Homeowners wage war on real estate dictatorship
By Carol Lloyd
Inman News
Consumer Real Estate News

This is Part 1 of a two-part series.

"In the whole U.S., I would say in the whole world, there has not been another intruding, dictatorial act perpetrated on the owners of free residences as here. And…for 50 years, a dictatorship that has lasted longer than any political dictatorship in the world, including in Cuba." —Mrs. U. Deutsch

When I receive e-missives like the one above, in which people claim to have a Surreal Estate tale the likes of which I've "never heard before" and that will "no doubt amaze [me]," I prepare myself to be underwhelmed. But after sitting with U. Deutsch in her proper Daly City, Calif., home and reading her point-by-point history of the rise and fall of the Westlake Subdivision Improvement Association (WSIA), the nonprofit homeowners' group for a massive development in San Francisco's neighboring Daly City, her hyperbolic turns of phrase no longer seem excessive.

Complete with California Supreme Court decisions, internal documents (from her secret source on the WSIA board), minutes from meetings and letters between opponents that are full of slurs, threats and byzantine bureaucratic maneuverings, her well-organized, meticulously highlighted documents chronicle the 52 years WSIA has existed – for better and for worse – as a sort of surrogate government for its 6,500 residences. Over the years, countless legal and personal battles erupted over the housing association's operations, resulting in lawsuits, accusations of criminal behavior and a deep-seated rift between pro-WSIA residents and those who believed the organization was a fraudulent, money-raising racket for power-obsessed board members and their hired guns.

The battle over the WSIA is a long one, and Deutsch, one of the founders of the resident-advocacy group Concerned Homeowners of Westlake, is its most persevering warrior. But what makes her tale all the more disturbing is not that the 30-year war between local homeowners and their homeowners association (HOA) has been unrivaled in its bitterness but that many other similar conflicts have been just as intense, with much higher stakes.

According to Evan McKenzie, author of "Privatopia: Homeowner Associations and the Rise of Residential Private Government," such entities have the power to effectively take away people's homes over seemingly small disputes.

"It's happening all over," said McKenzie, an associate professor of political science at the University of Illinois at Chigago. "I saw recently on a Web site – hoadata.org – that there had been 15,000 legal filings in the Houston area…between 1985 and 2001."

Indeed, type "homeowners association" into Amazon and you get not only the usual how-to manuals but another genre of literature – what can only be called "homeowner horror," wherein the monsters are homeowners associations, their lawyers and their property managers. There are even Web sites, like www.privatopia.com/info, that compile press links to stories about HOA battles. "Some have resulted in murders," McKenzie said, "and a whole lot of physical assaults."

Given that the vast majority of new construction in the United States – and especially in the San Francisco Bay Area – is built as "common-interest developments," with homeowners associations following their own bylaws, the story of the WSIA may offer a glimpse of what the future holds in store.

The ins and outs of the story of this development of single-family homes, built by Henry Doelger between 1947 and 1964 and comprising nearly a third of Daly City, are cumbersome and complicated at best, but here are some of the salient moments of the organization's 50-year history. When Doelger began selling the properties in 1949, he created a homeowners association with a "Covenants, Conditions and Restrictions" (CC&Rs) document to codify preservation of the spanking-white racial purity of the community. (By 1964, the WSIA was the largest housing association in California.) The "Restrictions" part of the CC&Rs prohibited homeowners from selling, renting or living with anyone "not of the white or Caucasian race" – unless they were employed as live-in servants. Should homeowners break this cardinal rule, they would be obligated to pay $2,000 to each of their eight closest neighbors to offset the presumed decline in property values. (By 1948, the U.S. courts had already ruled that such racial restrictions were not enforceable, but this didn't deter developers from drafting them and homeowners from adhering to them.)

After the 1968 Fair Housing Act made it common knowledge that racial residential restrictions were illegal, the WSIA ceased to act as an arbiter of who was an acceptable resident and instead maintained "aesthetic standards" – determining which plants could be planted in the front yard and whether lawns were kept sufficiently green. The only other service the WSIA offered residents was a tree-maintenance program that cared for the palm trees Doelger had planted on each lot. These trees had a life span of about 25 years, however, so most of them have since been pulled out or replaced.

But without common property to maintain, Deutsch argued, the homeowners association, one of the biggest in the country, had no reason to exist.

Of course, not all Westlakers agree. Norman Karasick, a member of the most recent WSIA board, told me by phone that he considers the organization a necessity. "It's a political entity like other neighborhood groups. Like, you must have 40 of them in San Francisco. It's for political power. Well, let's not say 'power,' let's say 'input.'"

What is the raison d'etre of the homeowners associations? Karasick said such organizations are important in order to represent the community to city hall and to "resolve disputes within the community."

Yet, unlike many neighborhood groups, membership in the organization is not voluntary. For people like Karasick, this makes the group more effective because, with more members, there is "more political clout."

For others, however, membership felt like little more than a trumped-up means for fining residents.

For failure to pay yearly assessments, which are tiny amounts – beginning at $7 per year and merely tripling by the late 1990s – or engaging in unacceptable gardening practices, residents could receive fines, threats of lawsuits and liens on their properties, which often amounted to thousands of dollars in penalties. For many homeowners, the experience was especially confounding, since the WSIA guarded the CC&Rs closely and, during its early years, didn't hold public meetings.

Linda Telles, a resident of Westlake for 39 years, recalled that when she tried to attend a meeting in the 1980s, all conversation stopped when she entered the room. "They told me it was a closed meeting and they wouldn't open their mouths until I left." The second time, she said, she came with some fellow homeowners, but they were not allowed in the door. The third time she tried to attend, she found the doors locked and a sign explaining that the meeting had been moved to another location.

Sometimes, homeowners would discover their legal relationship with the WSIA only after they had signed on the dotted line and bought their new home. "We had already signed the papers at the title company, and we were leaving, when they said, 'Oh, yes, and one other thing – there's a homeowners association,'" said Deutsch. "But then they said, 'But that's a good thing.'"

For 47 years, one lawyer and Westlake homeowner, Hartley R. Appleton, acted as the WSIA's legal counsel, aggressively pursuing the group's complaints. In the end, after receiving hundreds of thousands of dollars in fees, he retired. Deutsch contends that all along, he was breaking the WSIA articles of incorporation, which prohibit him, as a Westlake homeowner, from receiving money for his legal work.

Since Appleton's retirement in 1997, three law firms have represented the WSIA in too many cases to elaborate on here. Two cases have reached the California Supreme Court, many have played out in small-claims court and some have been highly personal, including two lawsuits filed in which residents accused their opponents of threatening to murder them.

Over the decades, hundreds of liens were filed against homeowners, and there were countless struggles over the most inane matters. Many homeowners discovered they owed $500 fines for removing the withering palm trees in their front yards or adding a strip of roses in the wrong place. Others got into conflicts with the WSIA for prohibiting additions to their properties even after they had received building permits from the city.

In 1980, some of the 51 subdivisions began the process of formally terminating their relationship with the organization, gathering the necessary notarized signatures from more than 50 percent of the homeowners and filing them with the San Mateo County government in Redwood City. Over the course of the next three years, 12 subdivisions legally terminated their membership, but the WSIA ignored their claims and continued to levy assessments and slap liens on properties for undue assessments. In 1981, Deutsch helped found Concerned Homeowners of Westlake to organize homeowners against the WSIA.

In 1997, the homeowners from terminated sections sued the WSIA in small-claims court to recover assessments they had been charged. The homeowners won, and when the association appealed to the state Supreme Court, the original judgment was upheld. In 1998, the WSIA hired a new attorney, who decided to rewrite the CC&Rs and claim Westlake was a common-interest development, the same legal entity condominium developers organize under, in which shared property is maintained. To shore up this claim, the WSIA claimed it had discovered five tiny pieces of shared property, hitherto thought to be part of Daly City and neighboring Pacifica streets. The WSIA also hired a property-management company, which was paid more than $70,000 a year.

Although the details of these new covenants were not made public, many homeowners began to get nervous when they saw an item in a property manager's budget that made mention of foreclosure. Homeowners also heard that after a home sale, there would now be a transfer fee of $125 payable to the property manager. And, in a questionnaire sent out to homeowners, the property-management company inquired as to whom the firm should contact in order to enter homes in case of emergency. All such fees and precautions are par for the course for a regular condominium complex, where there is shared property and property managers have many responsibilities. But for many Westlake homeowners, this was a red flag that they were losing their property rights.

"We had bought single-family homes, not condominiums," said Linda Telles. "The idea that they could now foreclose on us, that they could enter our homes – that's when people got very angry."

Upon hearing about these new covenants and rules, even former association attorney Hartley R. Appleton, now retired but still a Westlake homeowner, chose to sign the termination statements in order to sever his relationship with the WSIA.

Homeowner Alicia Holdinghausen recalls that in 1998, many of her neighbors stood in lines in the rain for hours, waiting to sign documents with notary publics to terminate their relationship with the WSIA. "They were lined up around the block, all day long," she said. "I was helping at the table, and I started at 9 a.m. and didn't get home until after 4 p.m."

Again, the WSIA refused to recognize the terminations of the 19 subdivisions that compiled signatures. As a result, the neighborhoods' homeowners filed their papers with the California Superior Court, which again found in favor of the homeowners.

Now the WSIA has all but ceased to exist. The group's phones have been disconnected, and the last board of directors retired earlier this year. The property-management company terminated their contract, and all the lawyers have washed their hands of WSIA business. (None of the most recent group of attorneys returned phone calls requesting an interview.)

"It still exists on paper," said Deutsch, but she added that it's just a shell. "We don't get any answers from anybody. We don't know where they stand. It's unconscionable."

Former board member Norman Karasick confirmed the WSIA's amorphous status. "It's still an organization, but it's ineffective. Nobody's in charge."

But questions remain about the fate of funds in the association's coffers. "We have reason to believe that there's still money in the WSIA accounts," Deutsch said.

Karasick maintains that "there was very little money. What's left, our lawyer is taking care of, and arranging for a caretaker." Karasick declined to name the WSIA's current lawyer, he said, "because I don't want to have him bothered."

Many of the key players who fought on one side of the issue or the other now live in subdivisions that voted themselves out of the WSIA or have moved out of Westlake altogether. This has left Deutsch holding the documents of what she sees as half a century of injustice and the knowledge that the work of the WSIA still could plague homeowners – even from its wastepaper-basket grave.

Why? Because liens filed by the WSIA may still be on record with the county, and when people choose to sell their homes, they suddenly find they have a lien on their home filed by an organization that no longer exists. For this reason, Deutsch is still writing letters to the WSIA's lawyers, asking them to make a formal declaration that the WSIA no longer exists and to inform the title company that the liens have been removed.

Why would a homeowners association that deals with such picayune bits of money and is run by a volunteer board of directors become the locus of such acrimony and conflict? Is it just that some neurotic homeowners have too much time on their hands, or is it something more structural that is reshaping the American dream into a realm that few of us would recognize?

Carol Lloyd's Surreal Estate column appears every Tuesday on sfgate.com. She can be contacted at carol@creatingalifeworthliv ing.com.
posted by Las Vegas at 1:05 PM

Bill to ban foreclosures for small sums in homeowner associations passes final committee test

By Jim Wasserman
ASSOCIATED PRESS
12:10 a.m. June 30, 2004

SACRAMENTO – A bill banning foreclosures in California's 36,000 homeowners associations for unpaid assessments under $2,500 has passed its final committee test.

The Senate Judiciary Committee approved the legislation 5-0 Tuesday, ending six months of committee hearings on bills with national implications for private neighborhoods that are home to 8 million Californians and one in six U.S. residents. Assembly and Senate floor votes are expected in August when the Legislature returns from its summer recess.

The vote provided more momentum to curb association foreclosure powers for small sums in California and reduce influence of attorneys and collection agencies. Homeowner activists and senior citizens groups maintain the foreclosure process is easily abused, while most major associations defend it as a necessary tool to collect assessments and maintain an association's financial stability.

"I urge you to be very, very cautious about doing anything that discourages people from paying assessments," said Michael Belote, lobbyist for the California Trustees Association, a group representing firms that handle home foreclosure sales.

"Our position has always been that homeowners associations need legal tools to collect assessments, but foreclosure should not be the first tool out of the kit," said Marjorie Murray, lobbyist for the bill's sponsor, the Congress of California Seniors.

Assessments that average between $100 and $200 monthly are a private neighborhood's equivalent of property taxes, paying for lawn care, security guards, tree trimming, pool maintenance and street repairs. But lawmakers want associations to collect unpaid assessments by posting liens – a legal right to collect when the house sells – or take the delinquent homeowner to small claims court.

While unpaid sums over $2,500 could still be collected by judicial or nonjudicial foreclosure, strict new limits could discourage late charges and attorneys fees. New rules would also make bids for foreclosed homes be at least 90 percent of appraised value and give residents 90 days to buy their homes back after the sale.

If California lawmakers approve the proposal before Aug. 31 and Gov. Arnold Schwarzenegger signs it by Sept. 30, homeowner activists will have succeeded where similar legislative campaigns recently failed in Arizona, Texas and Florida. Opposition in all three states blocked efforts to ban foreclosure for unpaid assessments, though Arizona and Florida recently banned foreclosure for fines levied by associations.

California's legislation, co-authored by Assemblyman Darrell Steinberg, D-Sacramento and Sen. Denise Ducheny, D-San Diego, would drastically overhaul a foreclosure procedure largely set in motion a 1985 law that substantially increased penalties, fees and late charges added to late assessments. Though the added fees increased association leverage over homeowners to pay their bills, critics say unpaid assessments are often dwarfed by attorneys fees and allowed a string of high-profile home foreclosures over small sums.

Most recently, a Calaveras County homeowners association sold the $285,000 home of retirees Tom and Anita Radcliff for $70,000 over a $120 late payment that quickly bloomed to $1,952 with penalties, fees and late charges.

But lobbyists for homeowners associations have called the case an exception, and say fewer than 1 percent of foreclosures end with a lost home.

"We've been unfairly compared to Goliaths out there, after the individual and senior homes," said Skip Daum, lobbyist for the Community Associations Institute, a Virginia-based group that advises homeowner associations.

In related action, the committee also passed 4-0 a bill by Assemblyman John Laird, D-Santa Cruz, giving potential buyers of homes in association-governed neighborhoods a clearer picture of what they're getting into financially. The bill makes associations spell out more clearly the monthly dues, expected increases and amounts that dues must rise in coming years to properly maintain the neighborhood.
posted by Las Vegas at 8:28 AM

June 28, 2004
Families, Deep in Debt, Facing Pain of Growing Interest Rates
By LOUIS UCHITELLE

ANCASTER, Pa., June 25 — With the Federal Reserve about to raise interest rates for the first time in four years, Joyce Diffenderfer is beginning to wonder how she and her husband, Curtis, will deflect the growing cost of their $16,000 in credit card debt.

Not that her concern is a pressing issue yet; it is more like a fire drill in anticipation of a fire that she is still not convinced will occur. The Diffenderfers figure that a modest rate increase would initially add only $35 to their monthly card payments, which now total more than $600. Still, they have run out of ways to sidestep the cost of borrowing, and if the rates keep rising, as the Fed's leaders suggest they will, then the only alternative, Mrs. Diffenderfer said, will be to seriously cut family spending.

The Diffenderfers are among the millions of American families who rode the recent wave of low interest rates to home ownership and the rapid accumulation of debt, and now they must cope as rates begin to swing upward. The process is almost certain to begin at a meeting of the Fed's policy makers on Tuesday and Wednesday. They are widely expected to raise rates a quarter of a percentage point and follow that with similar increases periodically over the next 18 months.

"Unless there is a sizable jump in rates, let's say two percentage points within a year, I'm not going to think much about it," said Mrs. Diffenderfer, 47, who earns $14 an hour fielding customer calls at Kunzler & Company, a manufacturer of sausages and frankfurters in this southern Pennsylvania industrial city on the fringe of Amish country.

"Less than two percentage points we can handle just by not eating out as much," she said, swiveling her chair away from her computer for an interview late in the day, after the phone calls died down. Her husband, 55, is a construction worker.

By several measures, Americans are more indebted than ever. Through the first quarter, they owed nearly $9 trillion in home mortgages, car loans, credit card debt, home equity loans and other forms of personal borrowing — accumulating nearly 40 percent of this total in just four years, according to published Federal Reserve data. But most of the debt is at fixed interest rates. Thus it will be unaffected initially as the central bank begins its much expected quarter-point increases in the so-called federal funds rate, now at a 46-year low of 1 percent. The federal funds rate, in turn, influences the interest rate cost of most household and commercial debt.

Only one-fifth of the $9 trillion in total household debt, or $1.8 trillion, is borrowed at variable rates. Variable rates, like those that the Diffenderfers pay on their four credit cards, often track what the Fed does, which means they are likely to rise one-quarter of a percentage point over the next few weeks. The immediate cost for the nation's households as a result of this process could be as much as $4.5 billion, including the initial $35 increase in the Diffenderfers' monthly credit card bill.

The $4.5 billion is roughly 10 percent of the cost of the rise in oil prices so far this year. That is not a big number yet, but each quarter-point increase would be another step closer to matching the oil shock, which brought gasoline prices above $2 a gallon in many parts of the country.

While the oil shock quickly raised the gasoline and heating oil bills of nearly every household, the burden of higher interest payments falls most heavily in the early stages on lower- and middle-income families. They are the biggest users of variable rate debt, particularly on credit cards, various studies show.

Upper income families, on the other hand - that is, families with more than $80,000 in annual income - are more likely to have fixed rate debt, particularly mortgages, and to owe relatively little on their credit cards. What variable rate debt they do have is usually at lower interest rates than lower income people. Lower income people, as a result, are 10 times more likely than upper income people to be devoting 40 percent or more of their income to debt repayment, the Economic Policy Institute reports. In addition, upper income people are the nation's biggest savers, and a rate increase raises the return on their interest-bearing securities.

"If you are a household with a lot of variable-rate debt and little equity left in your home that you have not already borrowed against, this is going to be a scary time," said Mark Zandi, who is the chief economist at Economy.com.

The Diffenderfers have a combined income of nearly $70,000 a year, including the overtime he earns and the small payments she receives as assistant organist at her church. They have been married 17 years but they lived with her mother for the first 11, paying her rent. When they finally bought a house of their own in 1998, for $89,000, they had nothing saved for a down payment, and borrowed the entire amount through a 30-year mortgage. They also took out a second mortgage, for $30,000, which they invested in remodeling the home: aluminum siding, a new bathroom and a refinished living room with oak trimmed walls.

As interest rates fell, they refinanced both mortgages, locking in a 5.25 percent fixed interest rate for 30 years. Still, the remodeling continued, mainly on credit cards once the $30,000 was exhausted. Their three-bedroom house is now worth nearly $120,000, almost equal to the mortgage debt, Mrs. Diffenderfer estimates. That leaves the couple with no spare equity that can be extracted in cash through a bigger mortgage. Nor can they lower their $726-a-month mortgage payment. With mortgage rates already rising in anticipation of the Fed's increases, that once lucrative route for millions of consumers is closing.

The Diffenderfers have only their salaries to meet the rising cost of their variable rate credit card debt, although for a while Mrs. Diffenderfer managed to reduce the interest payments by switching the balances to new credit cards whenever she could get a lower rate. The interest rates on her cards now average just under 10 percent, partly through her efforts to find teaser discounts and partly because credit card companies dropped their rates several percentage points, a decline now likely to be reversed.

"There are adjustments we could make in our spending," Mrs. Diffenderfer said. "Eating out is one. We could put remodeling of our home on hold and give ourselves a breather. We contribute $125 a week to our church. We don't want to cut back on that but we would if our financial situation changed drastically. It would have to be pretty drastic."

Another notch up in home prices would give the Diffenderfers some relief; they could float a 4 to 5 percent home equity loan against the additional value of their home and use the loan to pay down credit card debt. Tens of millions of Americans have used this route to lower the interest cost of credit card debt. With homes appreciating more slowly, there is less collateral left to support home equity loans, and paying the outstanding balances will become more costly. They totaled $375 billion at the end of last year.Home prices are a big potential casualty of rising interest rates. Sales of new and existing homes surged in May, the government reported, as people apparently rushed to become homeowners before mortgage rates went any higher. The average 30-year mortgage is already up a percentage point since early spring.

But for Stephen Black, a homebuilder here, the surge in home sales is a false signal. The customer base is already shrinking for his basic product, a two-story house with four bedrooms and a two-car garage on nearly a quarter-acre, a home currently priced at $215,000.

The buyers were families with $50,000 to $70,000 in annual income. Now they are increasingly bunched at the high end. The low end is pulling back partly because mortgages are more costly, Mr. Smith says, but also because in the past year the cost of building materials rose $17,000 and his company, Stephen Black Builders, has been able to pass along only $14,000 of that. Even the higher-income families have resisted paying the last $3,000. "Sales of these homes had been averaging 20 to 22 a year," Mr. Smith said, "but I think they will drop to 18 to 20."

One antidote to rising interest rates could be the recent surge in employment, and all the new income that will accompany the one million jobs created since February - but that remains to be seen. "The question really is, are the people who are leveraged with debt, are they the ones getting the jobs and income?" said Richard Berner, chief domestic economist at Morgan Stanley. Employment growth has been fairly robust in Lancaster, but even so, Mr. Smith is seeing fewer customers as they react to rising prices and interest rates.

Across town, in a rundown neighborhood, the working poor are just starting to show up in greater numbers at Tabor Community Services, a Lancaster agency that counsels those deeply in debt, said Michael Weaver, president of Tabor.

The "fragile low income," as Mr. Weaver calls them, do not tend to own homes, but those who do buy them through subprime mortgage loans, in many cases with adjustable rates. Apart from housing, nearly every transaction for these consumers involves interest payments in one form or another. Lacking enough income, they rent television sets, furniture and appliances, signing agreements that can adjust upward as interest rates rise.

Like their higher income peers, Mr. Weaver's clients often take loans to buy car, in their case, used cars. But they are loans of shorter duration and higher interest rates than the standard four- or five-year new car loan, now averaging 7.4 percent. They have credit cards, but at rates above 15 percent, which convert into much higher penalties when monthly payments are late.

"These are people who are maxed out on debt," Mr. Weaver said, "and their numbers are growing."


Copyright 2004 The New York Times Company
posted by Las Vegas at 4:31 AM

Homeowner Groups' Power to Foreclose Is Under Attack
Lawmakers say boards have gone too far by seizing and selling units over minor disputes.
By Daniel Yi
Times Staff Writer

June 7, 2004

Alarmed by a flurry of horror stories, state lawmakers are rushing to resolve a long-standing complaint about homeowners associations: the power that they have to seize properties without going to court.

By law, associations are entitled to foreclose on the homes of members who fail to pay their dues. Though most residents pay their bills before their houses are actually sold, thousands have lost their homes, sometimes over disputes involving a few hundred dollars.

"It's legalized extortion," said Marjorie Murray, a state advocate for senior citizens, many of whom live in condominiums and private communities run by associations. "Why should homeowners associations have such a power?"

Some homeowners association leaders say they need so-called nonjudiciary foreclosure powers, which allow them to take property without seeking a judge's approval, to keep neighborhoods looking tidy and to protect property values. Without such powers, associations would have little ability to require homeowners to pay assessments that cover the costs of such projects as new roofing in a condominium complex or landscaping services and street maintenance in a gated subdivision.

"Unless and until these debts are collected, the remaining homeowners must make up the difference, and that is unfair to them all," said Skip Daum, a lobbyist for the Community Associations Institute, a trade group whose members include homeowners association boards, community managers and lawyers.

But the Assembly and the Senate, responding to recent high-profile cases, are considering two bills this year that would limit homeowners associations' nonjudiciary foreclosure powers.

"One of the doctrines of our laws is that the penalty or remedy should fit the violation," said Assemblyman Darrell Steinberg (D-Sacramento), whose bill banning nonjudiciary foreclosure passed the Assembly at the end of May. "And taking someone's home obviously should be the last resort."

The controversy over nonjudiciary foreclosure stretches beyond California as legislators from Arizona and Texas, among others, have attempted — with mixed results — to limit the power of homeowners associations. Still, associations in many states can simply auction a property after deeming a bill overdue and filing notices with the county.

An estimated 8 million Californians — about one-fourth of the state's population — live in communities governed by homeowners associations. About 2,500 residential developments governed by associations are built in the state each year, the California Research Bureau says. And 40% of new single-family homes sold are in homeowners associations, the Public Policy Institute of California says.

As they grow in numbers, homeowners associations — a form of private government whose elected board members enforce community rules and levy assessments — have come under criticism, even ridicule, over seemingly trivial regulations, including what lawn ornaments residents are allowed to have or what color they can paint a front porch.

But the ability to take someone's home is such an extraordinary power that its use should be limited, even banned, critics of the practice say. Some associations are too quick to resort to foreclosures, sometimes over relatively small amounts, the critics say. And because the associations have little interest besides recovering the dues they are owed, homes are sometimes sold for pennies on the dollar, leading to huge losses for individual homeowners.

In Tom and Anita Radcliff's case, their association sold their home in less than a year over what began as a $120 bill.

Citing financial and health problems, the couple didn't pay the annual dues. Their Copperopolis, Calif., home, which was appraised at $277,432 and had a $30,000 lien on it, was auctioned for $70,000 in December.

The sale left the retired couple with about $68,000 after subtracting the unpaid assessment and collection fees — and without their house.

"It just didn't occur to me that someone would foreclose over $120," said Anita Radcliff, 64. "It was outside the realm of my reality."

Mike Woodbury, an attorney for their homeowners association, Copper Cove at the Lake Tulloch Owners Assn., said the couple were given warnings and opportunities to avoid the sale. "It is the obligation of the homeowner to pay the assessments," he said.

The couple filed a lawsuit in March, alleging among other things that the foreclosure was an abuse of collection laws. They are being allowed to stay in the home until the lawsuit is resolved.

Melissa Colburn of Chula Vista, Calif., sued her homeowners association after it sold her $230,000 two-bedroom townhome for $5,150.

Colburn, an expert on hazardous materials, said she wasn't receiving her homeowners association bills because of a mail mix-up. She got an eviction notice in late 2002 from the man who bought her home, Carlos Sosa.

"I thought it was a joke," she said. "I almost threw the piece of paper away."

Colburn, 35, settled her lawsuit and reclaimed her townhome at the Villas at Eastlake Shores Owners Assn. But in the process of building her case, Colburn found that her association's law firm, Peters & Freedman, had acted as a trustee in other foreclosures in which Sosa had bought properties.

In one case, Sosa paid $2,515 for a house in Escondido and, in another, $2,987 for a condominium in Bonita, according to property records in Colburn's lawsuit.

Colburn accused the law firm and Sosa of colluding to sell foreclosed homes at rock-bottom prices. Sosa and David Peters, of Peters & Freedman, denied the charges in court filings.

Sosa did not return calls, and Peters declined to comment specifically on the case, citing the settlement's confidentiality agreement.

"Foreclosure is a small part of our business," said Peters, whose firm represents nearly 600 associations in Southern California. "It is certainly not a profitable part of our business."

But it would have been a potential windfall for Sosa, who stood to make as much as 20 times his investment. Colburn said her townhome had nearly $100,000 in equity after subtracting the $130,000 in mortgage still owed to her bank.

Experts say such profits are possible in part because auctions held by homeowners associations are not widely advertised, and associations are typically interested only in recovering the dues and collection fees they are owed. By law, the bids start at the amount owed, and any anything above that goes to the original homeowner. The buyer assumes some prior liens, such as the mortgage.

California homeowners associations can auction a property in as little as six months — far more quickly than county tax collectors, for example, who must give homeowners five years to pay. Their power is similar to that of a mortgage bank, which technically owns a home until its loan is paid and can auction a property without a judge's review if the borrower defaults.

Actual sales of homes are rare. About 1% of all foreclosure actions begun by homeowners associations end with the home being sold, according to the Community Associations Institute, which conducted a survey in 2002. Most homeowners faced with the prospect of losing their home at auction pay their debts, the trade group maintains.

But based on the institute's numbers and estimates of the number of California homes that are governed by homeowners associations, that 1% represents several thousand foreclosed homes in recent years.

Hundreds of thousands of others are threatened with the action every year. And because there is no judge reviewing the process, the critics say, those who believe they are being wrongfully targeted have little choice but to pay their associations or file costly lawsuits.

Lawmakers would like to curb the trend and offer some protection for individual homeowners.

A bill introduced by Sen. Denise Ducheny (D-San Diego) would prohibit homeowners associations from foreclosing for debts of less than $2,500 and assure that those who are drawn into foreclosure receive at least a portion of their equity: up to $50,000 for a single adult, $75,000 for a family and $150,000 for senior citizens.

The Senate passed the bill unanimously last month. Ducheny's bill is likely to be combined into a compromise bill with Steinberg's Assembly bill, which passed 69 to 10 and seeks to ban the practice altogether. A final version should reach the governor's desk later this year.

"There is an increasing share of our population who" live in places with homeowners associations, Ducheny said. "And that raises all sorts of question about how they are governed which the Legislature has considered [in the past]…. But nothing is as visceral as someone losing their home."

Copyright 2004 Los Angeles Times
posted by Las Vegas at 9:49 AM