Effective January first of this year, restrictions have been placed on the ability of California Homeowner Associations (HOAs) to foreclose on delinquent members. This is a result of Senate Bill 137 (Ducheny), which passed both the State Assembly and Senate last September. Although a similar bill had been vetoed by the Governor last year, he was satisfied with the provisions incorporated into this one.

The main provisions of SB 137 are that associations are prohibited from using a foreclosure action to collect delinquent assessments that are less than $1,800 or that are less than 12 months delinquent. If either of those conditions are met -- the assessments are more than $1,800, or the delinquency is more than 12 months old -- either judicial or non-judicial foreclosure may be used. If foreclosure is to be used, the association must offer the owner an opportunity to participate in dispute resolution. Any decision to proceed with foreclosure must be made by a majority vote of the board members in an executive session.

Proponents of the bill argued that existing law that allowed foreclosure for virtually any delinquent amount made possible remedies that were far more severe than warranted by the offenses. The California AARP, one of the bill's supporters, offered testimony that "there is increasing evidence of a pattern of Common Interest Development Associations' use of a non-judicial foreclosure as a collection device for small amounts of overdue assessments. At the foreclosure auction, the homeowner receives any excess of the winning bid over the amount owed. However, since the minimum bid for purchase is the amount of assessments and other fees owned, the home is usually sold for a small fraction of its actual value. The homeowner may lose his or her home and receive no substantial amount of money." Certain well-known egregious cases were continually cited at hearings, in particular that of the Calaveras County home of two seniors who owed $1,900. Their $285,000 home sold at auction for $70,000.

Of course there was opposition to the bill as well. Representatives of the California Association of Community Managers pointed out that the bill's provisions allowed irresponsible homeowners to go almost a year or more without paying assessments, all the time requiring other members to subsidize them by paying higher dues. Indeed, the final version of the bill, with the $1,800 minimum, was amended down from an earlier version that would have prohibited foreclosures for less than $2,500.

Moreover, also amended out was a provision that would have required the minimum bid at auction to be at least 65 percent of the property's fair market value.

SB 137 specifically allows HOAs to pursue delinquent members in small claims court for amounts below the foreclosure limit, and it also provides that -- unlike most small claims plaintiffs -- the association may have third-party representation by an agent or management company.

One of the strongest, and apparently little-discussed, provisions of SB 137 is that it provides the homeowner with a ninety-day right of redemption period subsequent to a non-judicial foreclosure sale. There is no such redemption period for non-judicial foreclosure sales in general.

Neither investors nor those buying for their own use are comfortable with a redemption period. They want to know that their purchase is final at the time it is made. The presence of such a redemption period will certainly shrink the potential pool of buyers for HOA foreclosure properties.

Published: January 16, 2006

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Bob Hunt is a director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .