My name is Elizabeth McMahon.
I have been working on homeowners association issues for 13 years both locally in California and also nationally. I served as the consumer representative on Subcommittee of the California State Senate Housing Committee set up to revise the California homeowner association laws. I set up the first national data gathering site for homeowner associations, and subsequently, the first homeowner association news service. I am currently the Executive Director of the American Homeowners Resource Center, and Editor in Chief of AHRC News Services. My remarks here, which are necessarily brief , are based on that 13 year experience.
1. It is my considered conclusion that homeowner associations should either be abolished or comprehensively reformed. Born in the heyday of the post World War II housing boom, they were originally intended to provide citizens with decent, modern housing. However, they were quickly hijacked by a powerful coalition of lawyers and other homeowner association vendors, who formed a national trade group called Community Associations Institute (CAI). The very founder of CAI has admitted this. They lobbied state legislatures across the country to pass laws that cabin, crib and confine the homeowner, that strip homeowners of their constitutional and civil rights and that have turned homeowner associations into cash registers for themselves. In California alone, one prominent CAI lawyer has earned an estimated $150 million from homeowner associations.
2. Homeowner associations are a multi-headed hydra. Cut off one head, and a dozen more replace it. The Texas Senate hearing is a laudable effort to address the foreclosure issue, but if history is any guide, it will spawn many more hearings down the road. If the decision is made not to abolish homeowner associations, I offer the following considerations for your thoughtful review.
3. It has become crystal clear to me that no effective reform is possible without a special government oversight agency for homeowner associations. If the state general fund is currently not able to financially support such an agency, a modest fee of a $1 a month for each association homeowner would be clearly economically efficient. Because of the regulatory oversight, there would be fewer violations of state law and CCR1s by boards, lawyers and management companies. Courts would not be clogged with expensive lawsuits, and homeowners would not have to shoulder the unbearable and wasteful transaction costs of defending their rights. A properly designed agency could do much to replace the present climate of unrest, anxiety and fear that plagues so many homeowners living in associations. Such an agency could quickly and expeditiously resolve disputes and ensure that offending board members, lawyers and management companies are fined for their violations. Homeowner associations have in many cases become lawless highways where bandits lie in wait for unsuspecting homeowners.
4. Foreclosures in homeowner associations should become as rare as foreclosures by state governments for the non-payment of property taxes. In California, the state waits 5 years before it forecloses on a home. People around the world are astounded that Americans can lose their homes in homeowner associations so quickly and for such paltry amounts. They see a home as central to every person1s life, and they are shocked that in America, a person1s home has become a pawn in the foreclosure racket. The Blevins case is not some idle exception. A properly constituted state agency should be able to ensure that no citizen is thrown out on the street unnecessarily.
5. A top priority for the state agency is to reform the insurance for homeowner associations. A lot of abuses are made possible by the structure of existing insurance. For example, current D&O policies act as a sword - not a shield - for homeowners (see accompanying article). Board members are secure in their castles because they can violate the rights of homeowners, and know that multi-million dollar D&O policies will protect them to the hilt. Because the state mandates that homeowner associations purchase D&O policies, and because the homeowner pays the premium out of his own pocket, special provision should be made that insurance companies be required to have a fiduciary duty to the homeowner as well. Management companies should be required to purchase their own D&O policy, not get a free ride at the homeowner expense by piggy backing on the association policy. Bribes and kickbacks by insurance companies should be specifically outlawed, with substantial fines for violations.
6. A state agency should once and for all eradicate the practice by CAI lawyers of making homeowner associations cash registers for themselves. CAI lawyers manufacture lawsuits in a multitude of ways. They push boards into violating homeowner rights, knowing that they will earn substantial legal fees from the insurance policy when the homeowner sues. As a class, lawyers are the single most pernicious cause of harm in homeowner associations, not just in Texas, but around the country.
Conclusion:
Homeowner associations are seriously flawed both in their fundamental concept and practice. Executives (board members) are generally completely untrained for the operation of what are often multi-million dollar enterprises. Lacking the external discipline of stockholders that the normal business enterprises have, or the regulatory oversight that municipalities have, boards operate in a legal no man1s land. The law should clearly recognize that homeowner associations are another layer of government, and make them comply with state law regarding elections, disclosure and non-discrimination. Lawyers and management companies should be banned from keeping them in power. The lack of professionalism and expertise often allows petty animosities to rule the day. This creates ill will, which causes more ill will, and before long, an association is a seething cauldron, close to the boiling point. In one association in Arizona, the cauldron boiled over, and a homeowner shot 3 board members to death because he believed that they were unnecessarily harassing him.
In the midst of all these complexities and confusions, one simple fact should act as a guiding beacon. People need safe, comfortable and adequate homes. People in prior generations were able to do that without the entangling mess of laws and regulations that homeowner associations represent today. Is it a too impossible a task for this generation to achieve that? I do not think so. However, it will take courage, a clear mind, and a willingness to place the welfare of the citizen1s home before that of such powerful economic interests as lawyers and other association vendors.
I know that the collapse of Enron has caused much pain and suffering in Houston. Hence, I do not lightly make the following comparison. Unless the issue of homeowner associations is comprehensively tackled, there will be many future Enrons within them also.
Thank you for your attention, and if I can be of any assistance, please do not hesitate to contact me.
American Homeowners Resource Center
Telephone (949)366-2125
Website: http://www.ahrc.com
