constitution – Page 52 – HOA Constitutional Government

Mortgage industry – developer cooperation for HOA survival

Does the mortgage industry collusion extend beyond just foreclosure to a broader tit-for-tat, “one hand washes the other” cooperation with HOA developers? Ever wonder why your CC&Rs contain a 20 -30 year “no terminate” clause? Or why your CC&Rs contain archaic and ignored wording that the first lender must approve any CC&R changes? Or why there’s that PUD rider attached to your mortgage?

In order to understand the “why” we must go back in time to the period of the original promoters of the legal scheme for planned developments with homes associations. That was in 1964 with the publication of the HOA mass merchandising document, the Homes Association Handbook, Technical Bulletin #50, by the Urban Land Institute. (For an analysis of this document see Part I of The Foundations of Homeowners Associations and the New America). The document was one that spoke of a utopian scheme for better communities, which would also make tons of money for the developers and promoters. In 1964, HOAs were a new concept that had to be sold to all the “players” in order for the concept to succeed and, as with any new venture or concept, it came with high risks. One question for these mass marketeers was how to get funding from banks and mortgage companies to finance the development of planned communities, and subsequent HOA home mortgages. It was a question of insuring the survival of the HOA and, consequently, its marketing success.

First, the right to foreclose. One way was to come down hard on homeowners who didn’t pay their “fair share” and threatened the survivability of the HOA: create covenants that run with the land granting the HOA automatic liens for assessments and the right to foreclosure for non-payment. And, since there may be instances where there would be insufficient funds, as they recognized the second position status of the HOA, it was necessary to include a grant of right to seek a personal judgment against all of the assets of the non-paying homeowner. All in the name of survivability of the HOA for the future success of the promoters. (See Section 12.3 and 12.31 of the Handbook).

They were not concerned with constitutional and legal issues relating to democratic governance and protecting the rights, freedoms, privileges or immunities of the member-owners. They could not tolerate democratic protections by means of independent tribunals and so gave themselves, as Declarant, dictatorial rights over the community. The developers had to stay in control to protect their investments and profits.

Second, “sweeteners” for the lenders. With these strong measures to protect the HOA income stream from non-payers, who, by the way, may dislike the way the HOA was operated and want to withhold payments, they could now approach the mortgage companies and banks. They gave the lenders additional protections to get them on board – the HOA cannot be terminated until after the first 20 -30 years of operation, even though the developer no longer had any obligations to the lenders – he was long gone and had paid off the lenders.

So, why this “no terminate” clause? Why the PUD rider on individual home mortgages not owned by the HOA, that holds no title to the individual home? Why should the lenders want additional assurances when they got none of these with traditional, non-HOA homes? Why were they given these “sweeteners?” As an inducement so they would make loans in support of this unproven concept?

It appears that this was all for their mutual benefit, at the expense of the unsuspecting home buyers.

HOA foreclosures illegal under “no title” rulings?

I now address the overall legitimacy of this right by the HOA to foreclose. I have said enough about the HOA draconian foreclosure right, its discriminatory nature, and its cruel and unusual punishment aspect when the homeowner losses more than 10 times the amount owed the HOA. Or the fact that it reflects the mismanagement by the board who refuse to use standard AICPA “provisions for bad debts” to ameliorate any shortfalls.

Most CC&Rs and state laws grant the HOA a lien on the homeowner’s property from the day the assessment is due, and that the perfection of that lien is automatic when the CC&Rs are filed with the county clerk. They go on to say that the foreclosure of the lien is the same as a mortgage foreclosure. And, to get around the protections against deficiency sales, the right to a personal judgment is given the HOA by the unsuspecting homeowner. However, if the underlying right to foreclose is invalid, then the personal judgment is notwithstanding. Also, the claim that the lien is supposedly a valid consensual lien is irrelevant to the argument advanced below.

Recent developments (see in general, “MERS: Is Your Home Foreclosure Proof?”) have surfaced the longstanding rule of law that to foreclose on real property, the plaintiff must be able to establish the chain of title entitling it to relief. Although the court rulings pertain to the electronic deed filing service, MERS, the reasoning can easily be applied to HOAs since they do not hold title, nor can they establish a chain of title for relief. The law requires that the party foreclosing must produce a promissory note or assignment that it is entitled to relief. The recent court cases held that, in regard to MERS, if the foreclosing party is not the title holder of properties held in its name, the chain of title has been broken, and no one may have standing to sue.

We all know that the HOA is not the title holder, nor has an assignment of interests in the property. Remember that the laws and CC&Rs explicitly specify that the HOA foreclosure procedure follows a mortgage foreclosure procedure, which renders its right to foreclose invalid under the recent court holdings (California, Florida, Kansas, Nebraska all serve as persuasive precedent). If the laws so favored the protection of a person’s home as to require a proof of a chain of title, there should be no exception for the HOA to have a bona fide right to foreclose.

There cannot be unconstitutional special laws for a private organization without passing judicial scrutiny as to an appropriate level of government interest or purpose. If there is such a compelling necessity, and not just a convenience, then why not protect the homeowner by declaring the HOA a government entity subject to the same constitutional restrictions and prohibitions as all other government entities are subject?

These recent developments also raise the issue of an entitlement to relief. What is the entitlement to relief owe to the HOA that warrants cruel and excessive punishment through foreclosure? What are the damages to the HOA that are never stated by the HOA to warrant such a draconian procedure? Damages that favor and benefit the third-party HOA attorney more than the HOA itself? If the lender must produce a chain of title when it has advanced hard cash, why is the HOA, who has not advanced any hard cash, entitled to the same relief?

Homeowners facing HOA foreclosures should immediately contact a lawyer to pursue this defense and put a stop to draconian foreclosures that serve to intimidate and punish homeowners who have fallen on hard times.

What were the intentions of the “original parties” to the CC&Rs?

I found this HOA case revealing of the misguided attitude, that mindset that HOAs are unquestionably solidly “legit.” The NC appeals court cited Wise, 357 N.C. 396, 584 S.E.2d 731 (citations omitted, emphasis added) :

“As a general rule, ‘[r]estrictive covenants are valid so long as they do not impair the enjoyment of the estate and are not contrary to the public interest.’ (describing freedom of contract generally). Restrictive covenants are legitimate tools of developers so long as they are clearly and narrowly drawn. The original parties to a restrictive covenant may structure the covenants, and any corresponding enforcement mechanism, in virtually any fashion they see fit. (‘an owner of land in fee has a right to sell his land subject to any restrictions he may see fit to impose’). A court will generally enforce such covenants `to the same extent that it would lend judicial sanction to any other valid contractual relationship.’ As with any contract, when interpreting a restrictive covenant, ‘the fundamental rule is that the intention of the parties governs'”.

Id. at 400-01, Wise, 584 S.E.2d at 735-36.

Therefore, under the common law, developers and lot purchasers were free to create almost any permutation of homeowners association the parties desired. Not only could the restrictive covenants themselves be structured as the parties saw fit, a homeowners association enforcing those covenants could conceivably have a wide variety of enforcement tools at its disposal.

What is missing here is an answer to the question: Who were the “original parties”? What were their intentions? Well, it seems quite obvious that the original parties are none other than the declarant and his “stand-in” employees and not at all any of the subsequent homeowners. I mean, what am I missing here? It gets back to the obvious Contract Law 101 requirement of a meeting of the minds. How can an oppressive, adhesion contract be viewed by our lofty courts as to the intents of the “original parties”, and then bind the poor homeowner who is not required by law to even read it to be bound under servitudes (covenant) law.

And let’s not get into the judicial scrutiny requirements that all “contracts” must pass to bind the surrender of one’s rights, privileges, immunities and freedoms under state laws and the Constitution. I mean, isn’t this still America?

See Bodine v. Harris Village POA, No. COA09-1458, (N.C. App., September 7, 2010). (http://www.leagle.com/unsecure/page.htm?shortname=inncco20100907514).

Do homeowner regulations go too far?

So his homeowners association levied fine after fine and put a lien on his home though he’d coughed up nearly $50,000 to pay fines and other related costs. Eventually, his home was foreclosed because Darius still owed $24,591.

On Aug. 15 – after losing his one-story home and two days before he would be evicted – Darius’ next door neighbor heard an explosion about 2:20 a.m. Patti McCallister ran outside, saw Darius’ home burning and called 911.

Firefighters found Darius’ badly burned body lying on the floor of his living room in the back of his home.

Do homeowner regulations go too far? By Matt Tomsic
Matt.Tomsic@StarNewsOnline.com

Sep 3, 2010

My Reply:

HOAs will continue to have serious problems because:

1. They are based on an undemocratic authoritarian legal scheme that does NOT place the individual rights and freedoms of the members first, as does our Constitution, but the monetary goal of maintaining property values.

2. Consequently, this un-American private government exists outside the Constitution and its protections of the people. All the legal court battles are attempts to restore those lost rights.

3. The misleading claims of agreement by homeowners is superficial and would not stand up to judicial scrutiny for the valid surrender of one’s rights. The mere filing of CC&Rs with the county clerk is sufficient to legally bind lot owners, sight unseen, and is a mockery of both Constitutional and contract law.

4. Then there is the unspoken alliance of local governments, state legislatures, consumer protection agencies, and public interest firms who shout “individual rights” and “no government interference”, but see no problem with private government interference. And that also includes CAI.

5. Community Associations Institute (CAI) was formed back in 1973 to address these problems with the HOA legal scheme, yet these problems continue to exist in spite of all that “education” provided for board members, managers, and legislators. Would you hire a training firm with that record? State and local governments seem not have a problem and hire “the failure to get results” CAI.

6. CAI is on record in its amicus brief to the NJ appellate court in the Twin Rivers case, cautioning the court about the “unwise extension of constitutional protections to homeowners” in HOAs. The common law synopsis of court decisions regarding covenants takes a decided editorial opinion rather than a neutral summary of the cases when it states, for example, that if there’s a difference between servitudes law (covenants) and constitutional law, servitudes law should apply (§ 3.1, comment h).

6. The media, even in this article, takes the premise and presumption that the HOA unquestionably has the right to act, and that its motives are pure and for the benefit of the community. None of the above substantive issues are ever delved into.

In order to avoid another 40-odd years of continued injustice and discontent, government authorities and legislatures must address the above issue of substance, and stop their participation in the unspoken alliance of “No negatives about HOAs”.

HOAs in the punishment business

I have argued that the HOA is in the punishment and intimidation business, especially with respect to foreclosure “damages” and fines under failed due process procedures — the kangaroo courts. Here’s a recent NJ case that addresses penalties as a punishment. In this instance, the HOA had a covenant that granted it the right to access a flat 20% charge as liquidated damages rather than attempting to determine just what were the actual damages incurred by the HOA.

Let me clarify. When seeking damages, the damaged party must submit to the court the actual damages it incurred. For example, what are the damages to the HOA if your grass height violated the arbitrary rule for well kept lawns? Or you painted an unapproved house color? Anybody? Well, that gets down to simply attorney fees and court costs of which the HOA sees nada. That’s why there are no actual damages to the HOA itself submitted by the HOA. So, are these actions by the HOA really a punishment rather than a recovering of damages inflicted on it by the homeowner? Hell yes!

The NJ opinion contained,

As we have previously noted, the 20% payment was not “interest.” It constituted a liquidated damages provision established in the By-laws of the Association in lieu of an assessment of counsel fees in instances in which legal action on the Association’s behalf was required.

A clause is a liquidated damages provision if the actual damages from a breach are difficult to measure and the stipulated amount of damages is “a reasonable forecast of the provable injury resulting from [the] breach. Such clauses are deemed “presumptively reasonable” and therefore enforceable, and “the party challenging [a stipulated damages provision] should bear the burden of proving its unreasonableness.” Because the harm is necessarily incapable of accurate estimate, “`reasonableness’ emerges as the standard for deciding the validity of stipulated damages clauses. The amount fixed is unreasonable if it serves not as a pre-estimate of probable actual damages, but rather as “punishment,” grossly disproportionate to the actual harm sustained.

We are certain that if counsel submitted an accounting of the time required to prepare for and conduct the two-day trial held in this matter, the resultant counsel fees would have been substantially higher. However, as the result of the By-laws, the Association has waived the right to that higher award.

Mazdabrook Commons HOA v. Khan, No. A-6106-08T3, (N.J. App., Sep. 1, 2010).

That about says it all when a $200,000 home is lost for a $2,000 fine, plus $3,000 in attorney fees. The homeowner loses everything after building up his equity over 10 -30 years. This ratio of 40 times the $5,000 is far in excess of the 10 times standard set by the US Supreme Court for punitive damages in product liability cases. And yet, the HOA had not been damaged as it had not lost a penny of its own!

It’s called punishment, pure and simple! How else can an authoritarian regime like an HOA obtain obedience and acceptance of its rules and regulations (“laws”)?

Note that the attorney has no say in the matter, because unlike its erroneous attitude — you owe me $nnn in fees — in all those dunning letters, it is not a party in the issue, but just a hired hand of the HOA. So, why are HOAs being so nice to attorneys? They undoubtedly agree with the attorney that how else can they coerce compliance except through punishment? And if lawyers refuse employment because the fees are so low, no coercion.

And, while we are at it, doesn’t a flat fee of even 20% sound nice? The above $2,000 foreclosure amount would cost only an extra $400 and not $3,000 to the attorney. Now that sounds like a leveling of the playing field without HOA attorney fee churning — we need to make a living — obstructing justice.