Worshipping At the Temple of Greed: Fraud, Not Stupidity, Caused Our Economic Mess

In March of this year, we wrote a short piece entitled, "Who are the Brains behind the Housing Crisis?" (March 2, 2008) We questioned how so many of our best and brightest young people on Wall Street, from the very finest universities, working for well-respected companies like Lehman Brothers, Goldman Sachs, and Merrill Lynch could err so badly. Later we found evidence that at least one computer program was in part responsible for what we believed were miscalculations. In the article, "Who's Responsible for the Crash?" (October, 2008) we quoted Alan Greenspan who stated that "bad computer models" led to the current economic crisis.

This early analysis gratuitously assumed one trait of those who had a hand in our economic debacle--good faith. Our assumption was that everyone involved believed that they were doing something positive and were somehow victimized by bad luck or maybe a touch of stupidity. We were deluding ourselves. If you look back and begin to tally the now obvious "mistakes," a pattern of intent begins to emerge that doesn't take "CSI" to uncover. 

Start with the mortgage brokers who hawked no down payment, no proof of solvency loans to low and middle income people who would never, ever be able to repay those mortgages. If we heard one ad for such vultures, we heard thousands, day and night. Did they know that they were putting people into homes with loans that were destined for default? How could they not? They were the ones processing the paper, the applications, and dare we say, they were the ones encouraging the fraudulent statements, at the very least, by failing to demand adequate proof of ability to pay, and at worst, by  creating  information they knew was fraudulent.

Continue with the investment houses that packaged this bogus paper into "equity" interests that were then sold as "collateralized securities" which were bought by funds and included in retirement plans, foundations, endowments, charitable organizations, as well as investor portfolios worldwide. Did financial institutions like Lehman, Bear Stearns, Merrill Lynch, and others, just not question the value of the assets underlying these securities, or did they know they were worthless all along, and thus were part of the scheme?

Finally, look at Bernie Madhoff and those around him. No question there. Out and out theft. Fraud of such massive proportions that we can hardly envision it, except that we can't avoid the stories that fill our newspapers and the television news every night. And does it stop with Madhoff? Who knows? And who knows how much more fake gold exists that people believe is real?

Who or what encouraged this mass misrepresentation? Look in the mirror.  The culture of wealth that rose in this country over the past decade  that made all of this possible was embraced by millions of ordinary Americans.  We reveled in their success as if they were rock stars. It had entertainment value. We wanted it. Millions of dollars in Wall Street "bonuses." Wealth beyond anything that we can remember in our lifetimes. And not just in the United States. Arab sheiks building extravagant cities in the middle of the desert that put anything in Las Vegas to shame. Russian oligarchs, growing rich on the ruins of the old Soviet empire, and petty dictators made large and powerful by oil money produced by their otherwise poor and downtrodden nations. A culture of wealth ruled the world and  cash was the dominant icon since at least 9-11.  

The money god that we worshipped as a country has now proven to be false, but it was not until the temple crashed around us, taking a lot of innocent people with it, that we began to question the religion itself. Did our nation, and our government enable people like Bernie Madhoff and the gurus at Lehman, Goldman, and Merrill to do what they did? Yes we did. Did we hold them in high esteem because they were good upstanding individuals who served as role models for our children? No. It was because they created mountains of paper wealth for themselves, but also for others, and for no other reason.

As a nation we have always admired the entrepreneurs, the industrialists, the inventors who could take a creative idea and build an industry around it, enriching themselves, but also millions of working Americans as well.  But this was different. This was not real wealth. This was an ethereal bubble built on imagination to be sure, but without substance and with lots of hype. If you divide a worthless asset into a thousand pieces, are all of those pieces together worth  more than the single worthless asset? Are they worth anything?  No, of course not. And they won't have value even if a hundred economic gurus swear that they do. It's either valuable or it's not, and if the millions of pieces of worthless paper that contributed to this gigantic economic bubble were fraudulent to begin with, selling them from an ivory tower with the blessings and encouragement of Harvard-trained financial wizards won't make them any less fraudulent. Or less worthless.

And what did all of that bring to us? An illusion of wealth to be sure, but also a  flagrant  violation of the respect, albeit falsely derived, of a nation. And now it has been exposed.  Have we learned anything? Can we recover our direction and self-respect? Can we trust our leaders? As recently as this week, we have seen that the massive government bailouts have  apparently opened new opportunities to reward the financial sector with large bonuses, this time using taxpayer cash, shedding new doubts upon our government's ability or desire to grasp the enormity of this problem or its terrible effect on the national psyche.

Maybe this will all get so bad that government will have no choice but to truly crack down on this shameless looting of the public trust and restrain the wretched excess. Perhaps the new administration, with its promise of a major course correction, will impose some much needed regulation and some new ethics and discipline on the financial sector such that it will begin to apply its considerable economic might to rebuilding our sick economy. Perhaps we will begin to worship a proper god once again. 

We'll see.

Your Homeowners Association is Broke

Who do you Pay When the Cash Runs Out?

         We’re living in troubled times. The American economy hasn’t seen anything like this since 1929 and we won’t likely be out of it for several years. Homeowners associations, like the rest of the country, have entered a period of uncertainty, but more to the point, they have entered a period when the cash pool is drying up. Foreclosures, layoffs, bankrupt developers, and owners conserving cash by not paying assessments—it doesn’t matter which, the end result is fewer assessments being paid and way less cash in the association’s coffers.

            Collection actions don’t do much good when the owner is out of work and can barely feed his or her family. Homeowner assessments are way down the list of priorities and what are the association’s options? Record a lien and foreclose? And then what? The lender has a senior lien and it is very doubtful that there is any equity in the property anyway. Small claims court? Sure, and you’ll get a judgment for the unpaid assessments quickly, but after that you have to execute. On what? The fact is, many owners see no value in continuing to pay a mortgage, much less homeowners association assessments, on a condominium unit that has absolutely no equity whatsoever. And you can’t garnish wages that don’t exist.

            So now what? It’s time to start prioritizing expenses. Who and what does the association pay? What does it pass over? Yes, that may very well be the subject of an upcoming board meeting in many associations, so we might as well deal with reality now. What is the most important obligation of the homeowner’s association? The health and safety of the owners, for sure. What threatens health and safety if it’s not paid? Garbage collection? Yes. The water bill? Of course. The bill for common area electricity? Yes, especially when there are elevators, pathway and corridor lighting. After that, we would put security services and payment of the premium on the liability and fire insurance premium. Management and accounting services come next so that there is someone to pay the bills that have to be paid. Contributions to reserves should continue with any cash left.

            The items at the bottom of our list would be the gas bill for the spa or pool heater; some or all landscaping services; such things as window washing and last of all the cable bill for the clubhouse television! Yes, most of this is obvious, but no board of directors has had to face a situation like this and we want to re-assure them that massive cutbacks in services to accommodate a shrinking budget is not only legal, it would be a breach of their fiduciary duty to sacrifice the health and safety of the owners just to keep the lawns mowed!

            So consider what you will do as a board member when the cash runs out. Think of the personal safety of the owners first and you will usually make the right choices.          

No Right To Refuse Payment

The Court Turns a Right Into a Duty as it Orders a Board to Assess its Members to Pay a Creditor.

A 2005 decision of the California

Second Appellate District Court of Appeal in JamesF. O'Toole Company vs. Los Angeles Kingsbury Court[1] answers the question: can association members be forced to pay, by special assessment, debts incurred by their association? Essentially, O'Toole upholds a lower court order requiring a community association to levy a special assessment to pay a judgment creditor. The importance of O'Toole is not that a community association was required to pay its debts--every person or entity should pay what it owes. The importance of O'Toole is that the court required the board of directors to levy a special assessment upon the members, one that the members had specifically rejected, to pay the obligation. The court also appointed a receiver to enforce collection of the assessment, and pay the creditor.
[1] JAMES F. O'TOOLE COMPANY, INC., v. LOS ANGELES KINGSBURY COURT
OWNERS ASSN., 126 Cal. App. 4th 549; 23 Cal. Rptr. 3d 894 (SECOND
APPELLATE DISTRICT 2005).

To read the rest of this article, click on the title link above.

Are They Building Condos Better?

Do New Construction Methods and New Materials make a Better Product?

 Here was the typical multi-family building as constructed 25 years ago: Wood siding, single pane aluminum windows, flat roof, a one or two-ply built-up roof membrane, and galvanized iron water pipes. To make matters worse, the siding often wasn't real wood. Wood substitutes like Masonite, essentially sawdust mixed with glue and pressed in a steam press to resemble wood planks, was used extensively. This was a design formula for disaster. The siding dissolved over time. The flat roof usually didn't stay flat, it deflected causing water to collect because it had nowhere to drain. These “ponds” stayed on the roof until they evaporated. The roofing materials used then could not resist this continued immersion in water and failed prematurely. The plies became separated and the water quickly found its way into the interior of the building. Or, the moisture that the material absorbed heated within the plies and the resulting vapor caused huge blisters to appear on the roof, blisters which eventually cracked and became yet further sources of water leaks. The iron pipe corroded over time, of course, and many buildings had to have all of it removed and replaced with copper.

Many single family houses were built the same way, but since it was up to the owner to deal with all of this, it never gained much attention, because if the owner wanted to maintain the value of her property, she had to repair these problems by re-siding, re-roofing, including adding slope to the roof, and eventually re-piping. But the condominium association saddled with this nightmare had a more difficult problem—it had to find the cash to do the repairs, cash that has always been in short supply. We've written for years about the long-term effect of an association's inability to maintain its buildings—a gradual deterioration of both the physical plant and the value of the individual interests.

But over time, some things have changed...

To Read the Rest of this Article Click the Title Link Above...

The Contractual Community: Why Community Associations are not Governments

Articles in this and other publications devoted to the science of community association operations and management often discuss the concept of "community association" as if it were just another subdivision of local government. It is a common perception because so much discussion about this unique housing type is devoted to questions of governance. We have boards of directors that, in some respects, appear to be like city councils. There are property managers who carry out many of the same functions as city staff. The property so governed has many of the same physical accoutrements as a town or city-streets, utilities, parking and recreation facilities.

There are controls that are seemingly analogous to municipal government, where ordinances such as zoning place restrictions on individual property rights in order to give effect to the paramount needs of the city or county, as determined by the elected policy-makers. But while these two governance systems may appear similar, their respective legal bases are really quite different. Understanding this difference may help to understand why the occasional characterization of community associations as "mini-governments" or "quasi-government agencies" is particularly inapt and can lead to false assumptions about community associations...

To read the rest of the article click on the the title link above

When Condominiums Become Obsolete

What Determines the Lifespan of a Common Interest Development?

"Obsolescence” is the process by which something loses its value and relevancy usually due to being supplanted by a better product or changes in its environment. Several times we have written about our concerns for the impact of that process on common interest developments.

First, let's realize that the obsolescence of common interest developments, as with most man-made structures, is inevitable. It can't be stopped; it’s simply a matter of time. If you doubt that, ask yourself how many residential buildings that you know have lasted, say 100 hundred years or more. Look around and you’ll see only a few types of buildings that have survived the century mark--public monuments, and buildings that have historic or intrinsic value due to their unique location or architectural style. Most others have been replaced with newer structures...

Click on the title link above to read the rest of this article

Who’s Responsible for the Crash?

Today we got our answer... “Alan Greenspan: Bad data hurt Wall Street computer models”

On March 2, 2008, we wrote:

“...We send our best and brightest young people to Wall Street to learn investment banking and figure out new ways to attract investment funds and enrich their firms and themselves. Usually, many are successful and the economy and the country benefit from this economic stimulus that creates capital for investment in new industry, thus creating jobs and purchasing power. So what happened here? Who were the “brains” behind this housing crisis? Which genius or geniuses decided that it was prudent or even smart to lend to people who could not afford to repay their loans and then use those loans as security for other investments? Wasn’t a crash inevitable under those circumstances? 

The lenders and the investment bankers knew in advance that certain borrowers were not credit-worthy; would not have sufficient incentive to repay their loans; did not have the income necessary to meet the projected payments, and yet, in what can only be considered a mass delusion, made these loans anyway. Was it greed? That’s a tempting thought, but even the greediest money managers can sense a disaster in the making and find ways to avoid it--perhaps like not making the loans in the first place? No, that would be too simple. I think it’s more a case of a lot of professional people who were too used to believing in the infallibility of their decisions coupled with the pressure to churn out enormous profits to keep their positions intact. A form of “greed” to be sure, but way more sophisticated, at least on the surface. Here we have a large number of very smart people who perhaps were too insulated from the real world...”

 The New York Times , October 23, 2008:

“...(Alan) Greenspan has long praised computer technology as a tool that can be used to limit risks in financial markets. For instance, in 2005, he credited improved computing power and risk-scoring models with making it possible for lenders to extend credit to subprime mortgage borrowers.

But at a hearing held today by the House Committee on Oversight and Government Reform, Greenspan acknowledged that the data fed into financial systems was often a case of garbage-in, garbage-out.

Business decisions by financial services firms were based on "the best insights of mathematicians and finance experts, supported by major advances in computer and communications technology," Greenspan told the committee. "The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades a period of euphoria."

 A quote from Warren Buffet in his annual letter to investors:

 "As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out--and what we are witnessing at some of our largest financial institutions is an ugly sight."

 Amen.

California Used Car Lemon Law Tips

Sergei Lemberg, an attorney specializing in lemon law [link: http://www.lemonjustice.com/ftc_used_car_rule.php], is sitting in the guest blogger’s chair today. He’s outlining some of the ways that consumers with used car lemons can get justice.

 I don’t know anyone who doesn’t feel at least a little bit of trepidation when they buy a used car. Always lurking in the back of your mind is the thought that you might just be buying someone else’s troubles. Unfortunately, although every state in the nation has a new car lemon law, few states have lemon laws covering defective used cars.

Although California’s lemon law doesn’t apply to used vehicles, portions of the Song-Beverly Consumer Warranty Act (which incorporates the lemon law) do apply to used vehicles. California also has a Car Buyer’s Bill of Rights, which includes the opportunity for used car buyers to purchase a two-day cancellation option for vehicles under $40,000.

The Car Buyer’s Bill of Rights also prohibits car dealers from advertising a used vehicle as “certified” if the odometer does not indicate the actual mileage of the vehicle; the vehicle was a voluntary lemon buyback; the title was branded as a lemon buyback, manufacturer repurchase, salvage, junk, non-repairable, flood, or similar designation; the vehicle was damaged by accident, fire, or flood, unless it has been repaired to safe operational condition; the vehicle has frame damage or was sold “as is”; or the seller failed to provide the buyer with a complete inspection report of all components inspected.

 That doesn’t mean that all is lost, however. There are a number of other ways consumers can take action if they find they’ve purchased a lemon. Federal laws, like the Magnuson-Moss Warranty Act and the FTC Used Car Rule, as well as state Unfair and Deceptive Acts and Practices laws, can provide you with a cause of action if you find that you have a used car lemon on your hands.

And What Will Community Associations Get?

Ok, the Feds just approved $700 billion to "bail out" struggling financial institutions. Great news for struggling financial institutions but what about other struggling institutions, say like cities, counties, and yes, community associations? Cities and counties maintain our local infrastructure, and, increasingly, so do homeowners associations. And all three have major budget shortfall problems. Cities and counties rely on property taxes to balance their budgets. The free fall in housing prices means a free fall in property tax revenues. Community associations also rely on a form of property tax--annual assessments, and while they are not keyed directly to the value of property, they nevertheless are impacted when home values fall. 

In most cases a fall in value, coupled with the whole mortgage mess,  will translate into delinquent assessments, or assessment receivables which are wiped out in a foreclosure. No statistics are available yet, but it is pretty clear that foreclosures and the general recession in our economy is beginning to be felt by community associations as delinquencies climb. And, of course, it was already bad enough--major shortfalls in association budgets due to years of neglect by boards of directors. Now, this problem could be multiplied exponentially as owners default on their annual assessments in increasing numbers.

As far as we can tell, there is nothing in the recent legislation to assist local governments, including homeowners associations. Loosening credit could help, of course, but associations cannot simply borrow their way out of serious budget shortfalls. This economic issue is one that has of yet received little or no attention from anyone. It's time to start paying attention.

What are We Getting for Our $700 Billion?

In our last post ("There Has Never Been Anything Like This") we mentioned some doubts about exactly who is getting all that taxpayer money. That is, of course, the now mind-boggling $700 billion bailout proposed by the Bush administration, but without any details yet posted. It would be a stupendous mistake, almost as stupendous as the bailout itself, if all that money went unsecured to the very institutions that caused this economic melt-down to occur in the first place. 

Several writers in the news today are calling for public ownership of at least part of any company that accepts the bailout funding. That strikes me as not only fair, but obvious. I mean, if we are going use public money to fix something that private companies screwed up, then let's get some public ownership for our cash. I have no idea how that would work, but I do know that the government is not playing with Monopoly money--its real cash and more than some whole continents could muster. So for this real cash we should get real equity and the executives who let this happen should get tossed out of the plane real soon and without their famous golden parachutes. Really.  

I mean at least a lien for Pete's sake. Can you imagine Goldman Sachs lending any of us money to buy anything--a house, a car, a million shares of Microsoft, without taking back an interest in the property as security for getting their money back? Of course not. So why shouldn't the government take a piece of the pie for all their trouble? At least until the money is returned and with a lot of interest tacked on. I know Goldman and Morgan will understand.

(Sorry, we'll get back to condos before too long, but this is all way too interesting to ignore.)

There Has Never Been Anything Like This

The Assault on Our Economy

The historic meeting described below took place in Washington D.C. on Thursday night, September 18, 2008.

            

WASHINGTON — It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.

                  Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.

                  “When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.

                  As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”[1]

 

Wow.  And after that, “How did we get here?” If you can get by the instinct to question motives, political and otherwise, this describes a situation that would be about as bad as it could get. The fact that both Republicans and Democrats can agree on its severity probably dispenses with the question of motive, but I guess we will all wonder whom we were really bailing out.

But, again, how did this happen? We wrote a piece a few months ago about the sub-prime mortgage debacle that we thought was moderately humorous.  “Who Are the Brains Behind the Housing Crisis”[2] Basically, we were asking how all of this Ivy League brainpower on wall street could screw something up so badly.

But this isn't funny...

Please click the title link above to read the rest of this article

---

[1] Herszenhorn, David, “Congressional Leaders Stunned by Warnings,” The New York Times, September 19, 2008.

[2] CondoIssues.com, March 2, 2008.

The Role of Experts in Evaluating Building Defects

When a building fails to perform as it should, we immediately look for answers. Is the problem the result of someone’s failure to assemble it properly? Is the problem an act of nature? Was the proper maintenance of the building not performed as it should have been? The answers often depend upon a number of factors: the age of the effected building component, the exact nature of the problem, the presence or absence of human error, or some combination of all three.

Because buildings are not single products but rather an assembly of individual parts and components often put together by different contractors; and because the materials used often require periodic maintenance to maintain their projected service lives; and because acts of nature often intervene to test the resistance of building components to leaks and decay, it is usually never exactly clear why a particular building defect occurs. And the average person who might sit in judgment one day cannot easily understand, much less unwind, the disputes that arise over these enigmatic, technical and often costly problems.

For these reasons, independent experts are a necessary and valued part of the resolution of construction defect claims. Experts are professionals whose credentials qualify them to analyze the cause of a particular type of construction or design problem, design a solution, and assign responsibility for it. The qualifications needed are determined by the nature of the problem and the component, but in the construction defect arena experts are predominantly architects and engineers...

To read the rest of this article click on the title link above...

Home builders look to Urban Development

In a couple of our prior posts (Back to the Housing Future, The End of Suburbs) we have predicted a return of housing to the inner city core where owners can be adjacent to transit and services as well as jobs. That trend is continuing and now The National Association of Home Builders, those responsible for 3/4 of all homes built in northern California,  are opening a new office in San Francisco for builders specializing in mid-rise, transit oriented structures. This new housing is aimed at "The Millennials" or "Gen Y" according to a recent article in the Contra Costa Times. It's also aimed at "the other huge group, folks over 55 who have sold the single family home when the kids moved out who live in denser condo or townhouse developments and don't want to move to Tracy and don't want a big house anymore." The NAHB points to a recent study indicating that there is a potential of 1.5 million units of infill housing in California alone in the next 20 years. Density requires multi-family housing, of course, and that usually means condominiums, so we are likely going to see a lot of new common interest developments in the inner city in the next few years.

Off Their Radar?

Why are Common Interest Developments Not on Party Platforms?

   It's all about politics this year. More to the point, its all about Republicans and Democrats. This is the season of the candidates, the issues, and the Parties. We hear everything about illegal immigration, the economy, and the war. The two political parties and their nominees for public offices everywhere are consumed with new and old answers to such social and economic issues as universal health care, housing, and interest rates. This is business as usual in an election year.

 

            However, if you listen to all of the speeches, read all of the political flyers, hear all of the endorsements, you will still hear nary a word about common interest developments, homes for millions of Americans. "Who cares?" you say, "Elections are about important national and state issues, not about something as mundane as my homeowners association." That's probably true at the national level where the debate about our country's future rages over problems that are often close to insoluble. But what about at the state and local levels? What about the candidates for city council, the state legislature, or governor?

 

            At the state level, housing and real estate law and land use should carry a great deal of weight with politicians, and common interest developments are all about those issues. Where should we build new ones? How do we make them green? How do we govern those that already exist? How do we make them affordable? What do we do with the projects that have reached the end of their useful lives? These are issues which can and will have an enormous impact on any state's housing stock, its economy, and its future...

Click on the title link above to read the entire article

We're on the Radio!

Listen to community association talk show host Shu Bartholomew interview your blogger Tyler Berding on her radio show, "On the Commons." We discuss the past and the future of common interest developments--some of it fanciful, but most of it is the real deal. Shu says: "Some of his observations about today's projects are dead on and some of his visions would take American homeowners in yet another direction.   Please join us On The Commons.  We'll talk about lessons learned and hear some of his thoughts on where we may be headed with this experiment in communal living.  Will it be a brave new world or a scary place to be?  Tune in and you decide."

Click on the title link above to read her summary and listen to the show!

The Decline of Suburbia?

We have written many times in this blog about the benefits and perhaps, the inevitability, of reversing the trend to suburbia that started half a century ago. Conserving resources, shrinking commute times, re-developing old community associations and finding social benefits to living in higher density communities are all becoming increasingly obvious strategies as this century gets started. Ben Tracy, writing for CBS News, has not only captured a sample of this trend, but he also predicts that this could portend the decline of suburbia.  

To read Tracy's report, click the title link above.

Hidden Housing Opportunities--It Happened in Houston

Earlier this year we wrote about re-developing older community associations into new, higher density housing located in or near newly expanding urban cores (see February post: "Back to the Housing Future".) And now, we have a real instance of that happening--in Houston. 108 condo units have been consolidated for sale to a developer who will build a high-rise on that 5 acre parcel. 

To read more, click the title link above.

The Condo Conversion Budget

How do you Learn the Truth?

We have written on these pages before about the economic crisis that can befall the buyers of condominiums converted from old apartment buildings.[1] Buyers wake up to find that the home they thought could be owned and maintained with an attractively low monthly assessment turns out to be a nightmare of hidden expense. Understandably, they want to know the truth, and the truth is that a 25-30 year-old building just cannot be evaluated with the same criteria that you would use for a new one, and the financial plan used to maintain it also cannot be the same as one used for new construction...

Click the title to read the rest of this article

Predicting the Future of Community Associations

An Outline for the Next 50 Years

Co-operative, private maintenance of commonly owned land and structures in small villages and towns has been around for thousands of years. But in California, “common area,” and the community associations that maintain it, have only been regulated by statute for a few decades. The California Condominium Act was enacted in 1963. The Davis-Stirling Act, in use today, was enacted in 1985. We began seeing condominiums massed produced for California consumers in the early Sixties when the McKuen Corporation started building their ubiquitous fourplex buildings throughout California...

Please click on the title link to read the rest of this article...

A Reader Reports Back

Here is a letter I received from one of our readers:

Tyler,

The pen is mightier than the sword. I have seen it work on our association that was far less than noble.I took the advice of the association's attorney given to me several years back; and that was to embarrass the bad members of the board. I published several letters called the HOA Observer and only recorded the facts, and the facts where the board was not meeting the law.

Eventually the management company became more compliant in obeying the law and refused to do illegal activities as they once did with the board. My letters generated interest by other good people in the association that had no idea what the board was doing. I campaigned for them in my monthly letters and two were elected by the membership and the membership discarded the bad director(s).We now have a board that will walk "the straight and narrow", and will obey all of the state statutes, or CC&R's and the bylaws.

This victory was accomplished with only honesty and the good old fashioned way of American democracy. We did it without litigation or other legal enforcement; without intimidation, coercion or any corrupt or with legal council.We now will conduct all of the board's business at the board's regular meetings in an orderly manner, and the exceptions will be handled by legal means. We are living in a democracy; all we need to do is to use the democratic laws we already have; they actually work; they really do!We have never foreclosed on anyone's home and won't. The banks have foreclosed on homes but we have not.

We have only put liens on back monthly dies which is paid when the property is sold; to be fair to the rest on the membership.I do not see that our situation is unique and this would work with countless other associations with similar problems.I have attached the reserve irregularities report I made to the board and distributed to the membership along with the campaign newsletter.I have also included a chart of the regression analysis of the last eight years on our operating expenses. It shows that inflation is killing us. I excluded the earthquake premium which was canceled two years ago that would have skewed the data. The professional accountant and I will work on and make the least painful way to improve the reserve account funding.

The accountant has your book.I owe a lot to you and your book on "The Uncertain Future of Homeowners Association." That book may have saved us from an uncertain future.

Sub-Prime Backlash?

Will New Lender Rules Cut Availability of Condo Loans?

Last month we asked the question: “Will the sub-prime crisis impact community associations?” (www.condoissues.com, March 20, 2008) We predicted that mounting foreclosures of condominiums and town homes would greatly impact community association budgets as owners abandoned properties leaving unpaid assessments. Lenders holding first mortgages on these properties would have no obligation to homeowners associations to cover these deficiencies, leaving large gaps in association funding.

Now, a new issue is looming. Rules for government-backed mortgages and some private mortgage insurers are being re-written to toughen lending standards for condominiums. ..

To read the rest of this article, click on the title link above...

The Board's Dilemma

I had a call the other day from a woman (let’s call her Mrs. X) who was very troubled over recent increases in her homeowners’ association assessment. “I probably can’t live here much longer if this keeps up!” she said. Turns out the board of directors had raised the assessments by 20% on top of similar increases a year ago. They also levied a special assessment to fix some unexpected problems with the buildings. “You know what they did when I complained?” She said, “They handed me your book and said to read it!” She was referring to the treatise we wrote a couple of years ago entitled “The Uncertain Future of Community Associations” (See link on the left) a discussion of the perils of under funding association reserves. According to my caller, the board was using the book as at least part of the justification for the assessment increases...

Read the Full Publication: "The Board's Dilemma" --Click the Title link or Download link on the left...

If Density is the Key to Economic Growth; Are Condos the Key to Density?

We recently wrote that older suburbs may become the new urban cities if public policy in those areas would favor density (See below, "Will the old suburbs become the new urban core?).  Now, Richard Florida, writing in The Wall Street Journal, April 12, 2008 gives us the economic justification for such policies, he states: "...our public policy must work toward, not against, density. Nearly every expert on the subject agrees that innovation and productivity are driven by density. For the better part of a century, we've subsidized suburbanization."  He goes on to show that big cities and economic "mega-regions" are the primary creators of wealth.  Suburban areas with low density populations consume, but rarely produce sufficiently to meet their own consumption. 

If so, condominiums and multi-family rental housing are the key to higher density and conversion of old inefficient suburbs to productive, high energy economic zones. We're talking urban condominiums, however, not suburban projects that spread over acres of open space without proximity to transportation and jobs. Urban, high-rise condominiums fit the model of the new urban areas we discussed earlier, and if, as Florida holds, higher density produces more innovation, then greater use of high-rise housing in an urban environment should be a national priority.

Will the Sub-Prime Mortgage Crisis Impact Community Associations?

How many associations have seen units in their project enter foreclosure? How about yours? For every home that is in default on its mortgage, its a pretty sure bet that the assessments on that unit are also in default. Worse, however, while the lender might recover a % of its loan upon sale of the unit, the association will likely recover nothing. This is because an association's lien for assessments takes second place to the first mortgage. When the mortgage is foreclosed, so is the association's lien unless the community association takes the highly unusual step of bidding in at the foreclosure sale and buys the property. Otherwise the lien is lost and so is the right to the assessment unless the association wants to pursue the delinquent owner personally. Bankruptcy, or just plain disappearance of the owner can prevent even that, so the chances of recovering a delinquent assessment when the owner has no equity in the property are slim to none. This is not a small problem. There are over 200,000 community associations in California and many are in areas where foreclosures have risen rapidly. If your association has been effected, please tell us. We will be watching this situation closely in the weeks to come. 

Community Maintenance Trusts--Could They Make Maintenance More Affordable?

It isn't often that a complex problem can be solved with a relatively simple solution, and the criticism of skeptics is excused until the problem is truly solved-but a simple solution to the problem of providing new affordable housing, and saving existing projects, may be at hand...

Click the Title Link Above to Read the Entire Article...

Who are the Brains behind the Housing Crisis?

by Tyler P. Berding

Market melt-down! As I write this, the DJIA is down over 200 points this morning alone, and has dropped almost 15% from its high last year. The news is thick with comment about the possibility of “recession.” The economy has supplanted the Iraq war as the most talked about issue in the presidential campaign. The pundits know how all of this got started: the bursting of a housing bubble fueled by cheap and available mortgage money with few rules in place about who could borrow it. Worse, usually reliable and successful investment banks packaged these questionable loans into securities that were sold to a huge number of investors all over the globe for enormous sums of money. And now the bubble has burst, the loans are in default, and the securities are becoming, if not worthless, at least worth a whole lot less than they were six months ago.

And it doesn’t end there of course. Without loans, no one is buying houses. As housing sales tank, developers and lenders lay off employees and tighten lending so consumer purchases can no longer be financed, leading to further layoffs in other industries, and eventually, if it gets bad enough, to a recession, where “deflation” replaces “inflation” or even modest rises in consumer prices, leading to more fall off in consumer spending, etc, etc. In the meanwhile, all of this scares the bejeezus out of the stock market and investors pull out leading to further price dives in a broad base of securities, scaring people even more and causing them to hold back on purchases, and on and on until somebody does something, usually the government with various “stimulus” packages, to get the economy going again. The process can take anywhere from a few months to a couple of years, depending on the depth of the slowdown.

In the meanwhile, of course, people lose their jobs and maybe their homes, businesses fail, retirement funds shrink, and the economy and the mood of our nation and perhaps other nations, is depressed and ugly. Candidates and other politicians blame each other, the private sector, and whoever or whatever else is handy and culpable. Most of the parties upon who the blame will be hung are, in a sense, “innocent” participants in the entire process, but there are some who certainly should have known better. So, where are the brains in this outfit?

We send our best and brightest young people to Wall Street to learn investment banking and figure out new ways to attract investment funds and enrich their firms and themselves. Usually, many are successful and the economy and the country benefit from this economic stimulus that creates capital for investment in new industry, thus creating jobs and purchasing power. So what happened here? Who were the “brains” behind this housing crisis? Which genius or geniuses decided that it was prudent or even smart to lend to people who could not afford to repay their loans and then use those loans as security for other investments? Wasn’t a crash inevitable under those circumstances?

The lenders and the investment bankers knew in advance that certain borrowers were not credit-worthy; would not have sufficient incentive to repay their loans; did not have the income necessary to meet the projected payments, and yet, in what can only be considered a mass delusion, made these loans anyway. Was it greed? That’s a tempting thought, but even the greediest money managers can sense a disaster in the making and find ways to avoid it--perhaps like not making the loans in the first place? No, that would be too simple. I think it’s more a case of a lot of professional people who were too used to believing in the infallibility of their decisions coupled with the pressure to churn out enormous profits to keep their positions intact. A form of “greed” to be sure, but way more sophisticated, at least on the surface. Here we have a large number of very smart people who perhaps were too insulated from the real world. Maybe a sabbatical as a board member of a community association, especially one that now is suffering many foreclosures, would bring them back to reality.

 A quote from Warren Buffet in his annual letter to investors:

"As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out--and what we are witnessing at some of our largest financial institutions is an ugly sight."

Amen.

When Market Value Slips Out the Back Door

Are Owners stealing value by underfunding reserves and then selling out?

By Tyler P. Berding

We have written a lot on these pages about the damage that reserve underfunding can do to a community association. For ten years we have tried to focus attention on the long-term effects of failing to adequately save for the inevitable reconstruction or replacement of major building components. Nevertheless, we still see every day examples of what happens when a board fails to budget to meet these needs. Associations with less than half of the funds needed for a major re-construction project are common. Associations with no funds at all are less common, but becoming more so all the time. Other authors have also discussed this topic over the last few years, so it's not just our imagination!

With the evidence of underfunding so widespread, what I have not been able to fully understand is why more owners have not raised this issue with their boards. Why hasn't the subject of failing to fund proper maintenance and repair been raised at election time as a reason for turning out the board? After all, a properly funded budget adds real value to all of the units in the project. The answer is simple. No one likes to spend money, no one likes higher monthly assessments, and the condition of the reserve fund is often too esoteric of an issue to be fully understood by either boards or owners. Also, the pressure to keep assessments low easily outweighs any concern that might exist over the condition of the building until it gets so bad that no one can hope to sell their unit at anything close to market value.

I recently ran across the following quote in a memo from the Department of Real Estate:

"All condominium associations face the problem of high and ever increasing costs to maintain a condominium project, including reserves. To compound the problem, a number of condominium boards cannot, or will not, make 'hard and unpopular' decisions of raising maintenance fees to meet this problem and facing any criticism.

The law requires condominium association boards to study the project's particular maintenance and replacement needs of the common elements and to collect and establish reserves so that funds will be on hand when repairs and replacements are needed as well as emergencies. The law was enacted to provide relief for the vast majority of condominium associations, although a good number of well-managed condominium associations were already providing for reserves. If the reserves are properly calculated, each owner's share should only be what the owner ought to be putting aside each month for the true cost for
repairs and replacements. The law tries to prevent owners from taking value out of a condominium property by underfunding reserves, selling out, and leaving subsequent purchasers to pay for the underfunding...

Any delay in confronting and controlling reserve situations will not change the condominium association's need for repair or replacement or the common elements nor the need for funds. The Commission's research reflects that those condominium associations deciding on 50% funding of reserves and/or are substantially underfunded, especially if they face
major common area repairs and replacements in the near future, will have to dramatically increase maintenance fees, make special assessments and/or take out a loan."

Pretty timely stuff, right? Nope. That memo was written thirteen years ago, in 1995--By the Hawaii Real Estate Commission. The problem has obviously been around for a long time, and not just in California. Two statements from that memo stand out. Those associations that have decided to only fund their reserves at 50% or less had better start looking for alternate funding. It cannot be put off forever, and underfunding cannot usually be made up by merely increasing monthly assessments alone. It's too late for that ten years down the road. Special assessments coupled with bank loans (which also require monthly payments) are usually necessary, making the financial hit on the then owners that much greater and make units harder to sell.

But the statement that really had an impact on me was this one:

"The law tries to prevent owners from taking value out of a condominium property by underfunding reserves, selling out, and leaving subsequent purchasers to pay for the underfunding...."

That's exactly what happens when an association bends to political pressure and tolerates an
assessment level that is less than what is necessary for predictable maintenance and repair. The board allows current owners to take value out the back door by passing on the liability to future owners. The seller has taken value by failing to pay his share of the maintenance
and repair costs.

You could argue that the condition of the building and the budget will be reflected in the sales price. Perhaps it will be, if the seller's disclosures are adequate and/or the buyer is sophisticated enough to ask the right questions. However, more often than not none of this is apparent to the average owner who simply assumes everything is as it should be and no discount on the asking price is demanded. Underfunding should, however, be quite obvious to board members and managers who have a better working knowledge of the true financial health of the association. Their duty is to present and future owners when determining the proper level to set reserves.

So how do boards discharge this duty? By not permitting owners to walk away with value they didn't pay for. The way to do that is always the same: raise monthly assessments enough to reflect the true cost of ownership regardless of political pressure. Anything less is the easy way out.