CAI’s White Paper on HOA Reserves, Escrow of assessment fees

By Deborah Goonan, Independent American Communities


Today’s blog provides continuing analysis of Community Associations Institute’s (CAI) Panel Report on the Association Governance model. In particular, let’s look at CAI’s official intent to “sell” reserve funding as “consumer protection” and push mortgage lenders to require that HOA or Condo assessments to be set aside in escrow.


CAI objectives to increase industry influence over Reserve Funding

In order to overcome the problem of under funded associations, CAI proposes the following: (emphasis added)

SELLING RESERVES AS CONSUMER PROTECTION…. It is a woefully common scenario to see an individual or family stretch their financial envelope when buying a new home, only to lose that home when they get hit with hefty annual assessment increases or special assessments. … The ideal scenario would have model statutes or state statutes require developers to turn over an association with a completed reserve study and adequately funded reserves. … Realistically, however, such attempts would likely be opposed by other special interest groups—those who have an agenda to keep association fees artificially low, or those who represent delinquent owners. Presenting reserves as an enhancement to property value for savvy buyers (and thus sellers) would likely be more effective.

What consumer protection?

Note what CAI is suggesting here. Admitting that developers and real estate investors tend to set artificially low assessments in order to sell homes or condos, the alternate objective is to create homebuyer demand for adequate reserve funds. In other words, the hope is that consumers will start asking about reserves, and pressure builders to set realistic assessments, and pay their fair share of assessments on unsold parcels or units.

Given that most homebuyers do not know what a reserve fund is, let alone what constitutes an adequate level of funding, how does CAI propose to accomplish their objective?

Furthermore, because 70% of existing Association Governed housing developments are already under-funded, how will it be possible to convince existing homeowners (hoping to sell one day) that making up for a large reserve deficit will increase their property values? For example, will a homeowner facing a special assessment equivalent to 10, 20 or even 30 percent of current property value see a corresponding increase in the value of that property to offset such as sizable short-term financial investment?

Probably not.

And what good comes from creating a healthy reserve fund if no one is held accountable for safeguarding that fund?  Will CAI advocate for holding association board members and management companies fully accountable for closely monitoring use of reserve funds?

A common homeowner complaint in Association Governed housing is that assessment fees are wasted, misappropriated, or even stolen! How many Boards routinely raid the fund to make up for shortfalls in the operating budget?  How many associations discover a large chunk of that money has mysteriously disappeared without explanation?


CAI wants assessments collected by mortgage lenders (in escrow)

Another CAI proposal is to convince mortgage lenders to require collection of assessments as part of the mortgage payment. (Emphasis added.)

Like FHA approvals, legislation requiring associations to have a reserve study prepared by a qualified professional and to fund reserves based on such a study would have a positive effect on associations. However, persuading developers to put reserve requirements in the documents may be easier than changing legislation.Ideally, developers would draft documents that allow associations to require buyers to select lenders who will escrow association assessments and reserves just like insurance and taxes. However, few are aware of this and fewer are doing it. Columbia, Maryland, is an exception. State law requires lenders to escrow Columbia Association assessments—but that law only applies to Columbia Association, not other associations in Maryland. Even states that mandate reserves allow a lot of leeway and have loopholes that eviscerate the requirement.

Think about this proposed process. If developers are persuaded to require escrow of assessments for each and every property purchased with a mortgage, buyers would then be forced to find a lender willing to participate by collecting assessments and maintaining a separate escrow account for distributing those funds back to the association.

This seems to be a back-door way of forcing banks to start collecting and distributing HOA and condo assessments on a monthly basis. It makes the job of association boards and management companies easier, and, theoretically, reduces assessment delinquencies.

While some banks may favor this approach to avoid losing their financial interest when an HOA forecloses in a super lien state, others may not want the extra effort and expense involved.

But CAI’s reasoning seems to be as follows: if developers begin to make a habit of requiring escrow of assessments for mortgaged properties, lenders will have no choice but to underwrite loans under these terms.

But from the perspective of the consumer and the lender, escrowing assessments increases lending costs, loan servicing costs, and therefore closing costs for the buyer. When costs increase for the buyer, the lender is likely to complete fewer loans, and the developer is likely to sell fewer homes and see a reduction in sales revenue.

Once again, CAI admits that legislative change on this issue is unlikely.

Equating assessments to property taxes

Note how CAI is equating assessments to property taxes – they must be collected, no matter what, even if the association is unable or unwilling to provide services as promised in the declarations “contract.” Having the mortgage lender escrow these funds further ensures their collection, but also holds associations even less accountable for delivery of services.

Recall that associations are not held to the same Constitutional standards as local municipal or county governments, nor are private organizations held to the same standards for open government and transparency.

Furthermore, voting in a new, more qualified association board is challenging, often undemocratic, and sometimes impossible.

For one thing, while the developer remains in control, homeowners cannot vote for someone else to collect and prudently spend their money, because the board is appointed by the developer.

In many other associations – especially master planned common interest communities that require large operating budgets and reserve accounts – homeowner members may not be entitled to a direct vote for their master board, because representatives or pseudo-delegates vote on behalf of dozens or hundreds of members – often without their knowledge.

At the same time, associations restrict who can attend meetings, and commonly give homeowners the run around when they request access to financial records, even to the point of charging homeowners a management fee for access to this information.

In general, association governed housing developments lack accountability, and cannot be equated with a municipal or county government.

One final point to ponder.

Homeowners without a mortgage would still pay assessments directly to the homeowners, condominium or cooperative association. But if CAI is successful at getting banks to escrow assessments, an Association board will easily be able to pick out the properties that have full equity.



Note to readers: CAI refers to Common Interest Communities (CICs) in their official white papers. The term is used to collectively refer to Association-Governed developments in all its forms – homeowners associations, condominium associations, property owners associations, cooperative associations, mobile or manufactured home associations, and master planned communities.

The paper referenced today can be viewed here:

Community Next: 2020 and Beyond The Association Governance Model Panel Report

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