Sunday, November 22, 2009

The Great Foreclosure Debate

Should Community Associations Use Alternatives To Foreclosure To Protect Their Cash Flow?

There is currently raging a great debate. This one has nothing to do with national health care, war in the Middle East, or the future of the Washington Redskins. No, this debate is whether community associations should have the right to use foreclosure as the ultimate delinquent assessment collection tool. Foreclosure is the enforcement device that allows a creditor, in this case a homeowners association, to force the sale of an owner’s condominium or single family house to collect a delinquent association assessment. The practical arguments among the various participants in this debate go back and forth something like this: Assessments are a community association’s cash flow lifeline—if owners fail to pay, the association cannot keep its commitments. Foreclosure is a radical remedy—it costs associations more than they can possibly recover, so why do it? Foreclosure for failure to pay delinquent assessments is the only enforcement mechanism that works.

The legal arguments include: There is really no contract between owners and their association that gives the board of directors the right to foreclose because the owners weren’t parties when the association was created. The CC&Rs are recorded against the title of the owner’s interest and provide for lien rights and hence the right to foreclose. State legislatures have not clearly provided for an association’s right to foreclose.

And finally, the moral arguments: A home is a sanctuary—how can we allow it to be taken away just to satisfy a small arrearage in assessments?  We should not allow owners who do not pay their assessments to live on the backs of those owners who do. Everyone should pay his or her own way. Foreclosing on someone’s home is immoral and community associations should have no right to do it. It just supports a large number of attorneys, property managers, and collection companies.

Anyone who has paid any attention to the articles, blogs, websites, and water cooler conversation about community associations and the recession has heard these arguments, or others like them. Can’t be missed. And the underlying problem is real—thousands of community associations have real cash flow problems because owners are falling behind in their assessments. Enforcement activity is up, and that often means an increase in the number of properties entering the foreclosure process. People are losing their homes for a variety of reasons, but there has been an outcry over whether community associations should be able to enforce delinquent assessments through foreclosure. But we’re getting ahead of ourselves. Let’s back up and look at how we got here.

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  1. When I bought my condo may years ago, neither the contract nor the CCR's stated that I would be responsibile for another owner's HOA dues. I did believe, however, that if someone's unit was sold or foreclosed on, these delinquent dues would be paid for by the bank or the new buyer since that unit had been receiving maintenance and upkeep that would have been covered by those dues, and, more importantly, would receive future maintenance and upkeep from reserve funding that would have been supported by those dues. In California, this is not the case. This needs to change.

    I cannot be sympathetic towards owners when they don't contact the association to discuss their situation, when they don't make any amount of payment, and when they don't even inquire about a payment plan until they have racked up thousands of dollars in delinquent dues and are served with foreclosure papers. This has been the case in our large complex. We have not had ONE owner try to work with us when they first get into trouble! These same people don't seem to have any problem continuing to pay for their cell phone, DSL, and satellite dish services or, in some cases, continuing to drive their expensive cars.

    The responsible owner's don't have any say in who the bank chooses to give loans to, and the banks take their chances with these individuals. This should not be at the expense of the rest of the homeowners. What would happen if there was a need for a special assessment that these loafers would also ignore? That could potentially bring down a complex.

  2. Anon:
    Yes, that is indeed the flaw in the system. If a bank (or the community association) does not immediately foreclose, the owner can drift for a long time without paying anything. That amount is not made up when the bank eventually forecloses since that foreclosure wipes out the association's lien. In order for the association to benefit from the lien it has under its governing documents, it either has to move quickly to institute its own foreclosure action or pursue the delinquent owner personally. There is no alternative under California law.

  3. To: Anonymous at February 8, 2010 9:54 AM :

    That is the risk everyone takes buying in a common interest development. You don't know who you are in business with. The class warfare you attempt by making comments about "loafers," cell phones or "expensive cars" don't help the matter. The cell phone could be their only phone and the "expensive car" could be paid off. But whatever.

    There are problems with EVERY system. A single family homeowner could pay property taxes for years and while the City is the "loafer" and ignores problems.

    It's two sides of the same coin.