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A News Report
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Foreclosures And Lawsuits In California Homeowner Associations
California Government Hearings
February 16, 2004
By
Arnold A. McMahon
Copyright AHRC News Services
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| Sacramento, California - PRESENTATION
To
THE CALIFORNIA SENATE HOUSING COMMITTEE
February 17, 2004 • 1.30p.m., State Capitol Room 112
By Arnold A. McMahon
THE AMERICAN HOMEOWNERS RESOURCE CENTER
OUTLINE OF PAPER
1. Historical Introduction
2. Principles Regarding Foreclosure
3. Recommendations
4. Comments
5. Conclusion
HISTORICAL INTRODUCTION
Before discussing particular solutions to the foreclosure problem in homeowner associations, it is important to understand, at least in outline, some of the history behind the foreclosure problem. As Winston Churchill said, "Not to understand history, is to relive its mistakes." And mistakes there were. The purpose of briefly reviewing these mistakes is not to drag up dirty linen, but to help prevent similar mistakes in the future.
Mistake # 1:
The first mistake was the appointing of Katherine Rosenberry by Gray Davis and Larry Stirling to write the Davis Stirling Act. It was a mistake because Katherine Rosenberry was one of the leading lobbyists for Community Association Institute (CAI) which, despite its nice sounding name, is the national trade lobby group of homeowner association lawyers, managers and other vendors. She had been its national president. She publicly stated at a California Law Revision Committee meeting in 2001 that she had been instructed to "take care of the special interests", and admitted that the Davis Stirling Act was a mess.
Mistake # 2:
The second mistake was to let the feeding frenzy begin. CAI lawyers had a wonderful time, inserting all sorts of provisions that would be financially advantageous to them and devastating to homeowners. One of these was to give homeowner associations the power of non-judicial foreclosure. This MOAB of all collection bombs, possessed by no other institution except mortgage lenders, sailed blissfully into law. Homeowners, at this time, were oblivious to everything that CAI was doing to them.
Mistake # 3:
The third mistake was for some members of the legislature in subsequent years to allow themselves, in effect, to be bought by the CAI lobbyists. However, when some aspects of the Davis Stirling Act began to play out with disastrous consequences in real peoples' lives – for example, one poor lady, lost her condo in foreclosure over a few hundred dollars and had to sleep in the back seat of her car – homeowners began to come to Sacramento to seek changes in the law. They found that key legislators were in the hands of CAI and CLAC (California Legislative Action Committee) lawyers. For example, CAI/CLAC would wine and dine Dan Hauser, chairman of the Assembly Housing Committee the night before pending legislation, and the following day he would solemnly preside over the rubber stamping of their legislation.
One particularly egregious example is the case of Richard Fiore, the president at that time of CLAC – the lobbying arm of CAI. He was representing the Loma Vista Homeowner Association in San Juan Capistrano in a construction defect case. His fees became so high that he was using the association reserves to pay his legal bills – even though that was against the law. When several homeowner caught him doing this, he simply came to Sacramento and had his good friend Dan Hauser change the law to allow it.
It was because of such activities and many more, that the American Homeowners Resource Center (AHRC) was founded in 1990 to stop the wholesale corruption that was taking place, and the consequent devastation of homeowners' lives. Over the years, AHRC has grown exponentially here in California, nationwide and internationally. Its website is currently getting 1.3 million hits a month (over 43,000 a day) from 78 countries. It is consulted by major newspapers such as the Wall Street Journal, New York Times, Los Angeles Times, and by most major networks such as ABC, NBC, CBS and FOX.
It has been a long slow battle by homeowners to combat the money and power of such lobby groups as CAI/CLAC. They have also had to contend, unfortunately, with some in the legislative staff who have tried to undermine the democratic process. For example, when Howard Yee, was the chief consultant of this committee, a 120 page dossier that homeowners had compiled, was purged from the official Senate Housing Committee and it has never been seen again.
As stated above, homeowners from the mid 1980's to the early 1990's were in a state of oblivion as to what was happening in Sacramento regarding homeowner association law.
In the early 90's, homeowners then went from oblivion to tokenism. For example, I was appointed by Clark Wallace, the former head of the Department of Real Estate, to a task force on homeowner associations in the early nineties. There were 15 members on the task force, and I was the only homeowner representative. The other 14 were all CAI industry lawyers and the like. When it came to a vote on an issue, it was almost always 14 – 1, and Clark Wallace would then declare that his hands were tied because of the vote. Of course, he appointed all the members. Mr. Wallace now lobbies on behalf of the homeowner association industry.
My wife, Elizabeth McMahon, faced a similar situation when she was appointed to a task force of this Senate Housing Committee by Barbara Lee. She was the sole homeowner representative, and the result was the same.
The purpose of the above history is not to drag out dirty linen. It is to make the point that in any discussion of homeowner association issues, homeowner voices have to be heard loud and clear. In the coming weeks and months ahead, the members of this committee will be subjected to relentless lobbying by the CAI/CLAC lawyers on this foreclosure issue. Foreclosures are big money for them, and they are not about to let them go without a fight.
Hence, it is encouraging today that this committee is holding a hearing to get the input of homeowners. The homeowners trust that this is just the beginning of homeowner participation, and that the specter of non-judicial foreclosure will never hover again over the heads of homeowners in homeowner associations – and there are about 8 million Californians living in them. We do not need any more situations like Mr. Radcliff.
Non-judicial foreclosure is the biggest single issue in homeowner associations today. Like a bad parent, it also spawns many undesirable offspring as well. The elimination of non-judicial foreclosure will hopefully begin the process of bringing about a new and better day in homeowner associations.
PRINCIPLES REGARDING FORECLOSURES
AHRC's recommendations are guided by the following principles.
• AHRC is completely in favor of every homeowner paying their association assessments in full and on time.
• AHRC believes it should be the public policy of this state to keep every homeowner in possession of their homes as long as feasibly possible.
• AHRC believes that only mortgage lenders should have the power of non-judicial foreclosure.
• AHRC believes that HOA lawyers should not be involved either directly or indirectly with any foreclosure sale. The conflict of interest and potential for abuse are too great.
RECOMMENDATIONS
Homeowner associations must first obtain a Small Claims judgment for delinquent assessments before taking any further action.
Homeowner associations may file a lien against the property only after obtaining a Small Claims judgment.
While collection activities such as garnishment of wages may commence after the Small Claims judgment, executing on the lien should wait for a period of 5 years from date of judgment.
AHRC concurs with Common Cause that attorney fees should not exceed twice the delinquent assessment amount.
Reasonable costs for filing a lien and interest at the legal rate maybe included in the lien.
Homestead exemptions should be reinstated.
Homeowner associations should be authorized to set aside monies in their Reserves to cover delinquent assessments. Homeowner associations have to recognize like any other business that there is a cost to doing business.
Civil Code Sec. 1365.5 (c) (1) should be amended to allow the Reserve fund to also be used to deposit monies to cover unpaid assessments. Such a provisions would enable associations to handle cash flow problems resulting from unpaid assessments.
COMMENTS
1. The above proposal acknowledges that there has to be a balance between the legitimate needs of an association to fund its activities, and the public policy of keeping homeowners in their homes as reasonably long as possible. Insurance companies could be required to provide an option in their homeowner policies for association homeowners to purchase insurance that would pay their assessments in certain specified situations such as illness, loss of job etc.
2. The industry will predictably seek to prevent the elimination of non-judicial foreclosure as the weapon of first choice in homeowner associations – or to so water down any such proposal that it becomes virtually meaningless. Their traditional argument has been that homeowner associations will go bankrupt if they cannot foreclose. This is a specious argument for at least five reasons.
I have never heard a homeowner association going bankrupt at all, let alone going bankrupt because of unpaid assessments.
The overwhelming majority of homeowners pay their assessments in full and on time.
The cases where homeowners are judgment proof will be exceedingly rare. These rare instances should not be allowed to justify the continuation of the present system where people like Mr. Radcliff can lose their homes for $120.
Homeowner associations as a group are incredibly rich. While no precise statistics are currently available, it is estimated that homeowner associations possess over $50 billion in reserves on a nationwide basis.
The Davis Stirling Act allows boards of homeowner associations to make temporary transfers from reserves to cover short term cash flow problems. Civil Code Sec. 1365.5 (c) (2).
3. The real opposition from CAI lawyers, of course, is that foreclosures are a rich source of revenue for them. Melissa Colburn has done research at the San Diego County Recorder's Office showing that one CAI law firm, Peters and Freedman, filed 70 Notices of Foreclosure of the 125 recorded. Her research also shows that in a number of cases, Peters and Freedman acted as the trustee at the sale and seems to have sold to a straw buyer, Carlos Sosa.
4. Some HOA lawyers do not have a clean bill of health when it comes to foreclosures in HOAs. For example, AHRC receives on an almost daily basis, complaints from homeowners in San Diego, Orange and Riverside counties about the law firm of Peters and Freedman. Homeowners have requested an investigation by the Attorney General's office, but none has yet been initiated. Maybe this committee can make a request for an investigation at the appropriate time.
This is not a normal law firm. Its leading partner, David Peters, is currently on 3 years probation after pleading guilty to illegally hooking up the sewer line from his $5.4 million home and causing raw sewage to seek into a river. He was fined $96,000. AHRC is also in possession of a letter from a U.S. District Judge to David Peters forbidding him to appear unrepresented by counsel in his court room because of Peter's dishonesty before the court. He has fraudulently changed CC&Rs, and caused untold hardship to many homeowners.
5. In many cases, homeowners lose their homes, not because of the unpaid assessments, but because of the attorney fees and costs that are heaped on top. In my own case, my association attempted to foreclose on my home over a disputed $5 late charge. It ballooned to over $2,900 with attorney fees and costs, and I was told to pay this to avoid foreclosure. Knowing that the association was wrong, I filed a lawsuit to stop the foreclosure, and a year and a half later and after much grief, I prevailed.
6. In some cases, the attorneys seem to practice outright extortion. We have been told by reliable sources that Peters and Freedman told a homeowner that an alleged architectural violation could go away if the homeowner paid $5000.
CONCLUSION
Eliminating non-judicial foreclosure will go a long way to eradicating a whole series of sins in homeowner associations. AHRC urges this committee to do something substantive and worthwhile in this matter.
Thank you for your time and attention in listening to this presentation. |
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