By Deborah Goonan, Independent American Communities
In 2017, I posted an article highlighting The Arizona Republic investigation of a sharp increase in foreclosures by homeowners and condominium associations.
In The Arizona Republic article, Attorney Jonathan Dessaules blamed the spike in HOA, and condo association foreclosures — a record of 330 within one year — on opportunistic foreclosure attorneys taking advantage of rising home values with respect to Association liens of as little as $1,200.
As unbelievable as that may sound, the situation could be made worse for homeowners if Arizona Senate Bill 1080, introduced by Sen. John Kavanagh (R), is enacted in the 2018 Legislative session.
A homeowner could face foreclosure following 6 months of unpaid assessments, for any amount of money, even a few dollars.
Housing advocate Dave Russell, Manager of Circle Tree Condominium in Mesa, Arizona, contacted me about SB1080. Russell says that, if enacted as currently drafted, Arizona homeowners will lose valuable consumer protections. Simply put, “If association dues were $10 a month, [homeowners] could be foreclosed upon by their HOA for $60,” says Russell.
Arizona bill would make it easier for HOAs to take your home
Jessica Boehm and Catherine Reagor, The Republic | azcentral.com Published 6:00 a.m. MT Jan. 10, 2018
Currently, Arizona homeowners associations can foreclose on owners if they fail to pay their dues for a year or get behind by $1,200 — whichever comes first.
But a bill introduced by one of Arizona’s most powerful Republican senators would allow HOA foreclosures after six months, with no minimum debt.
Sen. John Kavanagh, R-Fountain Hills, the primary sponsor of Senate Bill 1080, said six months of avoiding payments is a serious infraction.
“Tell a landlord that not paying him for six months isn’t a big deal. It is a big deal,” he said.
But the proposal already has opponents.
“This is a dangerous bill,” said Dennis Legere of the Arizona Homeowners Coalition.
Legere’s grassroots group has fought for homeowner protections against HOAs at the Legislature for the past several years. When Kavanagh introduced the bill late Monday, the group began organizing its opposition.
Read more (Video):
How does SB1080 differ from current Arizona Statutes pertaining to association-governed communities?
Arizona law, as written with respect to HOA foreclosures, already creates a perverse system that is a win-win for HOA collection attorneys and real estate investors who purchase undervalued property at Sheriff sale auctions, by allowing foreclosures to proceed when past due assessments reach a $1,200 threshold, or when the owner has not paid any assessments for 12 months, whichever comes first.
By striking out one 17-word phrase and adding the words “SIX MONTHS,” SB1080 removes the $1,200 minimum threshold and reduces minimum delinquency time period from 12 months to 6 months.
By way of example, here is what could happen if SB1080 were to become law.
Let’s say an HOA has annual assessments of $350. The owner fails to pay as of Jan 1st. By July 1st, if the owner has either missed or ignored the warning notices required by statute, the HOA (under SB 1080) would be entitled to move to foreclose a $350 lien, plus associated late fees, interest, collection costs, and attorney fees.
Although Arizona statute also allows association-governed communities to pursue a money judgment, which could be collected through wage garnishment, there is no legal requirement to pursue this option preceding foreclosure.
So, in this example, the owner could lose her home for $350 plus collection costs and attorney fees.
Also by way of hypothetical example, a home worth $325,000, with a $175,000 outstanding mortgage and $7,500 due to the HOA, might sell to an investor for $10,000.
In Arizona, first mortgage liens have priority over HOA liens. But, even after paying off the HOA and lender, the investor would end up with a $325,000 home for a cost of $185,000.
The owner, on the other hand, will have lost $140,000 in equity, in order for the HOA to recover $350 plus a few hundred dollars in late fees and interest.
To be fair, SB1080 could work slightly in favor of some property owners subject to high monthly assessments. For example, a condo owner paying $250 per month in assessments would have to accrue $1,500 in past due assessments before the condo association could initiate a judicial foreclosure.
However, the shorter timeframe for repayment of late assessments is often most problematic for households affected by job loss, unexpected illness or disability.
What can an owner do after HOA foreclosure?
Following an HOA foreclosure, owners face eviction from their homes. And, as a result of fire sale prices at auction, former owners with limited equity in their homes (high mortgage balances) might even find themselves on the hook for paying off first and second mortgages, or other outstanding amounts owed to their association.
In Arizona, there is a small sliver of hope for some owners.
Dave Russell explains that, if an owner resided in his foreclosed home as a primary residence, Arizona law provides a way to keep the home, under a little-know provision in AZ Statute 12-1282. “Even after the homeowner is foreclosed upon, they do have a 6 month right of redemption provided that this is their primary residence that they live in.”
However, Russell goes on to explain that, due to financial hardship, homeowners rarely take advantage of the opportunity to reclaim their homes.
To redeem their homes, the owner must repay the purchase price of the winning bidder at auction, plus 8%, as specified under AZ Statute 12-1285.
In most cases, a homeowner who has been unable to pay HOA assessments is even less able to cover substantial post-foreclosure redemption costs.
Owners who do not use their home in the Association as a primary residence — those who use the home seasonally or who rent the home to tenants — are not eligible for redemption.
Can HOA foreclosure be prevented?
Given the ease with which HOAs can foreclose for relatively small dollar amounts, and the difficulty in reversing foreclosure sales, it makes sense to consider ways to avoid foreclosure in the first place.
Dave Russell suggests that mortgage lenders collect homeowners and condo association dues in escrow. “ I do believe that the solution to HOA delinquencies is by making HOA assessments payable through mortgage escrow accounts like property tax and insurance. Roughly 75% of all homeowners in America have a mortgage, the remaining 25% of homeowners do not have a mortgage and those homeowners would be far less likely to fall behind in HOA assessments.”
In other words, if lenders were to collect assessments along with mortgage payments, it would reduce the likelihood of delinquent accounts for the association.
Other possible solutions to prevent HOA assessment delinquencies and foreclosure
Special Districts. Some common interest communities form special districts, public units of governments and taxing entities, to raise funds for essential infrastructure and community services, payable as a component of property taxes.
Although special districts add yet another layer of taxation on homeownership, collection processes are consistent with state laws for other public taxing entities. offering housing consumers a somewhat greater level of protection against swift and draconian HOA foreclosure sales.
Avoid creating small associations. According to The Republic, Kavanagh is also considering limiting the “six month” amendment to what he calls “small” associations that are more likely to feel the pinch when an owner fails to pay assessments. After all, the fewer members in the association, the greater the financial burden upon each individual property in that association.
It’s not clear how the Legislature would define a “small association.”
Perhaps a better long-term solution might be to avoid creating small associations in the first place.
Elimination of perverse incentives. The Legislature could consider an amendment requiring HOA auction starting bids to be commercially reasonable, starting at 80% – 90% of appraised value (no fire sales!)
Arizona statute might also be amended to prohibit self-dealing in HOA foreclosure sales to “insiders” such as board members, property or community managers, HOA attorneys, and their family members or business affiliates.
Finally, homeowners should be entitled to greater transparency of the collections and foreclosure process. Consumers should be provided with upfront written disclosure of collection costs and legal fees to be imposed in the event of continued nonpayment of assessments and fees. If homeowners are warned that nonpayment could lead to thousands of dollars in additional fees, they are more likely to pay off small debts or reach out to their association to set up a payment plan.
Additional Reading:
Arizona Senate Bill 1080, introduced by Sen. John Kavanagh (R) can be tracked here:
https://apps.azleg.gov/BillStatus/BillOverview
In Arizona, late payments are applied to assessments first (not attorney fees);
33-1807. Lien for assessments; priority; mechanics’ and materialmen’s liens
and
33-1256. Lien for assessments; priority; mechanics’ and materialmen’s liens; applicability
J. Notwithstanding any provision in the community documents or in any contract between the association and a management company, unless the member directs otherwise, all payments received on a member’s account shall be applied first to any unpaid assessments, for unpaid charges for late payment of those assessments, for reasonable collection fees and for unpaid attorney fees and costs incurred with respect to those assessments, in that order, with any remaining amounts applied next to other unpaid fees, charges and monetary penalties or interest and late charges on any of those amounts.
There should be an investigation done on who buys the foreclosed properties. I noticed that in my community many attorneys are the buyers.