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By
Christopher Durso
Article
Courtesy of "Common Ground"
From
the July/August 2004 issue
Spurred on
by several well-publicized, controversial cases, state legislatures are
considering more and more limits on association foreclosures. But do they need
that kind of scrutiny?
The
stories sound terrible, especially when they're related in the bold, broad
strokes that encourage outrage. In Calaveras County, California, a retiree who
fell behind on a year's worth of dues to his homeowner association—$120 in
all—had his house and three acres of property sold at auction last December.
Two months before, in October, an association in Gilbert, Arizona, moved to
foreclose on a single mother who was battling breast cancer and owed $393 in
overdue assessments. Down in Jupiter, Florida, a Marine veteran is facing the
loss of his home for $20,000 in legal fees and other charges he owes his
association after unsuccessfully fighting to keep a 12-foot flagpole in his
front yard. And, of course, back in 2001, there was Wenonah Blevins, the
elderly widow who started out owing her Harris County, Texas, association
$814.50 in back dues, lost her house, got it back, and became a poster child
for the victims of abusive HOAs.
But
when you peek beneath the surface of these cases, and set aside the immediate,
visceral reaction provoked by any tale of a person losing his home, things get
fuzzy, and so does the entire debate over community associations and
foreclosure.
The
California retiree, for example, simply overlooked his payments for a
year—even though, as required by law, the association sent him several
notices about possible foreclosure, and its collection service says it tried
to collect from him dozens of times. And the Marine in Florida has been
clinging to his flagpole for several years now, running up everyone's legal
bills in the process—even though he's always been free to fly a flag from a
bracket on his house.
The
bold, broad strokes shock and appall, but the smaller, closer details confuse
and contradict, and prompt a host of questions. Who has the greater
obligation—the owner, who has agreed to pay assessments to the association
in a timely manner, or the association, which is bound to collect assessments
in a fair and equitable way? Does the association's duty to provide services
to the entire community always trump its commitment to individual owners? And,
are these messy, high-profile foreclosures the norm, or just anomalies that
have inflamed people already suspicious of homeowner associations?
TELL
IT TO THE LEGISLATURE
You
can get lost in the fog of these and other legitimate questions surrounding
association foreclosure, starting with the biggest and most basic one of all:
Why do associations have this power granted very few entities in American
society—the power to take someone's home?
"At
some point, the responsibility has to be on the person who's not paying their
assessment," says Dan Shapiro, Esq., a partner with Wolf, Rifkin,
Shapiro, & Schulman, LLP, in Los Angeles, which represents more than 2,000
associations and management companies. "If the law firm or the trustee
that is doing the collecting is following the rules and the person is just not
doing what they're supposed to be doing—paying—what alternative is left to
the association? If they don't proceed with the foreclosure and the word gets
out they're not proceeding with the foreclosure, why would [other owners] pay?
People are going to stop paying, and then the association is really in a
fix." That's especially true for smaller communities that depend on their
assessment income. "Say you're in a condominium, and it's a
master-metered condominium, meaning the association also pays the
electric," says Margey Meyer, CMCA, PCAM, president of Prime Site Inc.,
AAMC, in Houston. "You're talking about fees that could be $800 or $1,000
a month. So those delinquencies add up quickly, and the association can really
get hurt if you let it go too long."
Pat
Haruff, who is the president of an Arizona-based group called Concerned
Homeowners for Reform and Education (CHORE), doesn't think much of that
argument. In fact, she thinks the association industry is something of a
Chicken Little, constantly warning about widespread homeowner rebellion and
financial dissolution when in fact very few communities ever declare
bankruptcy. "You're always going to have [people who don't pay what
they're supposed to]," Haruff says. "That's why we pay more for our
clothes, for our cars, for our electricity. There are just people in life, no
matter what it is, they're just not responsible and they're not going to pay.
I just don't believe that will ever change."
Trying
to stake out a middle ground on this issue is difficult, but among the groups
that have tried is CAI, whose position is rooted in the idea that assessments
protect property values by funding the delivery of tangible services,
including maintenance, trash pickup, and landscaping, not to mention
amenities. According to CAI President Paul Grucza, CMCA, AMS, PCAM, while
legitimate financial hardships should never be ignored, owners who are able to
pay their assessments but don't are cheating their neighbors, and the process
of foreclosure is often the only leverage associations have to ensure they
fulfill their obligation. That said, says Grucza, vice president and chief
financial officer of Consolidated Community Management, AAMC, in Tamarac,
Florida: "Foreclosure should always be the avenue of last resort after
exhausting every other means available to protect the debt owed to the
community."
While
these and other questions are plentiful and definitive answers elusive, the
debate has inspired state legislatures across the country to act, in many
cases spurred on by groups like CHORE that claim money-hungry
associations—and their attorneys—are simply running foreclosure mills. The
issue has been particularly hot in Arizona, California, and Florida, all of
which have introduced legislation this year that would limit associations'
power to foreclose. Not surprisingly, they all follow Texas, which had its own
legislative reckoning with association foreclosure three years ago, in the
immediate aftermath of the Blevins case. The result was the Texas Residential
Property Owners Protection Act, also known as the Wenonah Blevins Act, which
among other things prohibits homeowner associations—but not condominiums —
from foreclosing solely to collect fines or attorney's fees based on fines,
limits attorney's fees for nonjudicial foreclosures, and gives owners 180 days
to buy back their house after foreclosure, a guarantee known as the right of
redemption. Various measures before the Arizona, California, and Florida
legislatures have similar aims, though their scope varies widely.
Arizona.
Gilbert Mayor Steve Berman told the East Valley Tribune that State
Rep. Eddie Farnsworth was "livid" over the plight of Evelyn Lyles,
the breast-cancer patient who faced foreclosure last year. (Eventually her
home was saved by an anonymous donor who paid off the dues and fees she owed.)
And, sure enough, this year Farnsworth introduced a bill that in its original
form would have prohibited all condo and HOA foreclosures until seven years
after a delinquency started, and would have banned outright foreclosures for
fines. Scott Carpenter, Esq., a senior partner with Carpenter & Hazlewood
and chair of CAI's Arizona Legislative Action Committee (LAC), says the LAC
balked at the seven-year moratorium but approved of the fines provision.
Meanwhile, CHORE championed the entire bill. Eventually, a modified version
reducing the moratorium to three years and lifting the fines provision for
associations that maintain limited common elements was introduced. It passed
the House and the Senate; as of press time, it was awaiting the governor's
signature.
California.
Here, the state legislature's discussions have occurred in the shadow of the
Calaveras County case, in which Thomas and Anita Radcliff started out owing
their association $120, which with late fees and collection charges ballooned
to nearly $2,000; their property, which had been appraised at $280,000, was
sold at auction for $70,000. In February, the Radcliffs' son testified before
the Senate Housing and Community Development Committee as the legislature
considered proposals to ban nonjudicial foreclosures for less than $2,500 in
delinquent assessments and require that properties be sold for at least their
appraised value. As of press time, the legislature was still considering these
proposals, the authors of which were discussing amendments with CAI's
California LAC and other players.
Florida.
Amid this year's legislative proposals were a host of measures recommended by
a Homeowners' Association Task Force convened by Gov. Jeb Bush, who two years
ago visited George Andres, the flagpole-planting ex-Marine, on Flag Day and
donated $100 to his defense fund. (Andres faces foreclosure for the tens of
thousands he owes his association, but a judge has suspended the proceeding
and ordered the sides to try once more to settle the dispute.) While activist
groups like Cyber Citizens for Justice (CCFJ) have advocated minimum
foreclosure limits, the bill most relevant to association foreclosure would
prevent homeowner associations from foreclosing for fines, which Florida
condominium associations are already forbidden from doing, and—in a
provision introduced by CAI's Florida Legislative Alliance—require HOAs to
provide at least 14 days' notice of board meetings at which special
assessments will be discussed. As of press time, the bill had passed both
houses but had yet to be sent to Bush for signing.
( In the meanwhile
the bill SB 2984 was approved by Governor Bush on 06/23/2004)
HOW
MUCH IS TOO MUCH?
With
all these legislative remedies swirling around, you wonder, are association
foreclosures so prevalent, and so routinely abused, that such sweeping
measures are necessary? Or is it not coincidental that each of the three
legislatures presides over a state that has witnessed a sensationally
publicized association foreclosure proceeding within the last year? It's
difficult to say, because exact numbers are hard to come by. While a recent
survey from the Mortgage Bankers Association found a nationwide decrease in
mortgage delinquencies and a slight increase in foreclosures, it doesn't sort
its information by housing type. Indeed, there doesn't seem to be any central
clearinghouse that tracks association foreclosures nationally.
Instead,
each side is left to make its own case. Not long after the Blevins detonation,
for example, Beanie Adolph, a Houston activist who says she and her two sons
reviewed more than 15,000 association foreclosure cases in Harris County
between 1985 and 2001, unveiled an online database that shows a tripling in
HOA foreclosure lawsuits filed during that time period. Anti-HOA forces took
it as evidence that association attorneys were becoming increasingly
predatory, while industry professionals suggested the rise in lawsuits
corresponded to a rise in the number of association homes being built in and
around Houston.
Around
the same time, Clifford J. Treese, CIC, CPCU, ARM, CIRMS, was crunching his
own numbers. A veteran association industry theorist (and former national
president of CAI), Treese took preliminary information from Adolph's study
published in the Houston Chronicle, compared it to mortgage
foreclosures nationwide, and found the rates of both association and mortgage
foreclosures hovered around 0.37 percent. For Treese, president of Association
Information Services, association foreclosures are a red herring hiding the
real issue: money. In every foreclosure, whether by an association, a bank, or
a county government looking to collect back taxes, there is a debt to be paid,
and Treese thinks the debate needs to shift away from who's foreclosing and
toward better lending practices and credit counseling. "The thing that
causes a twang in the heartstring is somebody—whether it's a widow or
not—losing their home," Treese says. "The cure is money. Pay the
debt."
Other
industry professionals as well as experienced board members offer anecdotal
evidence that foreclosures aren't out of line. Margey Meyer, a former chair of
CAI's Texas LAC, says that in the 25 years Prime Site has been in business,
the company has foreclosed on no more than 10 homes—despite the relative
ease of foreclosing in Texas, which allows nonjudicial proceedings. Likewise,
Jerry Paluha, president of the 817-home Springs Community Homeowners
Association, in Rancho Mirage, California, says there have been foreclosures
during his time on the board—but they've been instigated by banks and
mortgage companies. "I'm not going to say it doesn't happen, and there
are probably some very egregious cases," Paluha says. "But that's
probably the major exception to the rule. I have never seen and I don't see
where foreclosure is a big problem."
Instead,
industry observers in battleground states like Arizona and Florida think any
problem with association foreclosures is largely one of perception, with
increasingly organized advocacy groups wringing whatever shock value they can
from the issue. "There are a group of people in this state who
characterize themselves as homeowner advocates, and what they really are is
anti-association," says Paul Wean, Esq., the managing shareholder of Wean
& Malchow, P.A., in Orlando, and chair of the Florida Legislative
Alliance. "And, unfortunately, by dint of repetition, they've gotten the
ear of some people in government. These people are driving the agenda at this
point."
One
of the people Wean is talking about is CCFJ President Jan Bergemann, who sat
on Florida's Homeowners' Association Task Force and takes pains to point out
that he lives in a homeowner association. He insists that his organization
isn't reflexively anti-association. "We're against deadbeats," he
says. But, he adds, "Our opinion is that the rules and regulations, or
statutes, or whatever you call it, don't protect the consumer enough. We feel
it is just unbelievable that people can lose their home for a real small
amount of money." Likewise, Haruff serves on the board of her 2,685-unit
community in Mesa, which she says allows her to "speak from both
sides." Her group, she says, isn't anti-HOA but rather pro-homeowner.
But
Carpenter, who frequently squares off against Haruff, says CHORE and other
organizations like it seem to coalesce around the foreclosure issue, and use
it to tarnish the entire industry. "We have thousands and thousands of
people who live in associations in Arizona who aren't saying one word about it
one way or the other," he says. "There are a handful of people who
feel strongly about foreclosure who think it's bad [and] who are very
vocal.... The best I can tell, there's no more than a dozen or two dozen
people who are leading the anti-HOA movement." For them, he says,
foreclosure is "so big, it's like it's the only issue."
IT'S
IN THE WAY THAT THEY USE IT
Activists
don't disagree with that. Truth be told, however, Haruff says she doesn't
think association foreclosures themselves are that big of a problem. Although
the process varies from state to state, the standard procedure is fairly
cut-and-dried. Once an association has sent out its own reminder letters,
warning notices, and certified demands to a delinquent owner, it turns the
matter over to a lawyer, who sends one or two more certified letters. Assuming
the owner still hasn't paid, the attorney files a lawsuit seeking court
approval for the association to foreclose on the lien, there's a trial before
a judge or jury, and, if there's a verdict in favor of the association, the
house is foreclosed on and sold at auction. Proceeds go first to pay what's
owed to the association, with the remainder of the money going to the owner.
If the party who bought the house at auction wants the owner to leave, there's
a separate eviction proceeding that has nothing to do with the association.
All
this might be fine, Haruff says, except it almost never happens that way.
"What happens is, the actual foreclosure never comes to fruition,"
Haruff says, "the reason being that the homeowner is intimidated and
threatened with the loss of their home if they don't pay the fine for leaving
their garbage can out too long or planting a shrub that's the wrong
size." If a homeowner ignores or overlooks the fine, an attorney usually
gets involved, and next thing you know a $100 fine has turned into a $5,000
debt. "That's where the problem really lies," Haruff says, "in
this intimidation and threats with these fines." There's also the fact,
she says, that foreclosed homes are often sold for a fraction of their
appraised value. It's all too much, too fast.
Haruff
is echoed by Rob Edwards, a legislative aide to Texas Sen. Jon Lindsay, who
chaired a subcommittee that heard testimony about association behavior.
"I think what we found was that the actual loss of property was not a
problem," Edwards says. "What was a problem was the threat and
subsequent attorney fees that accompany that threat that were a little out of
line with what we thought was reasonable for associations."
Indeed,
the more people you talk to, the more it becomes clear that the issue is less
that association foreclosures happen; rather, it's how they happen.
In states that allow nonjudicial foreclosures, including Texas and California,
the howls of outrage can be particularly loud. The perception is that
associations use nonjudical proceedings—which are also performed by
attorneys but don't involve lawsuits or oversight by the courts—to railroad
through foreclosure after foreclosure. But in fact, Meyer notes, associations
usually use them because they're faster than full-blown legal proceedings and
cost about a quarter as much. They're particularly attractive to associations
on a tight budget. And the savings is even passed along to the homeowner whose
house is being foreclosed on, because there aren't as many attorney's fees
that accumulate. So in places like Texas, where you can go either way, which
type is used more often—judicial or nonjudicial? "I'd say it's a pretty
good toss-up," says Marc D. Markel, Esq., a partner with Roberts Markel
Guery PC, in Houston. "A lot of people prefer judicial foreclosure
because you have a judge looking over the documents."
To
the larger question of their role in association collections and foreclosures
and the fees they charge, industry attorneys say they're simply following the
law—a growing tangle that includes the federal Fair Debt Collection
Practices Act, state condominium and homeowner association acts, and various
statutes, plus their communities' governing documents. In every case, they
say, if an association and its attorney are doing it right, they're following
the law—even when you're talking about Wenonah Blevins.
In
many ways, the Blevins case is emblematic of the entire foreclosure debate,
because it cuts both ways and, three years after the fact, offers no easy
answers. On the surface, it seems to make the activists' points about
insidious fees and outrageous resales—with interest and other charges, the
$814.50 Blevins owed in back assessments swelled to several thousand dollars,
and eventually her $150,000 house was sold at auction for $5,000. But the
Blevins foreclosure also makes the association's case, because it was
technically correct; the association and its attorney sent Blevins every
notice they were supposed to, as required by law, and then some. But then, at
the very least, doesn't it highlight the abuse potential inherent in the
nonjudicial model? Well, no, because even though the association had that
option, it decided to file a lawsuit. But then the pendulum swings back to the
activists' side, because Blevins claimed she never once heard from the
association; she didn't get any of the delinquency or foreclosure notices,
including the foreclosure lawsuit. But then the pendulum swings the other way
again, because, according to Markel—who didn't handle any of the collection
or foreclosure proceedings but represented the association afterward, when
Blevins sued—the process server who delivered the lawsuit to Blevins
couldn't make personal contact with her but used duct tape to attach the
documents to her front door, and even took a photo of that.
No
easy answers. Not even when you hear that Blevins settled her lawsuit with the
association for an undisclosed sum, and that the association bought her house
from the purchaser and gave it back to her. You wonder, did they have to do
that? Could they have saved themselves a ton of legal fees and hate mail by
doing more up front? "What else could they have done?" wonders
Meyer, whose company wasn't involved in the case, but who debated Blevins'
attorney, Marian Rosen, on local TV. "Contacted her relatives? Does our
duty stop with the owner, or are we obligated to find someone who understands
the implications of the issue? Are we our neighbor's keeper?" In the end,
Meyer says, "[The association] did everything right in the foreclosure,
other than realize the lady is [82] years old."
NOT-SO-QUICK
FIXES
One
final question, also probably unanswerable: Does foreclosure need to be fixed,
fine-tuned, or otherwise reformed? People who say no think, first of all, that
the system works fine, and that any attempt to scale it back would be
redundant, because good associations already treat their residents with
sensitivity and respect. "There are many sad cases," Scott Carpenter
says, "and the hope is that the board and the management company will
respond to each case separately, as we do here."
Cliff
Treese thinks the notion of foreclosure reform is misleading, even insulting.
"If you look for the primary cure to be in the association's
behavior," Treese says, "it's the wrong focus." A contract is a
contract, and that's what owners have with their associations, and vice versa.
Adds Carpenter: "Why is the association any worse than the local hospital
suing a person for an unpaid hospital visit? It's because people want to
believe that the neighborhood is still a friendly place. And foreclosure's not
friendly." But, he says, you can't forget that "this whole thing
started with an owner who does not pay. So putting the burden of being nice on
the association kind of presumes the owner is innocent."
On
the other side of the equation, industry professionals and activists alike
have some ideas for softening, focusing, tweaking, or overhauling foreclosure.
Right
of redemption. Last year, Texas Sen. Lindsay tried unsuccessfully to
extend HOA homeowners' new 180-day right of redemption. His aide, Rob Edwards,
says Lindsay might try again next year. Similarly, Markel would like to see
the right of redemption for condominium owners expanded. Currently, condo
owners have 90 days to buy back their home from their association but no
guaranteed right if a third party buys it.
Minimum
limits. Jan Bergemann, the Florida activist, has been trying to sell
state legislators on minimum foreclosure limits whereby a homeowner
association could only foreclose on an owner who owed a certain amount of
money. (Bergemann doesn't favor the same limit for condominiums because their
expenses, including utilities, are often more urgent.) "I think if
somebody forgets to pay $100 or $200," Bergemann says, "they
shouldn't lose their home for it." But some associations simply don't
like the idea of their hands being tied, especially by a generous foreclosure
limit. "To go and say you can't foreclose until $5,000 or $25,000,"
say Jerry Paluha, the California board president, "even our association,
which is on a pretty even keel, could get into [financial] trouble."
Escrow.
His "wrong focus" quote notwithstanding, Treese does think there's
room to improve how association collections are handled. Mortgage companies,
he says, should escrow assessments, like they do with property taxes.
"That takes care of the vast majority of foreclosure issues," he
says. According to Meyer, maintenance fees used to be escrowed until the early
1980s, when there were a lot of foreclosures and mortgage companies didn't
want to be responsible for paying the fees. "If [mortgage companies]
escrowed for maintenance fees," Meyer says, "let them be the
heavies."
Garnishing
and eviction. In some states, associations or their agents can
garnish the wages and bank accounts of a delinquent homeowner, or even evict
an owner without actually selling the house. Where associations can't do that,
assessment collection can be more of an all-or-nothing game, with the stakes
being house and home.
Personal
contact. There's also the idea of an association having mandatory
personal communication with an owner before foreclosing. Again, the Blevins
case is the textbook example here, showing how poorly a foreclosure can be
perceived when there's no face-to-face contact. But the industry is split on
this issue. Markel's office, for example, has a detailed internal procedure
that must be followed before a property can be foreclosed on. "One of
those steps," Markel says, "is personal contact with the homeowner,
and that's close to the sale, not up front during collection." But
Carpenter is leery of requiring face time because emotions can run very high
in these situations. "Enough people have opened the door and spit on
board members and even waved guns in their face," he says, "a lot of
board members are unwilling to do that."
No
fines. There's also the idea of foreclosing only for past-due
assessments, not for fines—meaning it would be owners' failure to pay dues
and not their flouting of, say, architectural guidelines that would cost them
their homes. Florida has considered such a law, much to Bergemann's delight,
and in Arizona, Carpenter says that would be okay with him and the LAC
Good
boards. Perhaps the most telling thing about the entire foreclosure
issue is that, in the end, everyone on every side—attorneys, managers,
activists—returns the debate to the people who are responsible for
foreclosing on their residents: association boards. "We need to figure
out how to force boards to be informed," Haruff says. "[My
association] handle[s] over a million dollars a year, and there are people who
don't have any clue as to what's going on." But those who do are keenly
aware of the responsibility they hold. "To go into foreclosure with a
neighbor," Paluha says, "is one of the worst things you have to do
as a neighbor. And we're still all neighbors. So that's not something I would
rush to."
Christopher
Durso is the editor of Common Ground. |
