Tuesday, January 12, 2010

The Great Foreclosure Debate--Readers Respond

 Here are two of the letters we received in response to “The Great Foreclosure Debate: Should Community Associations use Alternatives to Foreclosure to Protect Their Cash Flow?” posted on www.condoissues.com on November 22, 2009. They represent two sides of this very controversial issue. The first is a spirited response from Mr. George Staropoli, a community association activist in Arizona who writes a blog and newsletter devoted to the question of the constitutionality of community associations. The second is from Ms. Nancy Sterling, a real estate professional, about a 34 unit condominium complex where nearly half of the units have been through bank foreclosure in the past two years. They help to understand why the foreclosure debate has generated so much energy and provide contrast between the theoretical and the practical.

 Here’s Mr. Staropoli’s response:

 Mr. Berding, an attorney, has prepared a comprehensive and lengthy six-page justification (herein noted as “Foreclosure”)[i] for the need, and therefore the right, for HOA  foreclosure. As a non-lawyer, homeowner rights advocate of long-standing, I commend Mr. Berding for tackling this controversial issue.   The detailed attention paid to this issue, including the question of the morality of the right to foreclose, indicates how effective advocates have been in raising this legitimate act of gross injustice.  A right given to the HOA government that is embedded in the developer’s CC&R imposed adhesion “agreement”, and which is backed by state law.
HOAs are vital to our national security
The premise of Mr. Berding’s argument:  foreclosure is necessary in order for the HOA to survive.  “What any rational version of the debate centers upon is not whether we should enforce these obligations, but rather the means of that enforcement . . . . because enforcement today often means using some means of foreclosure . . .” (Foreclosure, p.2).   His justification is a very weak: “what’s the alternative?”
I ask: Why should HOAs be given “special dispensation”?
[i] The Great Foreclosure Debate: Should Community Associations use Alternatives to Foreclosure to Protect Their Cash Flow?, Berding-Weil enewsletter, January 2010, http://www.berding-weil.net/newsletter/2010/01/35/ (Jan. 8, 2010).
Continue reading . . . Foreclosure.
Author: Establishing the New HOA-land America -  http://starman.com/starpub
HOAGOV videos: 
George K. Staropoli       "We must continue to provoke until they respond and change the laws" . . . Gandhi
http://pvtgov.org                   "supporting principles of democratic government"

Here’s the letter from Ms. Sterling:

Hello Tyler,

Great article about Debating Foreclosure, however, without foreclosure rights, no owner would ever have to pay dues.  We had this problem on two separate owners on one 34 units property. One owner refused to pay dues, his unit was 110% financed and he stopped paying the HOA and paid only his mortgage.  The HOA was forced to foreclose or he would live there free, forever.  It has cost over $10,000 to date and still climbing.  Then the owner's lender refused to foreclose against the HOA, so the property will sit until the lender does something.  There is more to this on going story, but I won't bore you with details. 

The second owner did the same thing, but had lots of equity.  HOA was told by an attorney they could not use non-judicial foreclosure because of the equity.  Two years later, the HOA foreclosed, it sold on the court house steps (about 4 months ago) and two days before the rescind period, the owner redeemed the property and once again will not pay dues.  We recaptured the original cost, but this time it will not be a non-judicial foreclosure, which was a major mistake... 

If you need a good example of why foreclosure is an absolute necessity, give me a call.  We have great proof that no one can refute. 

** I should add to this saga, in the last two years, this property of 34 units has been almost 50% foreclosed on by the lenders.  The only thing that has kept this property from going bankrupt is an outstanding manager.  Almost all of these foreclosures were due to bad loans.  What a tragedy.  Not for those who lost homes they could never afford anyway, but those who stayed and paid.

One last opinion.  The control of HOA's should not be allowed by the legislators.  There should be a new, separate department under the DRE that controls the laws on how HOA's are run.  This department should be run by people like you who are in the business and extremely knowledgeable.  The legislators are like a team of wild, runaway horses, driven by people who have never seen a horse and thinks they are driving a dog sled.   Complete fools, much like the foolish people who thought free mortgage money was a good idea to keep the economy going.  I am a real estate broker for over 30 years.  I will retire my soapbox....!

Kindest regards,
Nancy Sterling

 Here are my comments:

            Mr. Staropoli worries that the contractual promises and conditions inherent in community association documents undermine an owner’s basic constitutional freedoms and that the foreclosure remedy given to community associations is an example. His premise is that owners either had no choice but to buy homes in covenant communities, or that they were duped into it by self-serving public agencies and developers. While this assertion fails to acknowledge the legions of owners who voluntarily and intentionally live in homeowner associations, the premise begs the question. However we ended up with hundreds of thousands, perhaps millions, of homes located within covenant-restricted communities, the fact is that we have and that most of them suffer from the bigger problem of how to survive financially. What we do about that problem is more important than how we got them in the first place. Existing associations are plagued with financial problems that have nothing to do with constitutional protection and it is too late to re-write their organizational or governance structure in any significant way.

            Ms. Sterling brings a strong dose of reality to the debate. How do homeowners associations survive if they are stripped of any reasonable method of collecting funds for common maintenance and repair? And if they fail, who is going to repair the roof? Mr. Staropoli’s answer is to put money into a “bad debts” reserve. But homeowners associations have historically failed to contribute sufficient funds to any reserve and that has brought about widespread underfunding in the area of 50% on the average. With higher priorities like leaky roofs, rotting wood, and flaking paint, where will the money come from for a bad debts reserve?

            It is important to continue this dialog. It is also important however, to clearly understand each other.  That may require dialing back the rhetoric on all sides and acknowledging that other views exist. Both of my correspondents would probably agree that existing statutes governing community associations are lacking. The bigger question is how to reform them in a way that acknowledges both the emotional appeal presented by those owners whose individual financial condition has put their equity at risk, but also the practical realities of securing cash flow to allow these associations to continue to operate and maintain the physical plant. It is without question that every democratic organization, homeowners associations included, must provide the opportunity for freedom of expression. But if that free expression manifests itself as a refusal to pay assessments, just like with property taxes or any other lawful debt, the law provides remedies which insure that no one unfairly shifts their responsibilities to others.

          My correspondents each bring a different take on the foreclosure issue.   Constitutional law specialists will tell you that private contractual arrangements among individuals are generally not subject to constitutional scrutiny since they do not involve state action. Any contractual over-reaching by a developer or forced by a public entity would certainly be subject to civil attack if unconscionable. But so far the assessment schemes and the enforcement mechanisms that are found in most community associations have not yet been found to violate anyone's basic constitutional rights.

To be continued…

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