By Deborah Goonan, Independent American Communities
The subject of foreclosure by association-governed communities is getting substantial attention in the past year or two, and that’s a good thing. Investigative reports, such as the following article published by The Arizona Republic at azcetnral.com, serve to increase public awareness of risks for homeowners, as well as the high potential for HOA abuse of its statutory powers.
According to The Republic, Arizona HOA foreclosures for 2016 hit a record high of 330, but hovered around 60 per year in 2002 and 2010. Attorney Jonathan Dessaules opined in his interview with The Republic that the spike in HOA foreclosures is directly related to increasing equity for homeowners, as the real estate market continues to recover from its devastating crash circa 2007-2008.
Dessaules seems to be onto something big, because, the facts reveal that, since the housing recovery, the number of lender foreclosures is way down from its peak, when home values plummeted like a stone, leaving millions of Americans underwater on their mortgages.
HOAs foreclosing on hundreds of Phoenix-area homeowners for as little as $1,200
Jessica Boehm and Catherine Reagor, The Republic | azcentral.com Published 6:00 a.m. MT Sept. 14, 2017 | Updated 3:27 p.m. MT Sept. 14, 2017
Homeowners associations, the enforcers of neighborhood paint colors, holiday decorations and trash bins, are leading the latest surge in Phoenix-area foreclosures.
HOAs are foreclosing on a record number of homeowners for as little as $1,200 in missed maintenance payments, according to an Arizona Republic investigation. And homeowners who thought only their mortgage lender could seize property are losing their houses at sheriff’s auctions, sometimes for just $100 more than they owe.
“It’s become a huge issue,” Arizona Real Estate Commissioner Judy Lowe said. “Most homeowners don’t understand the foreclosure process and don’t know their HOA can foreclose.”
Read more (Videos):
Although critics can argue that The Republic has given too much credence to HOA industry advocates in comparison to homeowner and consumer advocates, the more pressing question is this:
What should be done – in Arizona and nationwide – to curb abusive HOA foreclosure practices?
Several suggestions follow. In the list below, the term HOA is used in the generic sense, referring to association governed communities, including condominium, cooperative, homeowners’, and property owners’ associations or planned residential communities.
Limit HOA rights to foreclose — essential vs. non-essential assessments
A substantial number vocal homeowner rights advocates call for a total elimination of the HOA’s right to foreclose. Realistically, however, there are circumstances which might warrant foreclosure as a last resort.
For example, consider the case of a small real estate investor who owns several condo units in the same association. Whether he rents them to tenants or allows them to remain vacant, the units are poorly maintained. The unit owner does not live in the community. When market conditions turned sour, he elected to “strategically default” on outstanding mortgages, essentially walking away from his responsibility to pay his share of maintenance fees and assessments.
In another case, the owner of a single family vacation home in an upscale resort realizes a loss in her business for three years, and decides to dissolve the company. Instead of paying assessments on her non-primary residence, she diverts the money to pay other creditors, and has neglected the property for well over a year.
It is going to be exceedingly difficult to argue that, under those circumstances, the HOA has absolutely no right to foreclose.
However, a reasonable argument can be made to limit the HOA’s power to foreclose to just these kinds of extenuating circumstances, subject to proper disclosure, procedural restrictions protecting consumer rights, and, most of all, judicial review. (See below)
Also, to the extent that an HOA does not provide essential services, there may be no justification for collecting the lien through foreclosure. For example, if a planned community’s infrastructure maintenance is financed through a special tax district, and the property owners association handles nothing more than enforcement of covenants and architectural standards, then there is no compelling health and safety concern for taking draconian measures to foreclose to collect HOA or POA assessments.
Fix priority of payment – assessments first, attorney fees last
One of the biggest scams in the industry is a priority of payment policy that favors the financial interests of attorneys and collection companies over that of the HOAs the industry purports to serve. Most states, including Arizona and Florida, apply partial homeowner payments to attorney fees first, and to the delinquent HOA assessments dead last. That arrangement creates a cash cow for HOA collection law firms, makes it exceedingly difficult for homeowners to catch up on their late payments, and is more likely to lead to foreclosure. In the end, attorneys often collect double, triple, or quadruple the amount owed to the HOA.
The state of California addresses this issue in its Common Interest Development statute as follows: (emphasis added).
5655. (a) Any payments made by the owner of a separate interest toward a debt described in subdivision (a) of Section 5650 shall first be applied to the assessments owed, and, only after the assessments owed are paid in full shall the payments be applied to the fees and costs of collection, attorney’s fees, late charges, or interest.
(b) When an owner makes a payment, the owner may request a receipt and the association shall provide it. The receipt shall indicate the date of payment and the person who received it.
(c) The association shall provide a mailing address for overnight payment of assessments. The address shall be provided in the annual policy statement.
(Added by Stats. 2012, Ch. 180, Sec. 2. Effective January 1, 2013. Operative January 1, 2014, by Sec. 3 of Ch. 180.)
Notice that, in collection of past due amounts, the HOA gets paid first, then fees and costs of collection, then attorney’s feed, and finally, late charges and interest. Since HOA attorneys are expected to defer collection of their fees until after the HOA is paid in full, the homeowner has a better opportunity to erase the delinquency before the account accrues excessive attorney fees, and the HOA is likely to recover its money more quickly.
This is a partial solution that is meant to prevent accumulation of excessive attorney fees, hopefully reducing the likelihood of foreclosure.
Prohibit HOA power to unilaterally impose monetary fines, prohibit automatic contractual conversion of fines to assessment liens, unless judicially approved by a court
The suggestion of eliminating the HOA’s statutory or contractual rights to impose monetary fines was adressed previously here on IAC. Ideally, an HOA would only be permitted to charge monetary fines (other than parking violations) following a court order arising out of small claims or civil court. The HOA would not be conducting what amounts to kangaroo court – internal hearings held behind closed doors – to decide whether or not to impose punitive fines for relatively innocuous offenses such as painting the front door the wrong shade of beige.
Unless and until state Legislatures repeal the power of HOAs to impose monetary fines, states should enact amendments that explicitly prohibit, without exception, the rights of HOAs to treat unpaid fines as if they were past due assessments. Only in extenuating circumstances, where covenant violations threaten the health and safety of community residents, or create substantial public nuisance or insurance liability for the association, should an Association be able to call upon the Court to order and injunction, and, if all else fails, HOA foreclosure for nonpayment of a court-imposed fine or refusal to comply with CC&Rs per a court-ordered injunction.
In other words, reinstitute proper judicial due process to resolve disputes with regard to alleged violations of HOA covenants and restrictions, and, if warranted, allow the court to imposed a penalty that fits the crime.
California Law also addresses fines: (emphasis added)
(a) A monetary charge imposed by the association as a means of reimbursing the association for costs incurred by the association in the repair of damage to common area and facilities caused by a member or the member’s guest or tenant may become a lien against the member’s separate interest enforceable by the sale of the interest under Sections 2924, 2924b, and 2924c, provided the authority to impose a lien is set forth in the governing documents. It is the intent of the Legislature not to contravene Section 2792.26 of Title 10 of the California Code of Regulations, as that section appeared on January 1, 1996, for associations of subdivisions that are being sold under authority of a subdivision public report, pursuant to Part 2 (commencing with Section 11000) of Division 4 of the Business and Professions Code.
(b) A monetary penalty imposed by the association as a disciplinary measure for failure of a member to comply with the governing documents, except for the late payments, may not be characterized nor treated in the governing documents as an assessment that may become a lien against the member’s separate interest enforceable by the sale of the interest under Sections 2924, 2924b, and 2924c.
(Added by Stats. 2012, Ch. 180, Sec. 2. Effective January 1, 2013. Operative January 1, 2014, by Sec. 3 of Ch. 180.)
Note the distinctions made between when an HOA can and cannot treat a monetary fine as an assessment subject to lien and possible foreclosure. However, California law Permits nonjudicial foreclosure, so, once again, this is only a partial solution to the problem.
Similarly, legislation should impose strict limits on how much an HOA can charge for interest, late fees, and, most of all, attorney fees.
Prohibit conflicts of interest at HOA foreclosure sales
As explained in The Republic, sale prices at HOA foreclosure auctions often fall far short of fair market values. If the HOA is owed $10,000 on a $250,000 home, it can accept a winning bid of $10,001, potentially leaving the property owner homeless, completely robbed of equity in the property, and still on the hook for any outstanding mortgage.
The buyer at HOA foreclosure, such as an investor, can end up with windfall profit, especially if the home is not subject to a mortgage lien. (In some states, by priority lien, the first mortgage is also eliminated following the HOA auction. See more below)
Former homeowners have complained for more than a decade that the buyer at many of these HOA foreclosure sales are insiders – board members, friends of family members of the board, or affiliates of the association management company or HOA attorney.
Legislation expressly prohibiting insider trading or similar conflicts of interest is essential to preventing this kind of incestuous, self-serving behavior.
Florida recently addressed this matter in its new “condo crime law.” (emphasis added)
718.3025 Agreements for operation, maintenance, or management of condominiums; specific requirements.— (5) A party contracting to provide maintenance or management services to an association managing a residential condominium after transfer of control of the association, as provided in s. 718.301, which is not a timeshare condominium association, or an officer or board member of such party, may not purchase a unit at a foreclosure sale resulting from the association’s foreclosure of association lien for unpaid assessments or take a deed in lieu of foreclosure.
Require minimum bid at action, for example, set at 80% of current appraised value
Closely related to prohibiting insider HOA foreclosure deals, legislation must ensure that homes are not sold for mere pennies on the dollar, depressing home values in the entire community, and putting the homeowner at a distinctly unfair economic advantage.
Require judicial process, no exceptions
Currently 32 states allow nonjudicial foreclosures, meaning that no court or judge is involved in reviewing or approving a foreclosure or the fairness and reasonableness of its terms.
Hawaii is leading the way toward invalidating nonjudicial foreclosures, by way of a class action lawsuit. Hundreds of former condo owners claim that the nonjudicial foreclosure process used by their condo associations was unfair and unlawful.
According to an article published in Civil Beat, a team of attorneys in Hawaii and San Diego have filed a consumer protection class action lawsuit against two Condo Association law firms and 72 condominium associations.
The complaint claims that condominium associations erred in using a Non Judicial Foreclosure “Part I” process reserved for use by mortgage lenders when the loan contains a “power of sale” clause. According to lead attorney for Plaintiffs, Steven K.S. Chung, Condominium Associations were legally obligated to pursue “Part II” Non Judicial Foreclosure procedures written specifically for condominium associations, a process that offers considerably higher levels of consumer protection, and opportunity for apartment owners to avoid losing their property in HOA foreclosure.
According to the suit, class action lead plaintiffs lost their condo units following inadequate notice of foreclosure sale. The law firms initiating the Non Judicial Foreclosures on behalf their client condo associations acquired the apartment units at their own foreclosure sales, then took possession of the deeds for those properties for pennies on the dollar, leaving the condo owners on the hook for the outstanding mortgage debt.
The outcome of the class action lawsuit is yet to be determined, and, in any event, it does not seek to completely prohibit nonjudicial foreclosures.
However, Hawaii certainly serves as a good case study for legislation that would prohibit nonjudicial foreclosures altogether.
Abolish the priority lien
The community associations (HOA) industry’s argument in favor of expanding priority lien rights to include extinguishing a first mortgage cannot be supported by the facts. Priority lien status does not speed up the bank foreclosure process, reduce foreclosure rates, or contribute to a faster recovery of Association Governed Housing entities.
On the contrary, it can be argued that allowing HOAs to wipe out mortgage liens will only create an economic environment where it becomes more difficult to sell existing homes, decreases affordability for home buyers, and discourages homeownership.
The priority lien issue is a complex one. The issue is explained in more depth, with backup data provided here.
A recent court decision in Nevada will certainly put a damper on HOA foreclosure abuse. FHFA scored a victory, when the 9th Circuit Court of Appeals ruled that an HOA foreclosure may not extinguish (eliminate) the obligation of a buyer to repay a Freddie Mac mortgage.
9th Cir. Holds Federal Foreclosure Bar Preempts Nevada HOA Superpriority Statute
Maurice Wutscher LLP
USA September 8 2017
The U.S. Court of Appeals for the Ninth Circuit recently held that the Federal Foreclosure Bar’s prohibition on nonconsensual foreclosure of assets of the Federal Housing Finance Agency preempted Nevada’s superpriority lien provision and invalidated a homeowners association foreclosure sale that purported to extinguish Freddie Mac’s interest in the property.
Other considerations to prevent HOA foreclosure abuse:
- Mirror state, local laws for collection of delinquent property taxes, tax sale. Local governments are typically subject to many constraints that prevent abusive and premature foreclosure.
- Promote a best practices policy that advocates for working with owner occupants to keep them in their homes. After all, an occupied home is worth more than a vacant home, even if delinquent on HOA assessments, taxes, or mortgage.
- Emphasize PREVENTION:
- federal housing policies must limit mortgage approvals for high-risk borrowers and/or high risk associations
- FHA should not facilitate or insure mortgages for purchase or refinance of homes to be used as non-primary residence
- lenders must be prohibited from approving loans for borrowers purchasing as speculative investments
- permit a streamlined foreclosure process for unoccupied or abandoned investment properties
- DISCLOSURE: notify buyers at the time of showing or sale agreement – your HOA can foreclose on your home.
- List lien and foreclosure conditions, timing, and fee obligations of homeowner, in plain language, ALL CAPS, acknowledged by signature of buyer(s).
- At time of sale, pre-closing, buyer must receive written statement of rights and responsibilities with regard to making on-time assessment payments (including special assessments), owner rights vs. association rights, appealing a lien or collections practices, preventing foreclosure, etc.
See recently enacted legislation in the District of Columbia:
District of Columbia Condominium Law Amended To Require New Owner Notices
Posted on June 16, 2017
The District of Columbia Condominium Act has been amended to require new notices and information be provided to condominium purchasers and unit owners.
When a condominium advises the owner of its intention to take legal action to collect any past due amount owned by the unit owner, the owner must be provided with a statement of account showing the total amount past due, including a breakdown of the categories of amounts claimed to be due and the dates those amounts accrued.
The notice of delinquent assessments must also include contact information for the condominium so the owner knows who to contact to settle the past due amount. Additionally, the owner must be informed of resources which the owner may utilize at the District of Columbia Department of Housing and Community Development and the United States Department of Housing and Urban Development.