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April 13, 2008

Damned If You Do - Damned If You Don't - Foreclose That Is.

Did you have those kind of parents that taught you about balance, using frustrating phrases like: "Well its six of one and half dozen of the other." Or "Do You want the glass half full, or half empty?" Or "Looks like you let yourself get caught between a rock and a hard place."

HOAs in California (and I am hearing elsewhere in the country as well) are damned if they do, and damned if they don't - vigorously collect delinquent assessments, that is. I hate to swear, but this is an issue serious enough to warrant extraordinary expletives.

I was at a resource panel meeting in Walnut Creek, California, the other day of industry professionals, vendors and board members. We were discussing collections, foreclosures, and the crises that HOAs in California are facing because of the pervading loan issues, the subprime mortgage crisis, and the economy, and what HOAs can or need to do about it. One accountant stated that the associations he works with all give an owner 90 days in delinquency before referring accounts out for collection. Well, almost everyone in the room was on him right away saying that that process was inviting disaster. The comments were like this:

**"If you let people get too far behind in this day and age, they can't catch up." And

**"If you let accounts go out 90 days, and then send them out, under California law it takes another 30-60 days just to get to the lien process, and more than 60 more days to get to the ultimate "hammer" which is starting foreclosure, which then takes another 4 months at least to push the sale of a unit whose owner is not pulling its weight in the Association.That is too much time wasted on a deadbeat." And

**"That might have worked a year or two ago, when HOAs were not in crisis, but now, pushing the processes quickly through when so many people are simply walking away from their mortgages is the only way to get a title change to a "hopefully" responsible party."

This makes sense from a financial perspective for the protection of the HOAs, many of which are experiencing problems paying the bills because of serious increases in the delinquencies in the Association. These people were all people that are looking for solutions for the HOAs. The accountant said: "But when you send accounts out for collection, owners get hit with a big bill for costs, right away, when they missed only one or two payments."

"That is what gets their attention," the others at the meeting chimed in, including me. "The key to accountability is getting their attention."

Accountant: "But the credit card companies don't take drastic measures when someone is late to pay."

Me: "That is exactly the point. If Owners treat the HOA assessment debt like a credit card debt, something needs to happen to get their attention. The first 'pre-lien' letter is geared to do exactly that."

The trouble is that the law is so complicated that HOAs do not often do their own "pre-lien" letters anymore. If a step is missed or a technicality happens (misstep in the process), the whole collection matter can unravel before the HOA Board's very eyes. So they don't risk it. They defer to the collection company's processes that are practiced and experienced, and yes, the collection companies are in the business for profit, not fun, and yes, there are charges that immediately attach when an account is referred out for collections.

Then, that very same day when I returned to my office I had a couple of phone calls and emails from owners in HOAs being threatened with foreclosure, wanting to know what they could do to fight it. Two of them were very pissed off that their Boards sent their accounts to collections after only ONE LATE PAYMENT! They were livid that fees were tacked on so quickly that exceeded the very assessment payment that was late! They wanted to pay for consultations on how they could get out of paying the extra fees. Frankly, I did not really want to charge them for a consultation when I knew they were probably s _ _ t out of luck, especially since they were dealing with HOAs that were "in the choir" - assuming you know what I mean when I say, "preaching to the choir" does little good, its those outside the loop that need to hear this."

"How can the Board do that?" they asked. Well, I knew that if the HOA and management had dotted all the "i"s and crossed the "t"s - they could do that.

Issues may arise if a Board violates its own governing documents and/or California law and you can check out the statutes that apply (if you like reading really dry and confusing statutes). Just go to my website (http://www.californiacondoguru.com), the resource page, and click into the right section of the Davis Stirling Act. The pertinent statutes relating to collections and collections policies are found at Civil Code Section 1365.1, 1366 and the 1367 series. It would be up to you to review your own governing documents and especially the collections policies to determine what they say. If the Board did everything right, the advice I often given is pay up and stop the bleeding! if an owner thinks they have a claim that the Board did something specifically wrong, they can "test their theory" in small claims court, but in order to ask for a remedy in small claims court, one has to have a loss - hence the need to pay off all amounts that are due.

Stalling by putting assessments into escrow or causing delays while you have an attorney write a letter just results in more fees and costs, so anyone challenging an assessment and the collection costs of it had better be right on with their legal theories about "wrongdoing" before delaying the inevitable., or suffer severe consequences.

The law says that if a Board is wrong about a lien and foreclosure, it has to release the recorded foreclosure documents at its own expense and make things right with the owner. But if the owner is wrong, it is easy to throw "good money" after bad.

Maybe I got off point here - which is: while it is easy to have great sympathy for people who are struggling with their mortgage and assessment payments, it is equally easy to have sympathy for those innocent neighbors that are punished by having to cover the debt of their delinquent neighbors, even when they (the paying, struggling owners) are tapped to the max too. It is true that HOAs are "damned if they do (get aggressive with collections) and damned if they don't (get aggressive with collections.

P.S. This just had to be said. Unforetunately for those who are struggling, Boards need to be more diligent than ever about collecting delinquent assessments to protect the innocent parties.

These are difficult times ... I ask that you please don't shoot the messenger!

Posted by Beth Grimm at April 13, 2008 4:08 PM