HOA Foreclosure: Does the Punishment Fit the Offense?

"HOA Foreclosure: Does the Punishment Fit the Offense?" (a background study prepared by staff to the Senate Housing Committee hearings on association foreclosure convened by Senator Denise Ducheny, Chair, February 17, 2004.)





An informational hearing


February 17, 2004

State Capitol, Room 112








For many households, the home is not only the center of family life but also the family's major financial asset.  In recognition of these facts, public policy has long encouraged and protected homeownership.  Homeowners are given tax deductions for mortgage interest payments.  In addition, certain amounts of home equity are exempt from collection from most money judgements under the homestead exemption. 


Yet in the context of a common interest development, one's home can be at risk.   Homeowner associations can and do foreclose upon the homes of members, often for small amounts of past due assessments.  In one recent example, a family lost its home to foreclosure after failing to pay $120 in assessments.   Moreover, homeowner associations are not subject to many of the limitations imposed on other creditors.  Associations may begin the foreclosure process as soon as 75 days after the payment was first due, whereas a tax collector must wait five years before beginning foreclosure for a tax lien.  Associations are not required to go through a court to foreclose, as a property owner would to evict a tenant.  And homeowners do not receive the benefit of the homestead exemption when their house is foreclosed upon by an association, as they would in the case of any other money judgement. 


Homeowners clearly have the duty and responsibility to satisfy their financial obligations to an association.  The association's ability to provide insurance, upkeep, management and the amenities promised to members depends on timely payment.  However, there are a number of collection tools available to associations, including small claims court and liens.  The purpose of this hearing is to explore whether or not foreclosure is an appropriate tool to collect unpaid assessments.




A common-interest development (CID) is a form of real estate in which each homeowner has an exclusive interest in a unit or lot and a shared or undivided interest in common area property.  Condominiums, planned unit developments, stock cooperatives, and community apartments all fall under the umbrella of common interest developments.  There were an estimated 6 million residents living in approximately 30,000 CID's in California[1].


The Davis-Stirling Common Interest Development Act provides the legal framework under which homeowner associations operate in common interest developments.  In addition to the requirements of the act, each CID is governed by a homeowner association according to the recorded declarations, bylaws, and operating rules of the association.


The powers of the association are usually delegated to the association's board of directors that must be elected by the membership at an annual meeting. The Davis-Stirling Act sets forth the powers and duties of the governing board which include: enforcing governing documents, levying and collecting assessments from association members, foreclosing on property for unpaid assessments and taking disciplinary action against association members who violate the governing regulations.


Homeowner associations raise funds through assessments.  There are two types of assessments: 1) regular or annual assessments which are levied on a recurring basis and generally cover operating costs and normal deposits to reserves; and 2) special assessments that are levied on a one-time basis, often for capital improvements.  Assessments become delinquent 15 days after they are due, unless the governing documents of the association provide for a longer time. 


In the event of nonpayment, the association must provide the owner with a description of its collection and lien enforcement procedures and an itemized statement of the charges owed by the owner at least 30 days prior to recording a lien.  An owner may dispute the assessment debt and, if the full amount is paid under protest, request alternative dispute resolution.  An owner may also request to establish a payment plan.  Thirty days after the lien is filed, the association may enforce the lien through foreclosure.  In effect, the homeowners association can initiate the foreclosure proceeding in as little as 75 days after the assessment was first due.  Often, a homeowner association foreclosure is completed in less than one year.


Homeowner Association Foreclosures


Statistics show that homeowner associations foreclose on  members homes for relatively small amounts of delinquent assessments in comparison to non-CID creditors.  A 2001 study done by Sentinel Fair Housing conducted an evaluation of foreclosures in Alameda, Contra Costa, San Mateo, Santa Clara and Sacramento counties. The analysis reported that median amount owed in homeowner association foreclosures was $2,557; the median amount in all other cases was $190,000.  The recent example of the Copperopolis family who lost their home for $120 could be seen as a extreme example but it demonstrates the legal authority that associations posses to foreclose for negligible amounts.


Associations primarily use non-judicial foreclosure which does not require review by a court.

The California Civil Code stipulates that non-judicial foreclosure must be afforded basic due process and must be conducted "with fairness, openness and scrupulous integrity and the trustee must exercise sound discretion to protect the rights of all interested parties and obtain the best possible price."  Several legal cases have asserted that the courts will scrutinize all non-judicial foreclosure sales for fairness and for a gross inadequacy of price [2].  Although there are existing legal protections for the homeowner, in reality it is difficult for individual property owners to challenge the actions of the homeowner associations through the legal process after the fact.


Individuals who lose their home via the CID non-judicial foreclosure process often lose a significant amount of their equity due to the small amounts at which the homes are sold in auction.  The minimum bid at sale is the amount owed to the homeowners association, regardless of how much the home is worth.  In contrast, the judicial foreclosure process mandates that the minimum bid at foreclosure sale cover the amount owed, any junior liens, and the homestead amount which ranges from $50,000 to $150,000.


Alternatives to Non-Judicial Foreclosure


CID non-judicial foreclosures are unique in comparison to the process that most creditors must follow to collect on debts.  Most creditors must go through the judicial process in a attempt to garner a judgement; once a judgement is obtained the court has the sole authority to stipulate the appropriate recourse  to collect. Claims that are less than $5,000 could be handled in small claims courts which alleviates many of the legal and monetary obstacles to using the judicial process.  Judgements can then be enforced through wage garnishments, liens on property and, ultimately, by judicial foreclosure.


In a judicial foreclosure the lender must file a lawsuit in the superior court of the county in which the property is located. The property owner must be served with a copy of the summons and complaint for foreclosure; a judicial foreclosure can take up to three years to complete.  Foreclosure on a property under these provisions is subject to the homestead exemption, which protects the homeowner's equity in the property.  The homestead exemption equals $50,000 for an individual, $75,000 for a family, or $150,000 for a person who is a senior or disabled.


Another viable collection method that courts often utilize is a lien on property without foreclosure. In these situations, the lien will remain on the property until the individual sells the home, refinances their mortgage, etc. Keeping the lien on the home insures that the lender, or in this case the homeowner association, will be recompensed  while the property owner is not subject to the ultimate price of losing his or her home.  On average, homeowners' sell their property every seven years, making it likely that compensation will ultimately be obtained.


Recent Legislation


There have been unsuccessful attempts to limit the associations authority to utilize non-judicial foreclosure for small amounts.  The latest legislative attempt came in 2002 in the form of AB 2289 authored by Assemblywoman Kehoe.  The bill originally sought to prohibit associations from foreclosing on property if the delinquent assessment was less than $5,000. The minimum assessment provision was quickly amended from the bill and substituted with various notification requirements.  AB 2289, which was ultimately approved, requires associations to provide specific notifications to the homeowner at least 30 days before filing a lien on their property.  The legislation stipulated that the owner must be notified that they may request the association to enter into a payment plan to address delinquent assessments.




While homeowner associations must have the ability to collect assessment owed them, they do have a variety of collections tools at their disposal.  Given that the loss of one's home and the loss of equity is a very high price to pay for missing payments to the homeowners association, the question is raised:  Is foreclosure an appropriate tool for homeowners associations to use to collect debts?  Or should the association be treated like the majority of other creditors that do not have immediate access to foreclosure?




[1] B.E Bickels. 2002 Condominium Bluebook: The Complete Guide to the Operation of Condominiums, Planned Developments, and Other Common Interest Developments in California. Piedmont Press 9th Edition.. p. 3

[2] Curtis C. Sproul and Katharine N. Rosenberry. Advising Condominium and Homeowners Associations. Continuing Education of the Bar. 1991. P. 173

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