What’s Wrong With Assembly Bill AB 2598?—EVERYTHING.

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.

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