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Foreclosure

Four years have passed since that heated summer of 2005 when the U.S. Supreme Court shocked our national conscience by declaring that government can forcibly condemn a family’s home simply to make way for a more lucrative private development. While Colorado lawmakers responded by banning such a practice here, new threats to property ownership emerge every day.

Property rights are the nation’s least sexy — and most often forgotten — civil right. As Americans, we take for granted that when we purchase a home, no one can take it from us, except in rare exceptions based on overwhelming proof of public need. But in too many cases, this simply isn’t true.

source:  Jessica Peck Corry.  "Property Rights - America's Forgotten Civil Right"  August 27, 2009  (emphasis added)
At the time this article was written, Ms. Corry was director of the Independence Institute's (now defunct) "Property Rights Project"
Despite having a "Property Rights Project" and a "Center For The American Dream", the Independence Institute has never, not once,
informed its audience about the threat that H.O.A.s pose to individual private property rights and home ownership.

Most people I've talked to are not aware that H.O.A.s can foreclose on their homes, and have much more incentive to do so than any government.


source: HOA Reform Coalition, "HOA Attorney Fees; An Unconscionable Racket" (April 20, 2011).  Video hosted on Vimeo.


I believe it's fair to say that foreclosure is the business model of homeowners associations.

There are many horror stories about people losing their homes for trivial amounts and reasons to their H.O.A.  For some strange reason, the most vocal proponents of individual private property rights have ignored these "isolated incidents"; even when the victim was an American soldier in a combat zone.  Consider that


And in 33 states, an HOA does not need to go before a judge to collect on the liens.

It's called nonjudicial foreclosure, and in practice it means a house can be sold on the courthouse steps with no judge or arbitrator involved. In Texas the process period is a mere 27 days — the shortest of any state.

David Kahne, a Houston lawyer who advises homeowners, says that in Texas, the law is so weighted in favor of HOAs, he advises people that instead of hiring him, they should call their association and beg for mercy.

"I suggest you call the association and cry," he says.

. . .

With the recession, foreclosure filings for delinquent HOA assessments in Texas have increased from about 1 percent of all home foreclosures to more than 10 percent currently, according to the industry.

source:  "Not So Neighborly Associations Foreclosing On Homes"  NPR.  June 29, 2010.  (emphasis added)


Nine years ago, Evan McKenzie, a former HOA lawyer, author of Privatopia (1994) and Beyond Privatopia (2011), and currently editor of the Privatopia Papers blog, observed that

What's really driving this is the dynamics of these collection lawyers who are just out to generate fees and to sell these houses off as fast as they can.

source:  "Do Homeowners Associations Go Too Far?"  ABC 20/20  April 20, 2002.

These lawyers take a "collection-agency posture," he says, putting liens on property when homeowners are 10 days late paying an assessment. "Every letter has a price tag -- and if the homeowners don't pay, you slap them with a lien." Although the assessment is perhaps for only a few hundred dollars, the lien may total $5,000 or $10,000 -- and, in order to clear their title, the homeowners must pay not only the assessment but the lien as well. If they cannot do so, McKenzie says, they can lose their home through a form of foreclosure unmediated by the courts or any local government.

"These lawyers are so rapacious that it's just shocking," says McKenzie, adding that no laws govern their fees -- they can basically charge whatever they want. "It's up to the homeowner to file an action with the court, and if you don't file a lawsuit, you are out of your house before you can say boo," he adds.

The worst part about the whole process, says McKenzie, it that it's legal, a fully institutionalized practice: "The bar even offers workshops on the process." 

source:  Carol Lloyd.  "The Myth of Privatopia"  SFGate.com.  December 17, 2002.  (this is a follow-up to "Westlake Wars")


Although the housing crisis that began in 2006 and the recession that began in 2007 (and officially ended in 2009) are cited as factors, foreclosures by H.O.A.s were on the rise years before.  Note that the statements by Professor McKenzie above were made in 2002, after he had spent years practicing in and more years studying the industry.  The incentives of the profit-motive ensure that foreclosures by H.O.A.s are a feature, not a bug.

HOA Foreclosure Filings in Harris County, TX  1985 - 2007
Examples from the 1985-2001 database:
Some HOAs filed against 10% or more of their homeowners in one year.
One attorney appears on over 10% of filings. (1985-2007)
To avoid foreclosure, what must homeowners pay attorneys and HOAs?
source:  HoaData.org


While more Americans are facing economic hardship, HOA attorneys are advising their clients to "be aggressive with your foreclosure actions."

As a Managing Shareholder of Katzman Garfinkel & Berger (KG&B), I have witnessed the dramatic effect that the downturn in the economy has dealt many communities here in South Florida and across the state.. . .

History has taught us, however, that there are always those who survive and even thrive in tough times! My team of community association attorneys and I started to ask ourselves: What should communities be  thinking about right now in terms of saving money, recouping lost money and even making money?. . .

Rethink your traditional collection policy in light of today’s economic realities. . .

Be aggressive with your foreclosure actions.

                      source:  Donna Berger, Esq. (Community Advocacy Network)  "Time To Tighten Up Your Collection Policy"   April 01, 2010.  (emphasis added)

The first thing you want to do is to make sure that your governing documents provide you with all the right tools to deal with your foreclosure and other issues....

Adding late fees (if you don’t already have them) and increasing the amounts you can charge for late fees and interest to the “highest amount permitted by law”....

Add an acceleration of payments clause in the event installments are not timely paid. This gives the association a larger hammer to collect for the whole year which obviously benefits cash flow.

source:  Donna Berger, Esq. (Community Advocacy Network)  "Spend $$'s To Recoup More $$'s" (sic)  April 02, 2010.  (emphasis added)

Our goal is to move assessments to the top of the priority list and to impress upon owners that paying assessments is critical to keeping their home....

We have developed successful alternatives when traditional collection methods fail, including the use of foreclosures and receiverships. By taking a proactive, aggressive approach, your association can quickly recover the assessments you are owed....

Colorado has one of the highest foreclosure rates in the nation. HOALiensFor Sale is a service we offer which will benefit your association and its bottom line.

                      source:  HindmanSanchez.  "Collections/Foreclosures" (emphasis added)


Apologists for H.O.A. foreclosures claim that it is necessary for "community associations" to have the power of foreclosure to ensure that homeowners pay their H.O.A. dues (a.k.a. assessments).  However, H.O.A.s can also foreclose to collect arbitrary fines and fees (such as fees to collections attorneys, to collect the arbitrary fines).   The industry uses an accounting practice call "Application of Payments," or "Priority of Payment," to inflate fines and fees that can allow it to foreclose.

Every action, every demand, every fine, and every fee made by a "community association" is backed with the threat of losing your home.


The "Priority of Payments" Scam Accounting System    ( perma-link to this section)


At 5 minutes 25 seconds into the video below, the reporter explains how H.O.A.s can foreclose on your home, even if you have paid your H.O.A. dues (a.k.a. "assessments"):

HOA News Austin (2006)


John Carona (Republican-Dallas) "HOA And Change"
The law says if your HOA gives you a fine and you don't pay it, your homeowners association cannot sell your house.  They can only foreclose if you're behind on dues.  But some HOAs are getting around the law, by reassigning payments.   You pay your dues, but instead the HOA applies that money to fines.  That way, the fine is paid whether you agre e with it or not, and the HOA can still threaten to sell your house.

...Senator Carona says he will oppose any effort to ban HOAs from reapplying your payments.

As of July 2011, the Carona Loophole has not been closed.  (UPDATE:  Some reform was passed in Texas this year, but with major loopholes demanded by the industry that still keeps the homeowner at a huge legal and financial disadvantage.  See here.  I'll update this section when I have time to analyze this.  Until then, it sounds like one of those laws that give the appearance of making things better without really doing so).

This "Priority of Payments" scam is a common H.O.A accounting practice throughout the country.  Keep this in mind whenever you hear an industry spokesperson or H.O.A. collections attorney or H.O.A. board member speak about "delinquencies."   "Delinquent assessments" includes homeowners who are paying their regular dues, but have had their payments applied to some arbitrary fine or fee, including extortionist attorney fees, by the H.O.A.   Consider the following example:


DATE
DESCRIPTION  AMOUNT  BALANCE  
 1/1      assessment  
 -$100 
 -$100 
monthly HOA dues    
 1/2      payment      $100 
 $0 
 payment for monthly HOA dues
 2/1          assessment  
 -$100 
 -$100 
 monthly HOA dues
 2/2      payment  $100 
 $0 
 payment for monthly HOA dues
 2/3
 fine 
 -$50 
 -$50 
Some arbitrary fine. 
Say, the homeowner parked his car on his driveway, which is against the rules.  Homeowner disputes the fine, and refuses to pay it.  However, he still pays his regular HOA dues.
 3/1  assessment     -$100 
 -$150 
 monthly HOA dues
 3/2      payment  $100 
 -$50 
payment for monthly HOA dues
HOA applies payment to fine, creating a $50 delinquency in the homeowner's assessments.
 3/15      late fee
 -$20 
 -$70 

 4/1          assessment      -$100 
 -$170 
 monthly HOA dues
 4/2  payment  $100 
 -$70 
payment for monthly HOA dues
HOA applies
$20 to late fee of 3/15, 
$50 to remainder of assessment charge of 3/1,
$30 to assessment of 4/1, creating a $70 delinquency.
 4/15  late fee    
 -$20 
 -$90 
 
 5/1      assessment  -$100 
 -$190 
monthly HOA dues
 5/2  payment  $100 
 -$90 
payment for monthly HOA dues
HOA applies
$20 to late fee of 4/15,
$70 to remainder of assessment charge of 4/1,
$10 to assessment of 5/1, creating a $90 delinquency
 5/3      legal fees    
 -$200 
 -$290 
Since the homeowner has been delinquent for two months, HOA turns account over to the association's collections attorney.
 5/15      late fee    
 -$20 
 -$310 
 
 6/1  assessment      -$100 
-$410 
           monthly HOA dues
 6/2  payment  $100 
 -$310 
payment for monthly HOA dues 
HOA applies
$100 to attorney fee of 5/3,
$0 to remainder of assessment charge of 5/1,
$0 to assessment of 6/1.
 6/3      legal fees
 -$500 
 -$790 
Including filing a lien against the house.
 6/15       late fee
 -$20   -$810 

 7/1        assessment
 -$100 
 -$910 
$100 monthly HOA dues
 7/2           payment
 $100 
 -$810 
payment for regular HOA dues
HOA applies
$100 to remainder of attorney fee of 5/3
$0 to remainder of assessment charge of 5/1
$0 to assessment charge of 6/1
$0 to assessment charge of 7/1
Depending on the state, the homeowner may be at risk of losing his house.
At the very least, he will be subject to litigation, where the HOA will claim it has suffered "damages".  In this sample ledger, the "damages" are $810 at this point and increasing.  In any legal action, the homeowner will be required to pay up-front for his legal expenses and the HOA's legal expenses.
Because the "Priority of Payments" accounting scam is legal, the HOA will be able to claim that the homeowner is delinquent in paying his regular dues (a.k.a. "assessments"), even though he has been making regular assessment payments every month.
As far as the law is concerned, the homeowner has no recourse.  The courts consider these fines and fees to be legitimate debts that the homeowner agreed to pay when he became a member of the HOA.


By employing such accounting practices, H.O.A.s are artificially inflating the rate of true delinquencies in their associations, thus lowering property values and making it harder for the association, homeowners, and potential home buyers to get a loan.  But it is not for the benefit of the homeowners, or even the H.O.A. corporation itself, that these policies are created.  The H.O.A.'s attorneys -- who often craft these policies for their own benefit -- get paid first, so they have every incentive to create strife, conflict, and litigation within H.O.A. "communities."


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