The Communicator - Volume 1, Issue 2 - (Page 8)

The Hammer is Broken California Homeowners Associations are suffering bad debt losses due to lack of equity in the units and superior lien holders’ foreclosure actions. By Donald W. Haney, CPA, MBA, MS (Tax) THE PERFECT STORM has hit California Homeowners Associations (CIDs) and it has affected their abilities to collect delinquent assessments. The storm’s components are: 1. Lenders are making 100 percent of Fair Market Value (FMV) residential loans to owners; 2. FMVs are declining; 3. Many of these loans are made to “subprime” borrowers and contain complex variable interest rate features with significant payment escalators; 4. Some owners and investors with equity in their residential real estate have borrowed that equity to pay consumer debt or to make sure that they are not leaving any equity on the table; 5. The usual factors (job loss, divorce, death, bankruptcy, etc.) affecting owner occupants’ and investors ability to pay their CID assessments continue to occur at a slight increase from their usual rate, and; 6. The FMV decline and lack of remaining equity have combined to encourage residential real estate owners and investors to abandon their investment which leaves the CID and other lenders holding the bag. The critical assumption underlying the assessment collection process for California CIDs is that there is equity Mr. Haney’s accounting firm, Haney Accountants, Inc., has delivered an outsourced accounting service to Common Interest Developments (CIDs) for over 30 years. His service includes billing and collecting the assessments from start to finish. His career includes four years as a senior vice president and CFO of a national bank. His comments here are intended to increase the reader’s awareness of this issue and to suggest strategies for consideration. They are not intended as legal advice. An appropriate response to this situation requires collaborative efforts by industry trade associations, their professional advisors, and the California legislature. Haney can be contacted at dw@ haneyinc.com or (888) 786-6000, x-325. in the unit. With equity in the unit, the lien and foreclosure collection model will eventually collect all unpaid assessments and associations will not incur any assessment losses. The system expects the lenders to be the “equity protectors.” As stated above, the market and lenders have collaborated to invalidate this critical assumption. Moreover, the first mortgage holders’ liens are superior to the association’s lien in California. If there is no equity in the unit, even if perfectly executed, the existing lien and foreclosure hammer no longer works for CIDs in many cases and they are suffering bad debt losses. These losses must be covered by the other owners or come from reserves which in most cases are critically under-funded– not a good thing in either case. For some associations these losses are significant and place severe burdens upon the owners who are current with their assessment obligations. We have to fi nd a new tool kit to collect unpaid assessments. 8 • The Communicator

Table of Contents Feed for the Digital Edition of The Communicator - Volume 1, Issue 2

The Communicator - Volume 1, Issue 2 Contents President's Message The Hammer is Broken Top 10 Mistakes That Get Board Members Sued Dealing with Bankruptcy Ask the Experts – Are Your Contractors Licensed and Insured? 2008 Events & Education Calendar Welcome to CAI BayCen Directory Updates Index to Advertisers

The Communicator - Volume 1, Issue 2

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