Lawmakers move to ban nonjudicial foreclosures

Article Courtesy of the Contra Costa Times

By Jim Wasserman
Published June 27, 2004

SACRAMENTO - A Senate bill to ban California's homeowner associations from foreclosing on homes for unpaid assessments under $2,500 passed a critical test Tuesday in the Assembly, increasing odds that associations may lose a leading remedy to collect overdue assessments.

The Assembly Judiciary Committee voted 7-3 to make associations use small claims court for small amounts instead of a nonjudicial foreclosure process that critics say is abused by attorneys and collection agencies and can ultimately lead to owners losing their homes. The bill also lets associations continue posting liens -- legal rights to collect when properties sell -- but no longer to foreclose on them for small sums.

"Our notion is that homeowners associations are certainly entitled to their funds. They need the money and they need enforcement mechanisms," said Sen. Denise Ducheny, D-San Diego, the bill's author. "At the same time they need to look at other debt collection procedures before they go to these extreme measures."

The bill, sponsored by the Congress of California Seniors, would go into effect Jan. 1.

The legislation still allows associations to foreclose nonjudicially or judicially on late assessments greater than $2,500, but sets new rules to make it tougher. Among those rules, minimum bids for foreclosed homes must be 90 percent of their appraised value, and residents would have 90 days after the foreclosure to get their houses back.

Ducheny introduced the bill after a Calaveras County homeowners association sold the $285,000 house of retirees Tom and Anita Radcliff last December for $70,000 -- over a $120 late payment. The Copperopolis couple remain in the home while a lawsuit proceeds against the association and its collection agency.

Ducheny's bill, and an identical companion bill pending before the Senate by Assemblyman Darrell Steinberg, D-Sacramento, adds new momentum to ending a longtime foreclosure practice that requires no judicial oversight and has fallen out of favor among lawmakers since the Copperopolis case. Both bills to ban foreclosures for small amounts of unpaid assessments passed their respective houses of origin in May with unanimous votes.

But opponents, including professional groups that represent associations, property managers and trustees who preside over foreclosures, were quick Tuesday to criticize the new bill.

"This will put a 700 percent increase on the (small claims) court system, which would be a threat to the state," said Skip Daum, lobbyist for the Community Associations Institute, a national group that advises associations.

Michael Belote, lobbyist for the California Trustees Association, called the 90 percent minimum bid rule a "real problem. That will actually encourage people not to pay their assessments."

A majority of homeowners associations that dominate much of Southern California and represent 60 percent of the state's new homes and condominiums defend nonjudicial foreclosure as critical for collecting assessments from their 3 million homeowners. California assessments average $100 to $200 a month to cover costs of lawn care, street maintenance, pools, security guards, tree trimming and roof replacements. Association representatives say fewer than 1 percent of nonjudicial foreclosures actually lead to lost homes, and that without the power to foreclose, late-paying residents threaten the financial stability of entire neighborhoods.

Association lobbyists have also long maintained that liens offer them little hope of recovering late payments.

But Marjorie Murray, lobbyist for the Congress of California Seniors, told the committee that associations need a broader range of tools, saying the bill "regulates the use of foreclosure and puts foreclosure in its place."

Both bills must clear the Legislature by Aug. 31 and be signed by Gov. Arnold Schwarzenegger by Sept. 30 to become law.