HOA Law Blog

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.

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

Missed the recent teleconference but still want to hear what Sandra Gottlieb and David Swedelson had to say about SB 137 and the new assessment collection law and procedures? You are in luck. Download this MP3 file to your IPOD, computer or other device that will allow you to listen to this important seminar. If you want a CD with this MP3, contact jennie@sghoalaw.com.

Download sg_sb_137_teleconference.mp3

Download 2006_sample_collection_policyv2.doc

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

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 ouut 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.