Monday, July 20, 2009

Legislature Endangers Solvency And Manageability Of Homeowners Associations

The Indiana Law Blog caught a story by the Fort Wayne Journal-Gazette's Benjamin Lanka about a new law governing homeowners associations that has serious implications. Rep. Phil Hinkle (R-Indianapolis) and the Indiana General Assembly, in their infinite wisdom, turned an already bad situation for homeowners associations into a much worse situation. As usual, the lawmakers simply don't grasp the basic issues at hand to make an informed decision. Hinkle's HB 1021 creates a new statute prospectively governing homeowners associations established after July 1, 2009; however, it has an opt-in for existing associations. Any association in their right mind would never sign on to it because of the way it ties the hands of association boards grappling with budgets in the toughest of economic times.

Lanka's story points out that a key provision in Hinkle's legislation applies to all homeowners associations. "Now an association must file its lien within a year, but a lawsuit can’t be filed until 12 months have passed," Lanka writes. "The suit must be filed within five years." He adds, "That section went into effect July 1." What that means is that a homeowners association cannot record a lien for an outstanding assessment. Prior to July 1, homeowners association could file a complaint to foreclose on a lien no sooner than thirty (30) days after notice had been given to the homeowner. The new law makes homeowners associations wait at least one year before it can file a foreclosure action. That means other homeowners are stuck shouldering the burden for utilities, insurance, maintenance, etc. that the association incurs annually to benefit all homeowners within the association until a court forces the homeowner to pay up or the property is sold.

Homeowners associations are already at a big disadvantage in Indiana because the mortgage holder always has a superior lien, regardless of when it is recorded. With the current mortgage industry meltdown, many lenders are simply not forcing homes into foreclosure and taking possession of the property. Instead, the mortgage holders free load off the homeowners association, leaving it to the association to collect the money it needs to operate and maintain the community, including the delinquent homeowner's property, from other homeowners. When the property is eventually sold and there are no sales proceeds left over after the mortgage balance, interest and late penalty fees and collection costs are tallied, which frequently happens in today's market, the homeowners association never collects those unpaid assessments, making them a permanent burden on the other homeowners. Hinke's new law means homeowners associations will lose even more from delinquent homeowners to the extent the law delays foreclosure actions on the property.

The provisions of Hinkle's bill covering newly-established homeowners associations is equally harsh on associations. Homeowners associations' bylaws typically vests the board of directors elected by the homeowners with responsibility for adopting an annual budget and levying assessments on homeowners. Under Hinkle's legislation, a majority of the homeowners in attendance at the annual meeting will be required to approve the budget and assessments. Hinkle obviously isn't familiar with homeowners association meetings. As a member and elected board member of one, I can tell you that it is a struggle to get homeowners to attend the annual meeting. Without the proxy votes obtained in advance of the meeting, it would not be possible in many cases to convene a quorum required for conducting the annual meeting. In the event a quorum isn't present for the annual meeting, under Hinkle's new law the association is limited to the same budget it adopted the previous year, unless its bylaws allow the board to adopt a budget not greater than 110% of the previous year's budget.

As to contracts entered into by the homeowners association, Hinke's new law requires homeowner approval for any contract that would produce an assessment increase of at least $500 a year for a homeowner. To adopt such a contract, the association would be required to conduct two consecutive meetings with the homeowners and obtain the approval of at least two-thirds of the affected homeowners. If the homeownes association wants to borrow more than $5,000, it will have to obtain the approval of a majority of the homeowners. Paper ballots have to be prepared and mailed to all homeowners at least 30 days before a vote is taken.

Isn't that just like the legislature? It imposes all sorts of extra hoops for homeowners association boards to jump through to approve budgets and assessments for a governing body that is closest to the people it represents when the General Assembly budgets, taxes, spends and borrows tens of billions every year without requiring similar restrictions on itself. There is a complete lack of understanding and appreciation of the challenges facing homeowners associations, particularly in this horrible economy. Dealing with sudden mechanical and other building maintenance issues that can arise costing in the hundreds of thousands of dollars range and the unexpected, double-digit rate hikes for water and sewer, are just some of the examples homeowner association boards face regularly. My own association had to increase assessments this year simply to make up for a growing number of delinquent accounts.

What is particularly disturbing to me is the fact that I took the time to call Rep. Hinkle and explain the serious problems his legislation would pose to homeowners associations. I got the impression during my conversation with him that the impetus of this legislation was a single, rogue homeowners association from which he had heard complaints. I thought I had an assurance from him that he understood the concerns I raised and would address them as the legislation proceeded. Obviously, that was not the case. He attacked an isolated problem with a hatchet. The many will suffer because of the desire to aid and abet a few deadbeat homeowners, who delight in riding the backs of their fellow neighbors.


Doug said...

Great post, Gary. The phenomenon of legislation being proposed to address a specific incident as opposed to a general problem was one of the things that struck me most way back when I worked in Indy.

Gary R. Welsh said...

Thanks, Doug. You would know how it is over there having been an LSA staffer. Unfortunately, homeowners associations are not well-represented over at the State House to deal with these issues. They had a much more effective lobby in Illinois because of the high number of condominium associations in Chicago.