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Homeowners Association Foreclosures: Necessary or Extortion?


Using foreclosure to collect delinquent fees is becoming increasingly popular, especially in Texas, Florida, Arizona, and California.

Editor's Note: This article was written by Keith Jurow who currently writes about overlooked aspects of the housing debacle. This piece was originally posted on Real Estate Channel.

In 2000, an 81-year-old widow named Wenonah Blevins had fallen behind by $814.50 on homeowners association (HOA) assessments in her Houston, Texas subdivision. Without her knowledge, the homeowners association (HOA) foreclosed the lien on her property, then sold her $150,000 home for $5,000 the following April.

How could this happen? The annual HOA dues were $400. Because she was two years in arrears, Blevins dropped off a check for $800 to the Association in August 2000. Because the HOA had already begun legal proceedings against her, it didn't cash the check. Although the HOA tried to serve the required legal process on her, this was apparently always attempted after 7 p.m., when Blevins refused to open the door for fear of prowlers.

So on April 10, 2001, her home was sold in the lobby of a courthouse for $5,000. Of this total, $4,200 went toward late fees, interest, and legal expenses. It seemed puzzling that there were no competing bidders and the house was sold for this outstanding $5,000 debt.

If you think that was outrageous, how about this? In April 2005, Pamela Bernhardt, a 52-year-old realtor, was finishing $48,000 in renovations on her two-story rental home, which she and her husband owned free-and-clear. She arrived at the house and found a small, handwritten note posted on the front door. It notified her that the home had been sold at a foreclosure sale seven months earlier for nonpayment of a delinquent $420 assessment fee. The house sold for $1,600 with no other competitive bids.

Terry Sears, an attorney for the homeowners association, claimed that notices had been sent to Bernhardt by certified mail. Interviewed by the Houston Chronicle, Bernhardt insisted that "I was never sent any notices." She went on to point out that "I would have paid the $420 before spending about $48,000 on renovations. She had put the house on the market for $269,900 and had two full-priced offers. It's worth noting that Sears had filed 99 HOA foreclosures in 1994.

A Brief History of Homeowners Associations

The forerunners of the contemporary homeowners association were the subdivisions of luxury homes for the wealthy, which sprang up in the 1920s. Property deeds included what became known as restrictive covenants that prohibited owners from selling their property to anyone other than white people.

The modern homeowners association really developed under the heavy-handed guidance of the Federal Housing Authority (FHA). In the 1960s, the FHA promoted the HOA as a way of providing affordable homes to large numbers of people. The FHA issued guidelines and standards that required planned developments to have a non-profit homeowner association with mandatory membership in order to obtain FHA insurance.

Together with the building industry, the FHA also heavily promoted the use of covenants that attached to the property. These covenants included a lien for HOA assessments on property owners, which led to the possibility of foreclosure for non-payment of assessed fees. In 1964, the Urban Land Institute published its Homes Association Handbook, which provided model covenants for an HOA. One of the key authors was the chief of the land planning division of the FHA.

Another key organization was the Community Association Institute (CAI), which was established in 1973 to bring together all groups that had an interest in promoting HOAs and provide guidance for them. Over time, however, the CAI became dominated by the property management industry. In the 1990s it was reorganized as a 501(c)(6) tax-exempt non-profit business trade organization whose primary mission was to lobby state legislatures. Its major members were property management firms and attorneys.

In 1962, there were less than 500 homeowner associations in the entire nation. But the number has skyrocketed in the last 30 years. The overwhelming majority of new homes built since 1980 were put up in developments with an HOA, which owners were required to join. Today, there are roughly 300,000 homeowners associations that heavily regulate the lives of nearly 60 million Americans.

(Some of the biggest homebuilders to emerge during that boom were DR Horton (DHI), M/I Homes (MHO), and Toll Brothers (TOL)).

Throughout the United States, homeowners associations impose very similar obligations. Anyone who wants to buy property in an HOA development must join the HOA. A Declaration of Covenants, Conditions and Deed Restrictions (CC&Rs) lays out the obligations of the owner, including restrictions that run with the deed when the property changes hands. This will often be included with the deed at the closing, but few purchasers ever read the lengthy document.

The Rules and Regulations will specify in great detail the dos and don'ts of behavior in the community. The governing boards can change or add to these "quality-of-life" rules and can impose fines for violations. Homeowners pay regular dues as well as "special assessments" and, in return, the HOA is required to maintain the common grounds.
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