholders to develop and ensure that the process
for collecting CID homeowners’ assessments is refined so that all homeowners are treated
equitably and foreclosure only occurs after every reasonable alternative is exhausted.

Sincerely,

Arnold Schwarzenegger

Swedelson & Gottlieb was asked to prepare a letter to Governor Arnold Schwarzenegger and his staff setting out our issues and concerns regarding AB 2598. The following is our letter that went out to the Governor on September 21, 2004:

Governor Arnold Schwarzenegger
State Capitol Building
Sacramento, California 95814

Re: Veto AB 2598

Dear Governor Schwarzenegger:

We have been asked to provide you with some additional information regarding community associations, assessment collection procedures, and why AB 2598 is not good law.

By way of background, this law firm specializes in representing community associations. While the bulk of our practice is located in Southern California, the assessment collection division of our law firm, Association Lien Services, collects delinquent assessments throughout the State of California. We annually process more than 2,000 delinquent assessment matters. While a significant number of those assessment collection matters require the recordation of an assessment lien on the delinquent owners’ property, less than one percent (1%) of those matters actually goes to foreclosure sale. This makes sense; homeowners don’t want to lose their property to their homeowner’s association.

The non-judicial foreclosure procedure has been successfully used without problems for many years. AB 2598 is an over reaction to one unfortunate occurrence earlier this year in Calaveras County (where an association foreclosed on some delinquent owners who owed a $120 annual assessment). Despite what proponents of this bill have stated, there are no rampant problems with the assessment collection process (set out in the Civil Code) that justifies the major changes that are part of AB 2598. In fact, despite inquiry, we cannot find any other similar types of situations as occurred in Calaveras County.

AB 2598 provides that a community association may not proceed with foreclosure on a recorded assessment lien unless and until the amount owed on assessments is $2500. For many associations, that amount may not be accrued for 12 months and in many cases 2 years! Alternatively, the association may proceed to Small Claims Court, but may not record the lien, which secures the obligation.

Securing the obligation with a lien is critically important to community associations. Without the lien, a homeowner may transfer interest in the property to avoid the obligation to the association. You would be surprised how often this occurs. Further, by recording a lien an association is a secured creditor in a bankruptcy proceeding. We are sure this is not a surprise to your office that many seriously delinquent homeowners have financial problems and file bankruptcy. Unless the lien is recorded, the association is not a secured creditor and cannot recover the delinquent assessments.

As you have already been advised in other letters your office has received, if a delinquent homeowner does not pay their assessments, each of the other homeowners at the association must cover the shortfall to the association. If several homeowners do not pay their assessments, this only compounds the problem. AB 2598 protects the delinquent homeowner at the expense of all the other homeowners of the association who timely pay their assessments. This is not fair to all of the owners who do pay their assessments timely and who believed that the association would have expedited means of collection (per the recorded CC&Rs).

In March of this year, David Swedelson traveled to Sacramento to talk with the legislators and their staff regarding this proposed legislation. Shocking as it may seem, they were unwilling to discuss issues we had with their proposed legislation. The staff people that drafted this bill seemed to have no experience with the assessment collection process or community associations. They were certainly not experts in this area of the law. They refused to consider the matters we are addressing in this letter. Instead, they told us that if the assessments owed are below $2500, it is a matter for the Small Claims Court. They refused to consider the fact that because the assessments are an association’s sole source of income, the associations must have an expedited collection procedure to be able to pay their association’s expenses. They also refused to consider the fact that there are problems with collecting assessments in Small Claims Court.

Many Small Claims Courts favor the owner at the expense of the association and they will not consider the law. Small Claims Court has been called the “peoples’ court” on television, and for good reason. In the Small Claims Court, the judges are commissioners that sit as the trier of fact. They often fail to consider California law, either statutes or case precedent. Instead, they seem more concerned with what they deem is fair, even if what they deem is fair does not comply with California law.

For example, when an association proceeds to Small Claims Court, the delinquent homeowner will often state that they have not paid their assessments because the association has not fixed damage in their unit caused by a roof leak. This issue is dealt with in Park Place Estates v. Naber (1994) 29 Cal.4th 427, where the court held that an owner may not withhold assessments owed to an association on the grounds that the owner is entitled to recover money or damages from the association for some other obligation. The court held that the Davis-Stirling Common Interest Development Act establishes a strong public policy against allowing a homeowner to offset assessments against any other obligation allegedly owed by the association to the owner. Many Small Claims Court Judges ignore this case law. The Association then loses the case and cannot appeal. In many cases the association did not owe the owner any money nor did it have an obligation to repair the damage.

When an association sues the homeowner for the delinquent assessments in Small Claims Court, someone from the association has to appear in court. Many courts will not allow the manager to appear and will require that a volunteer board member take time off of work to appear in court. Although AB 2598 will now allow a manager to appear, to do so will result in an hourly charge for their time to be paid, not by the delinquent homeowner, but by the association.

Our guess is that if a homeowner’s association is required to proceed to Small Claims Court, it will have a fifty-fifty chance of prevailing. These are not great odds. If the association does prevail, it is the delinquent homeowner who has the right to appeal (an association has no right of appeal as the plaintiff in Small Claims Court).

The appeal means that the association is further delayed in collection, and is required to participate in a second court hearing. Many divisions of the Los Angeles Superior Court are taking several months to schedule Superior Court appeals. Even on appeal, the association still has a fifty-fifty chance of prevailing.

Even if the association does prevail, and obtains a judgment, it then has to collect the money. This is not an easy process and if the owner did not pay the $125 assessment, they likely do not have the money available for collection of the judgement. Foreclosure of the property on a judgment lien is almost virtually impossible (different procedures are provided for a judgement lien). The association must find some asset, whether it be a bank account, car, or the person’s wages to execute on. The collection process is time consuming. Even if the association is eventually successful, the association is delayed in collecting the assessments it needs to pay its bills. Keep in mind that a community association’s sole source of income is typically the assessments that it is diligently trying to collect.

Please also keep in mind that without assessments, the association cannot pay for the vital services it provides to its homeowners. This may include utilities, water, insurance, maintenance, management, etc. Who is supposed to make up this deficit if homeowners don’t pay? The remaining homeowners, of course!

The only real option for associations (if you do not veto AB 2598) is to proceed with non-judicial foreclosure once the delinquent amount is $2500. Is delaying the process until the amount owed is $2500 really going to change the end result? Not really. The proponents of AB 2598 will likely still have issues if an association initiates foreclosure to collect $2500.

At many associations, the assessments owed are $100 to $150 per month. Should community associations have to wait two years to begin the foreclosure process? We do not think this is fair or appropriate.

The Court of Appeal in the Park Place case (cited above) made some interesting comments regarding assessments in their reported opinion. The court, in its decision, referred to various statutes regarding assessment collection, including Civil Code Section 1366, and 1367, and stated that:

“These statutory provisions reflect the legislators’ recognition of the importance of assessments to the proper functioning of condominiums in this state. Because homeowners associations cease to exist without regular payment of the assessment fees, the legislature has created procedures to quickly and efficiently seek relief against a non-paying owner.”

The legislators referenced are obviously those of the past. AB 2598 is a product of legislators that were perhaps not in office when Civil Code Sections 1366 and 1367 were adopted based on the legislature’s acknowledgment that community associations need a quick and efficient process to collect delinquent assessments. AB 2598 would end the current quick and efficient process. Legislation enacted in 2003 already requires additional notices and a longer notice period. There is no rash of problems with the foreclosure process that requires AB 2598. The legislature is being shortsighted and overreacting; it’s up to the Governor’s office to recognize what is in the best interests of the majority of citizens in the state.

AB 2598 also requires that an association enter into some form of alternative dispute resolution (ADR) with a delinquent homeowner if requested. The Civil Code now allows for ADR if a homeowner requests it, and deposits the amount of the assessments plus an additional amount to cover attorney’s fees and costs. This procedure was implemented to eliminate the potential that homeowners would abuse and delay the process. AB 2598 will now allow homeowners to abuse the process by demanding ADR, even if the only issue is the amount of assessments they owe. This will provide homeowners with an ability to arbitrate or mediate their “disputes” with their association, complaints that perhaps their association is not budgeting for (i.e. expenses, etc.) or properly maintaining the common area. This proposed ADR process will be time consuming, expensive, and will eliminate the quick and efficient ability of an association to collect assessments that are needed to pay the associations’ ongoing expenses.

AB 2598 also requires a “drive by” appraisal before an association can actually foreclose on homeowners’ property for non-payment of assessments. The language in this code section is not workable. At a foreclosure on an assessment lien, potential buyers are bidding on the amount of the lien, not the amount of the property. If the amount of the delinquent assessments, interest, late fees, costs and attorney’s fees are $3,000, the opening bid will be $3,000, without any recognition as to the value of the property. Potential bidders are not going to bid up to sixty five percent (65%) of the value of the property at a foreclosure on an assessment lien; they are going to bid based on the value of the lien and equity in the property. They recognize that they will take the property subject to all senior encumbrances. AB2598 fails to recognize the mechanics of the foreclosure process.

In the case of Wilton v. Mountainwood HOA (1993) 18 Cal.App.4 565, the Court of Appeal ruled in favor of an association with respect to a litigation privilege, ruling that the litigation privilege would attach to the recording of an assessment lien. The Court’s ruling is relevant to AB 2598. The Court concluded as follows:

“The litigation privilege attaches to the publication of the assessment lien even if the homeowners association has not decided, at the point the lien is filed, that it will pursue a judicial foreclosure, even if the lien is ultimately enforced by private sale. To conclude otherwise would make the privilege hinge upon factual inquiries and which remedy the association intended to use, and might lead associations to resort to judicial foreclosure in every case simply to avoid the risk of tort liability. There is no reason to flood the courts with such cases. The legislature has given homeowners associations a remedy of private sale, and we must avoid deterring the use of that remedy while at the same time protecting associations access to the courts for the purpose of judicial foreclosures.”

It is interesting that the Court of Appeal in Wilton also stated:

“We do not share appellants’ concern that our decision will prompt, associations to file a flood of fraudulent assessment liens against our neighbors, but should that occur the legislature is free to limit the litigation privilege for such liens as it has recently done with respect to lis pendens.”

That case was decided in 1993. There was no flood of fraudulent assessment liens then, and there has not been a flood of fraudulent or inappropriate assessment liens recorded on delinquent homeowners now. Nothing has occurred that justifies the legislature’s reaction, or in this case, overreaction, to a situation which isn’t even a problem. AB 2598 is motivated by individuals who have a problem with the community association concept. They seem to distrust how the associations are governed and the powers asserted by the association’s board.

AB 2598 will hurt more than help senior citizens and all of the citizens of California. It will undoubtedly require that associations increase their budgets to make up for the shortfall in the income that will likely occur as a result of homeowners who are not being compelled to timely pay their assessments. Absent a flood of problems, we are urging you to veto AB 2598.

Our firm, along with other experts in the industry are ready, willing, and able to meet with legislators to come up with legislation which is more sensitive to all citizens, while addressing the issues that concern the legislators and proponents of AB 2598. AB 2598 was an overreaction, was not well drafted and does not deal with the realities of California law or community associations in California. Again, we urge you to veto AB 2598.

Sincerely,

SWEDELSON & GOTTLIEB
DAVID C. SWEDELSON, ESQ.
SANDRA L. GOTTLIEB, ESQ.

BY: SANDRA L. GOTTLIEB

A Soon To Be State Law May Do More Harm Than Good
Steven Shuey, PCAM, CCAM

Homeowner Associations exist in common interest developments to manage the community.  This management includes providing for the maintenance of the common areas as well as administration.  In many communities, this can mean thousands of dollars per month in regular monthly costs.

Associations pay their monthly bills with funds collected from owners through maintenance assessments, also known as a maintenance fee or dues.  Without this regular recurring income, funds would not be available to meet the association’s obligations.

Occasionally, there are owners who, for whatever reason, cannot or will not pay their maintenance fee on time.  This, of course, can present a problem for the association if it happens very much.  Associations must take measures to prevent this.  If a few owners are allowed to withhold their maintenance fee for any length of time, the remaining owners will need to carry the load.  This can mean increasing the fees for everyone in the association so that enough money will be on hand to pay the association’s bills when they come due.

Associations have policies regarding payment of the maintenance assessment.  In most cases the fee is monthly and in other cases it can be quarterly or annually.  The collection policy, adopted by most associations calls for the payment to be due on the first of the month and late if not paid within 15 days.

In order that pressure can be applied to a late paying owner, a late penalty is applied if the payment is not received on time.  This is usually 10% or $10, which ever is greater.  This means that for an association with a maintenance fee of $300, the late penalty could be $30; if the regular fee is $600, the late penalty could be $60.  This is a pretty good incentive to pay on time, but actually, it is not enough.

Typically, if a maintenance fee goes unpaid for three months, a recorded lien is placed on the property.  If the fee still remains unpaid, the property could be foreclosed upon.  There are in place comprehensive protections for the consumer relative to maintenance assessment collections including extensive notification, payment plans and wait periods.  Rarely does a property go all the way to foreclosure, but having the ability to do so puts enough pressure on the owner to keep the maintenance fees paid current. 

In recently proposed legislation, specifically, AB2598, some of these protections will be altered or taken away to such a degree that some associations will have financial hardship if the legislation goes into law.  These maintenance assessments are the lifeline of homeowners associations.  If the strength to enforce on time payment is taken away, it stands to reason that the maintenance fees will go up for everyone.  Let’s hope the governor does not sign the bill into law.  Action on this bill is expected shortly.

Homeowners in communities are encouraged to be involved in the governance of the community.  It is important to take an active role if we want our communities to continue to thrive and survive.  For more information check out www.ResponsibleNeighbors.com.

Steven Shuey is a Certified Community Association Manager (PCAM, CCAM), General Manager of the Desert Island Condominium Community and past president of the Coachella Valley Chapter of the CAI.

Homeowner Legislation Poised to Hurt More Than Help—CAI/CLAC‘s Press Release on AB 2598 The seven million Californians who live in homeowners associations will have to pay higher monthly dues, thanks to legislation passed in the last hours of the legislative session. Assembly Bill 2598 (Steinberg) again takes up the use of foreclosure to compel payment of delinquent assessments – a practice used in less than 0.007 of collections processes. Just last year California implemented a law (Kehoe, AB 2289) that provides comprehensive protections specific to dues collections, including extensive notification, payment plans and wait periods. These protections rank as the strongest nationwide. That’s why members of homeowners associations oppose AB 2598. Senior Sam Dolnick of La Mesa, CA, said the legislation will do more harm than good. “Many seniors in our association live on fixed incomes and they cannot afford to pay more. When placed in a squeeze, they will have to pay higher assessments to make up for those who may purposely not pay their assessments until they reach the $2,500 threshold.” Homeowner association resident and president of the Wildwood Association in Sacramento Lisa Lindsey said, “Assessments are the lifeline of homeowners associations. For smaller communities like mine, we would be crippled if 20 of our 137 residents were late on assessment dues. Our insurance alone costs more than $85,000.” Homeowners aren’t the only ones hurt by AB 2598. The legislation brings business disincentives for builders and lenders, who are central to responding to the state’s population growth. • Developers will not sell units if new buyers can willingly avoid paying the dues needed to maintain the property. • Banks and lenders will stop loaning money to developers and homeowner associations because their loan security is impaired. “We have thousands of community associations in California as clients. This law will have a negative impact on the ability of associations to secure financing for needed renovations and repairs,” said John Smith, Senior Vice President, U.S. Bank Homeowner Division. For More Information: www.responsibleneighbors.com

We have been asked for more information on why Steinberg’s AB2598 is bad law. AB 2598 is one of two pieces of legislation proposed following the foreclosure earlier this year on a senior citizen couple in Calaveras County. Proponents of this legislation, which would make it more difficult for associations to collect assessments, suggest that what happened in Calaveras County is only an example of a rampant problem. They have not referenced any other similar problems; assessment foreclosure abuses are not rampant; there is no problem with the current system other than the fact that it compels homeowners who are delinquent to pay their assessments.

This legislation is a poor response and overreaction to a situation which is not a rampant problem. We say overreaction because of the following:

1. Currently, if a homeowner is delinquent in the payment of assessments, the association has the ability to record a lien securing that obligation. Of course, the association must follow the proper procedures, send out the appropriate notices, and wait the appropriate time. However, if that lien is not recorded, the homeowner can transfer title to the unit without paying their assessment obligation. It is the lien with the possibility of foreclosure that compels homeowners to timely pay their assessments.

2. AB 2598 restricts associations assessment collection options to either recording a lien but not taking action on the lien until the amount owed is $2,500 or going to small claims court. What good is a lien if you cannot proceed to collect the assessments? The legislature refuses to consider the fact that the payment of assessments is a community association’s sole income. If owners do not pay their assessments, where is the money to pay for the associations utility, insurance and other expenses to come from.

3. Proponents of AB2598 argue that a community association should not be given any special powers and they should collect their delinquent assessments much like a credit card company collects from a borrower who does not pay. This argument misses an important point. Many associations have less than 100 members, and some have as few as five (or less). Credit card companies can spread the loss of revenue among the millions of their borrowers, and charge fees and other costs which may up the deficit. Associations are not given that luxury. If homeowners do not timely pay their assessments, the associations will have problems paying important bills such as those for insurance, utilities, maintenance and repair, etc. In addition, if this legislation passes, there is no doubt that associations will not be as successful in collection assessments as they have been. Associations will have no choice but to increase assessments to supplement for when homeowners do not pay their assessments.

You ask why assessments will be more difficult to collect. If an association waits until there is $2,500 owed, they can utilize non-judicial foreclosure, which has proven to be the most successful method of collection assessments. However, for many associations (including the one in Calaveras County that apparently had a $120 per year assessment) waiting until $2,500 is owed is not practical. Those associations have no choice but to proceed to small claims court. Unfortunately, history has shown that small claims court is a hit or miss proposition. Most managers indicate that an association has a 50/50 chance of prevailing in small claims court. If it prevails at the original trial, the delinquent homeowner can appeal to the superior court, requiring a second hearing. Even after the second hearing and providing that the association is successful, it still has to collect the judgment. A judgment lien recorded against an owner’s property, at that point, cannot easily be foreclosed on and there may not be any other assets available to the association for collection.

Even if the amount of assessments owed is $2,500 and the association opts for non-judicial foreclosure, this legislation has made that process even more difficult. AB2598 now requires that before the foreclosure, the association must have a "driveby" appraisal conducted and if the opening bid at the foreclosure sale cannot be less than 65% of the appraised value of the property. Not only does this increase the time and cost of the foreclosure process, the 65% of value requirement is an impossible roadblock. There is no way to get a bidder at a foreclosure sale to bid 65% of the value of the property when they are foreclosing on a lien which may have a value of less than $5,000.

Unfortunately, the legislators did not work with community association industry experts to develop a legislation which is workable. AB 2598 only demonstrates that they do not understand community associations. Again, this poorly drafted piece of legislation is an overreaction to a problem that does not exist. It is important that you, your colleagues, all Board members and homeowners that you know write letters to Governor Schwartznegger letting him know that AB2598 is a poorly drafted piece of legislation that is not necessary and should be vetoed.

They did it. The legislature passed one of the two foreclosure bills we warned you about previously. Senator Denise Ducheney’s (Democrat - San Diego) SB1682 did not move forward but Assemblyman Darrell Steinberg’s (Democrat - Sacramento) AB2598 passed the Senate although we are told that there was some confusion during the voting on this bill.

We are advised that an hour later Steinberg’s AB 2598 was passed on a split vote in the Assembly after a "robust debate" which addressed the negative impact this litigation would have on responsible homeowners who do timely pay their assessments. We are advised that 27 out of 80 assembly members voted "no" or abstained from voting on the first round, further indicating that there was (and remains) serious concerns with the bill.

AB2598 has gone to Governor Schwartznegger for his action. Governor Schwartznegger until the end of September decide whether to sign the bill into law or veto it. AB 2598 is bad law and we want it vetoed. The Governor needs to hear from all of us as soon as possible.

Now is the time for all of us to share this information with our colleagues, Board members, and responsible homeowners. Everyone of them needs to write letters to the governor letting him know that this is just bad law. Please forward this newletter on to everyone you know that is a board member, manager or is otherwise involved in the community association industry and get them to write letters as well. The more letters, the more we will be able to convince the Governor to veto AB 2598

The Wall Street Journal recently reported on the effect the sub-prime crisis is having on many community associations. While the crisis is not a problem in some areas of the country, in California it is a affecting many associations budgets, as many boards did not anticipate or address the potential for bad debt when they adopted their budgets. In an article entitled "When Dues Dry Up, the Neighbors Pay", the WSJ reports that the other owners are having to make up the deficit that results from the fact that some owners are losing their units or homes to foreclosure because they cannot afford the increased payments to their lenders. The article points out that at some associations, the boards are cutting back on services. Some associations are delaying projects such as painting or new roofs. We are also seeing some associations that are paying out money to deal with stagnant water in pools and brown lawns and dying landscaping at abandoned homes. How is the sub-prime crisis affecting your association? Let us know. And to learn more about collecting unpaid assessments from defaulting owners, see our recent blog entry: To Foreclose or Not to Foreclose.

To foreclose or not foreclose, that seems to be the question that many association board members and managers are asking themselves these days. There is no question that the sub-prime meltdown/crisis has increased the number of delinquent homeowners. Data Quick Information Services reports that in the first three months of 2008, 47,171 homes were lost to foreclosure, more than four times as many as a year earlier. In that same period, 110,000 California homeowners received default notices which is a 143% increase from the same period in 2007. Data Quick estimates that only 32% of the properties in default will avoid foreclosure, which is down from 52% a year ago. It is therefore no surprise that Association Lien Services has seen a steep rise in the number of delinquent matters that are being turned over for collection. With the potential lack of equity and the fact that these delinquent homeowners may not have any assets to collect on, making the decision as to how to proceed to collect and whether or not to foreclose are questions that many associations are having to face. Attorneys David Swedelson and Tracy Neal (supervising attorney at Association Lien Services) have written an article that will help board members and managers answer these questions. Download a PDF copy of the article To Foreclose or Not Foreclose.

Calaveras Enterprise  - April 13, 2005 

Copperopolis couple get their house back

By Vanessa Turner

Tom and Anita Radcliff got the deed to their house back and the Copper Cove couple is ready to get on with their lives.

The Radcliffs get to keep their home and have received money from the Copper Cove Lake Tulloch Homeowners Association and Coast Assessment Services of Garden Grove as part of a lawsuit settlement reached Friday.

Back in December 2003, the Radcliff's home was foreclosed on and auctioned off for $70,000 after they failed to pay a $120 association bill.

The Radcliffs continued to live in their home while they sued the association, Coast and Robert Vardanega of Oakland, the man who bought their home.

The association and Coast settled out of the lawsuit two months ago, the Radcliff's attorney Michael Macomber of Sonora said.

"They paid money damages," Macomber said. "It was a cash payment."

During a case settlement conference Friday, Macomber announced he and Vardanega's attorney agreed on a settlement at 10:30 a.m. that morning.

Macomber wouldn't say what the Radcliffs would pay Vardanega to get their home back.

"He's entitled to get his initial payment plus 10 percent," he said.

The paperwork still needs to be drawn up between the two parties and a case settlement conference is set for July 11.

If dismissal papers are filed before that, that date will be vacated, Judge Dwayne Martin said.

Martin told Macomber he did, "Good work. I'm sure you saved their home."

"It's all we can expect," Anita Radcliff said about the settlements. "I just want to put it behind us now."

The Radcliff's ordeal sparked an attempt to get legislation passed that would prevent homeowners' associations from foreclosing for trivial delinquent fees.

One such bill, co-authored by former Sen. Rico Oller, R-San Andreas and Sen. Denise Ducheny, D-San Diego, was vetoed by the Governor in September 2004.

This year Ducheny renewed her attempt by introducing very similar legislation and vowing to work with the governor to get the bill passed.

BILL BANNING FORECLOSURES ON SMALL DEBTS ADVANCES

By JIM WASSERMAN
Associated Press

SACRAMENTO - A bill proposing to ban home foreclosures as a tool to collect small debts in private communities easily cleared a key Senate hurdle Tuesday, beginning a journey that could eventually collide with the veto pen of Gov. Arnold Schwarzenegger.

The Senate Judiciary Committee voted 4-1 to send the bill affecting more than one-fourth of California's households to a full Senate vote later this spring. Lawmakers passed a near identical bill last year making California's 37,000 homeowner associations use small claims court to collect unpaid sums below $2,500, but Schwarzenegger vetoed it.

Schwarzenegger said it could force dues-paying homeowners to make up for lost money caused by those who don't pay.

The new version, by Sen. Denise Ducheny, D-San Diego, would end the long-standing power of homeowner associations to auction off a member's home for failing to pay assessments that average about $200 a month in California.

"Often for less than $200 people are losing their homes and being evicted without the due process rights given to tenants," Ducheny told the committee. "We understand the need for everyone to pay their agreed-upon debts, but we also want to protect both the equity of homeowners and their due process rights."

Nearly a dozen homeowners across the United States have lost their homes over small unpaid sums since 2001, triggering widespread negative publicity for one of the nation's fastest growing residential lifestyles.

Ducheny's bill would continue to allow foreclosures for amounts over $2,500 without a court's review. It would also significantly toughen foreclosure practices, giving homeowners 90 days to get back their homes and make buyers at auctions pay a minimum of 65 percent of the home's value.

Attempts to reach compromises that would meet Schwarzenegger's favor haven't worked, Ducheny said, adding that meetings haven't led to any specific proposals.

Several retirees groups backed the bill Tuesday, saying it protects home equity that takes a lifetime to build.

"Homeowners need to pay assessments and homeowners associations need legal tools to collect them," said Marjorie Murray, lobbyist for the California Alliance for Retired Americans. "But it is our strong belief that foreclosure should be the last procedure used and only used reasonably."

While no definitive figures exist of how many foreclosure actions associations initiate in California, an unofficial survey of state association lawyers last summer indicated nearly 20,000 filings during the last five years. Most homeowners quickly paid their debts.

Lobbyists representing association managers and boards of directors tried unsuccessfully to reduce the amount qualifying for small claims court collection procedures to $1,000 or six months worth of late payments. They also failed to win changes to make the bill effective for only two years.

Though the bill moved forward, significant disagreements still loom over its future.

Especially large is the idea of a $2,500 grace period before foreclosure can begin.

''We feel by placing the threshold it requires us to increase assessments on all other innocent homeowners who do try to pay their assessment on time,'' said Jennifer Wada, lobbyist for the California Association of Community Managers.

California associations collect dues for a range of needs that including lawn mowing, pool maintenance and private security.

Ducheny's original bill surfaced last year after a pair of Calaveras County retirees lost their home for missing a $120 payment to their association. The couple still live in the residence pending the outcome of a lawsuit against the association and collection agency.

California Senator Denise Moreno Ducheny (who represents parts of San Diego and Riverside Counties and all of Imperial County) recently unveiled a proposal, similar to one she offered last year, the veru same one that was vetoed by the Governor as being overly broad, claiming that it is “aimed at protecting homeowners in common interest developments from unfair foreclosures by their homeowners association“. Unfortunately, what she has proposed is almost identical to her prior bill. While Senator Ducheny may believe that the bill protects homeowners, it actually will hurt the very owners the bill seeks to protect. What she apparently does not recognize is the fact that the vast majority of homeowners in community associations timely pay their assessments and they will end up having to pay the deficit created by those owners that do not pay timely their assessments and will be protected by her proposed legislation.

SB 137 seeks to prohibit a homeowners association from using judicial or non-judicial foreclosure for the collection of delinquent assessments of less than $2,500. It provides that homeowners‚ associations may collect such debts only through a judgment in small claims courts or by placing a lien without foreclosing on the property until the amount owed is $2,500. What SB 137 will really do is delay associations from being able to collect delinquent assessments. The reason that community associations were given the ability to lien and foreclose on the property of those that do not timely pay their assessments is the historical recognition by the legislature and the courts that community associations have no other source of income. How are associations supposed to pay for insurance, utilities, and other costs if they are delayed in collection by going through the small claims court and then trying to collect on the judgment (assuming that they get such an award)?

Senator Ducheny claims that her proposed legislation responds to complaints from homeowners who have had their homes foreclosed upon for a small amount of delinquent dues. What complaints? Unfortunately, she has not provided anyone with that information, the number of complaints, or if she has even investigated to see if the complaints are justified. She relies on one case that involved the Radcliffs of Copperopolis who lost their home when their community association foreclosed the lein placed on their home when they failed to pay over $120 in assessments and fees. What she fails to mention is the extraordinary efforts the association went through in an effort to collect the assessments before they actually foreclosed.

When confronted with the fact that there is no widespread problem to justify her legislation, her staff stated that not one person should lose their home for unpaid association assessments or fees. She ignores the fact that foreclosure is part of the contract (CC&Rs) the owner agreed to be bound to when they bought their home in the association.

"It is simply wrong for a homeowners‚ association to take someone‘s home over a $120 debt said Senator Ducheny. While we might not disagree with the Senator, her bill seeks to limit foreclosure unless the amount owed is $2,500. This is just too high a threshold and will affect the budgets of many associations.

Senator Ducheny is quoted as saying that despite the 2004 veto, she is confident that the governor will work with her in this new session to “protect California homeowners”. We hope she will work also work with those that work with, manage and serve on the boards of the thousands of community associations throughout California, in an effort to produce legislation that is balanced and fair to all California homeowners.

SB 137 is supported by a variety of consumer groups including the Congress of California Seniors, the California Alliance of Retired Americans, Gray Panthers and the Older Women‘s League (OWL). We hope that these groups will keep informed and that they will likewise work with Senator Ducheny, the Govenor’s office and the California Legislative Action Committee as we all work towards creating a balanced bill that protects the interests of ALL community association homeowners and not just the few that fail to timely pay their assessments.

By: David C. Swedelson