Under
A.R.S. Section 33-1256 (condos) and ARS Section 33-1807
(planned communities, an association has a lien for unpaid
assessments, fines, attorney fees and interest. The lien is
inferior to all first mortgages and certain government liens.
It is superior to mechanics liens and second mortgages. It is
also not subject to the homestead exemption. On its face, it
is a powerful collection tool. It is largely a myth that
associations take many homes from homeowners. Because of the
homeowners’ financial realities, few homeowners lose their
homes to associations.
My office
filed approximately 50 lien foreclosure cases in 2002. In only
two cases did the association obtain the title to the unit.
The financial realities discussed below explain the low
percentage of completed HOA foreclosures.
Example
A.
Jones lives in a planned community with a retention basin and
a children’s play area. Because of the minimal amenities, the
assessment is only $35.00 per month. She purchased the home
for $140,000.00, with $20,000.00 down, and a $120,000.00
mortgage. It has amortized to a $110,000.00 principle balance,
and appreciated to $150,000.00. Her monthly payment is
$1100.00. She loses her job, and is not able to pay her bills.
Example
B.
Smith lives in a condominium with a clubhouse, pool and sport
court. His assessment is $120.00 per month. He purchased the
unit for $80,000.00, with a $10,000.00 down payment, and a
mortgage for $70,000.00. It has amortized to a $75,000.00
principle balance, and appreciated to $85,000.00. His monthly
mortgage payment is $600.00. He loses his job, and is not able
to pay his bills.
In both
examples, Jones and Smith have equity in the units. They both
have homestead exemptions that cover the entire amount of the
equity. In prioritizing payment of their bills, both if
rational would remain current on obligations that preserve the
equity, and would cut back on the credit card payments, and
payments on other unsecured obligations.
If their
financial positions worsen, they might be forced to skip the
mortgage or association payment. If finances continue to
deteriorate to where Smith and Jones will lose their houses,
consider whether it is more rational to keep the association
payment current, or the mortgage payment current.
If Jones
stops paying the mortgage, Jones will keep $1100.00 in her
pocket every month. In contrast, if Jones stops paying her
association assessments, she keeps only $35.00 per month in
her pocket. If Smith stops paying his mortgage, he will keep
$600.00 per month in his pocket every month. If Smith stops
paying the association assessments, he keeps only $120.00 in
his pocket every month.
If both
Smith and Jones stop paying both their mortgages and their
association assessments, they will lose the units to the
mortgage holders. That is so, because the trustee sale process
is considerably more rapid than an association judicial
foreclosure lawsuit. The judicial foreclosures take several
months, with a six-month right of redemption. In many
association foreclosure cases, the first mortgage holder
begins the trustee sale process after the association has
started the judicial foreclosure process, yet the first
mortgage holder completes the trustee sale process before the
HOA judicial foreclosure process is completed.
It follows
that it is irrational for a homeowner to lose a home to an
association. Our firm has experienced several foreclosure
cases against homeowners who suffered from mental illnesses.
In those cases, we work aggressively with adult protective
services, the public fiduciary or the children of the
homeowner. We do not foreclose on homeowners who suffer from
mental problems. Neither do we foreclose on homeowners who
genuinely work with us to pay the debt over time. In reality,
there are quite few completed association lien foreclosure
cases.
The few
lien foreclosure cases that are completed can make headlines.
As established below, there has been a failure in the few
instances where a homeowner is current on the first mortgage,
yet loses the home to an HOA. In the most recent case, an
association began foreclosure proceedings against a woman. She
appeared to have a genuine hardship (cancer). The attorney who
handled the case was not an HOA industry attorney. He
represented landlords. He treated the case like an eviction.
Most HOA industry attorneys would have worked with the
hardship case and resolved it.
In light
of the recent headlines, the legislature is addressing these
issues. The most common target is the lien. One industry
faction proposes to drastically reduce the power of the HOA
lien. It is certain that lien emasculation legislation would
have far-reaching financial effects on the entire residential
real estate market. The breadth and severity of the financial
effects are not certain. It is troubling that the legislature
would even consider lien emasculation legislation without
studying the likely financial effects on the HOA industry.
The
undersigned along with NICM has drafted two bills that are
currently under consideration in both houses of the
legislature. One bill is short, and provides disincentives for
HOAs to refuse to participate in inexpensive binding
arbitration for disputes with homeowners. The other is a
comprehensive regulatory bill that licenses management
companies. The comprehensive bill also contains a dispute
resolution process similar to the Registrar of Contractors
process.
The
legislature is receptive to alternate dispute resolution for
HOA conflicts. The HOA industry will be better served with
inexpensive dispute resolution, than with legislation that
emasculates the HOA lien.
