Power of homeowner groups to foreclose over small sums targeted
San Diego Union-Tribune, April 2005
By Emmet Pierce
Melissa Colburn, who nearly lost her home over a $990 debt, is now an activist seeking legislative reform on homeowner association foreclosures.
When Melissa Colburn told her friends she had been asked to vacate her Chula Vista town home for failing to pay a $990 debt she'd never heard of, they refused to believe her.
"They thought I was crazy," she recalled. "When I talked to my neighbors they didn't believe it was going on. I was just in shock."
Although she said she never received a bill, in late 2002 Colburn was given just three days to vacate the home she had purchased in the late 1990s. It had been sold through nonjudicial foreclosure for about $5,000 despite a market value she estimated at more than $250,000.
When she contacted the county Assessor's Office, Colburn learned the home had been sold to pay off delinquent homeowner association fees. Alleging that she had not received proper notification, Colburn successfully sued to halt the foreclosure. In mid-2003 she signed a confidential settlement with the Villas at East Lake Shores Owners Association and the town home's purchaser.
Since then, Colburn has become a vocal activist in a legislative drive to prevent California's more than 37,000 homeowner associations from foreclosing on members to recover small debts. She recently met in Sacramento with homeowners and community management representatives in an attempt to find common ground. The issue is being monitored by consumer and homeowner association (HOA) groups nationwide.
"The industry is petrified that this bill is going to pass because they are making millions by using foreclosure to collect small amounts of money," said Marjorie Murray, a lobbyist for the Congress of California Seniors. "They don't want to lose their golden goose. If it passes here, it is going to send shock waves across the country."
The political momentum is with those who would limit the foreclosure powers of community groups, said Evan McKenzie, a national housing-law expert. A decade ago he correctly predicted that a rapid growth in common-interest housing developments would reshape American lifestyles.
Concern about foreclosure abuses has made homeowner associations "a soft target" for critics, said McKenzie, who teaches political science at the University of Illinois at Chicago. "Associations need the power to foreclose. The problem is, in many cases foreclosures are unnecessary."
Introduced by state Sen. Denise Ducheny, D-San Diego, Senate Bill 137 seeks to prohibit associations from using foreclosure to collect debts of $2,500 or less. It also would prevent a home from being sold for less than 65 percent of its assessed valuation.
Under the bill, homeowners would have the option of repurchasing the foreclosed home within 90 days. The measure cleared its first hurdle on March 29, when it passed through the Senate Judiciary Committee in a 4-to-1 vote.
Ducheny, a past chair of the Senate Committee on Housing and Community Development, revived the bill after it was vetoed by Gov. Arnold Schwarzenegger. He blocked it last year, despite broad bipartisan support. His action came at the urging of management industry groups such as the Community Associations Institute.
The case of Tom and Anita Radcliff, an elderly couple from rural Calaveras County, helped rally support for last year's version of the measure. The retirees continue to live in their home, despite efforts by their association to foreclose over a $120 debt. They recently reached a settlement with the association and its collection agency, but a legal conflict with the home's would-be purchaser continues.
According to the American Homeowners Resource Center, between 7 million and 8 million Californians live in homeowner association communities. Veteran association attorney David M. Peters says cases in which foreclosures are imposed unfairly are highly unusual.
"The Radcliffs are extraordinarily rare," he said.
Associations hold that Ducheny's revised measure would limit their authority to collect the delinquent dues and assessments. Assessments "are the lifeblood of the organizations," said Jill Van Zeebroeck, a member of the Community Associations Institute's legislative action committee for California.
"If some people don't pay, it does place a burden on the people who do," she said. "While we agree nonjudicial foreclosure is not the first step, should be the last step, it is a viable remedy."
Van Zeebroeck said associations are seeking to reshape the bill into something that protects homeowners from unfair foreclosures without stripping them of an important tool for collecting debts.
McKenzie is the author of "Privatopia," a 1995 book that warned of the potential for homeowner associations to be misgoverned. Wielding powers normally reserved for courts and local governments, associations are home to an estimated 52 million Americans, the former San Diego County deputy district attorney said.
The Community Associations Institute estimates that more than four in five housing developments have been built as part of association-governed communities in recent years. In San Diego County, it has become difficult to buy a new or affordable home that is not governed by such an association, McKenzie said.
Like death and taxes, living under the authority of a homeowner board is becoming a fact of life for Californians. Ducheny considers such panels to be an added layer of government.
"What you have in effect is little city councils," she said. "They are elected. They are volunteers. They farm out a lot to management contracts. Then they have lawyers."
When foreclosures take place, there is little outside scrutiny to make sure the rights of homeowners are protected, she asserted. That increases the potential for misconduct among buyers and sellers.
"It appears there were some abuses going on in this universe of people, finding out about foreclosures and going in at really low sale prices," Ducheny said.
While there are no definitive figures on homeowner association foreclosure actions nationwide, "there clearly are hundreds of thousands" of such proceedings each year, said McKenzie. Most debts are paid before the homes actually are sold.
The widespread growth of homeowner associations was no accident, McKenzie insists. In California and many other states, property taxes no longer cover the cost of expanding public services when new homes are built. Homeowner associations often take up the slack, making sure that residents pick up the added costs for street maintenance, security and open-space development that otherwise would be borne by cities. "Municipalities are virtually requiring this all across the Sunbelt."
In California, even critics of Ducheny's bill acknowledge that some associations abuse their foreclosure rights, Van Zeebroeck said.
"We absolutely recognize that there are problems, and situations where people have lost their homes for small sums of money should not happen," she said. "Even one person who loses their home for a small amount of money is not right."
San Diego homeowner association attorney John Epsten says the Ducheny bill goes too far, however. He considers the $2,500 threshold to be much too high. Not all foreclosure subjects are innocent victims, he stressed.
"There are homeowners who will ask for payment plans to give them enough time to file for bankruptcy," Epsten said. "There are homeowners who say they have mailed checks and later we find out the checks were never sent. When we send a warning letter, the majority of people pay their homeowner assessment. ... Most of the homeowners we are dealing with are fairly sophisticated individuals."
Colburn said her own experience has made her sophisticated in the ways of homeowner associations. Now working part-time as a consultant on foreclosure cases, she says she has seen the good side and the bad side of life in a self-governed community.
"I have stepped into situations where you have a rogue board, people on a power trip who try to get rid of a neighbor they don't like," she said. "Then there are communities where they make it a nicer place to live. I would say its fifty-fifty. In order to have a good one, you have to have a good board and a good management company."
Colburn, a hazardous materials expert by profession, continues to live in the town home she saved from foreclosure. Eventually, she plans to move to a neighborhood that is not governed by an association. For now, she says her goal is to change the foreclosure law.
"I will never buy in an HOA, never ever, as long as I live, because of the things that can go bad," Colburn said. "But there are some things I want to change before I leave."
When buying a house or condominium within a homeowner association, consumers might do well to consider the words of Groucho Marx, the comic curmudgeon who said he wouldn't belong to any club that would have someone like himself for a member.
Groucho may have been kidding, but experts say you should carefully consider whether you're cut out for membership in a homeowner association. Unlike the Elks or the local YMCA, this isn't an organization you can simply walk away from.
The decisions an association's governing board makes can affect your pocketbook. Home equity, the principal source of wealth-building for Americans, can be enhanced or diminished by the actions of the board. Boards are responsible for the maintenance of building exteriors and common areas, such as swimming pools, parking lots, greenbelts and laundry rooms. Boards may weigh into neighborhood disputes.
Residents are legally obligated to abide by their organization's rules and regulations. And they must pay monthly fees if they don't want to expose their homes to possible foreclosure.
Required reading. Before purchasing, Ray Brown, co-author of the "Home Buying for Dummies" real estate primer, recommends careful reading of the association's declaration of covenants, conditions and restrictions (CC&Rs). Also on his reading list is the association's bylaws and the annual budget report. These documents may be boring but understanding them can save you money and aggravation.
Potential lawsuits. If your association is involved in extensive litigation, it could end up costing you money. Ask your real estate agent and the association board if there is any litigation, current or pending.
How fast are homeowner fees rising? A review of several years of operational budgets may tip you off to poor management practices or rising costs.
People skills. Many association boards that govern large communities enlist property management companies to oversee day-to-day operations. A good company does its job unobtrusively. Ask current residents how they feel about the board and its management firm.
Is parking adequate? One of the most common sources of disputes in homeowner associations is parking, says Brown. Make sure you know where you have a right to park and if there is adequate guest parking.
Other sources of information. For different perspectives on associations, contact the consumer-oriented American Homeowners Resource Center at www.ahrc.com and the industry-focused Community Associations Institute at www.caionline.org.