Friday, October 31, 2008

The Contractual Community: Why Community Associations are not Governments

Articles in this and other publications devoted to the science of community association operations and management often discuss the concept of "community association" as if it were just another subdivision of local government. It is a common perception because so much discussion about this unique housing type is devoted to questions of governance. We have boards of directors that, in some respects, appear to be like city councils. There are property managers who carry out many of the same functions as city staff. The property so governed has many of the same physical accoutrements as a town or city-streets, utilities, parking and recreation facilities.

There are controls that are seemingly analogous to municipal government, where ordinances such as zoning place restrictions on individual property rights in order to give effect to the paramount needs of the city or county, as determined by the elected policy-makers. But while these two governance systems may appear similar, their respective legal bases are really quite different. Understanding this difference may help to understand why the occasional characterization of community associations as "mini-governments" or "quasi-government agencies" is particularly inapt and can lead to false assumptions about community associations...

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Saturday, October 25, 2008

When Condominiums Become Obsolete




What Determines the Lifespan of a Common Interest Development?

"Obsolescence” is the process by which something loses its value and relevancy usually due to being supplanted by a better product or changes in its environment. Several times we have written about our concerns for the impact of that process on common interest developments.

First, let's realize that the obsolescence of common interest developments, as with most man-made structures, is inevitable. It can't be stopped; it’s simply a matter of time. If you doubt that, ask yourself how many residential buildings that you know have lasted, say 100 hundred years or more. Look around and you’ll see only a few types of buildings that have survived the century mark--public monuments, and buildings that have historic or intrinsic value due to their unique location or architectural style. Most others have been replaced with newer structures...

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Thursday, October 23, 2008

Who’s Responsible for the Crash?

Today we got our answer... “Alan Greenspan: Bad data hurt Wall Street computer models”

On March 2, 2008, we wrote:

“...We send our best and brightest young people to Wall Street to learn investment banking and figure out new ways to attract investment funds and enrich their firms and themselves. Usually, many are successful and the economy and the country benefit from this economic stimulus that creates capital for investment in new industry, thus creating jobs and purchasing power. So what happened here? Who were the “brains” behind this housing crisis? Which genius or geniuses decided that it was prudent or even smart to lend to people who could not afford to repay their loans and then use those loans as security for other investments? Wasn’t a crash inevitable under those circumstances? 

The lenders and the investment bankers knew in advance that certain borrowers were not credit-worthy; would not have sufficient incentive to repay their loans; did not have the income necessary to meet the projected payments, and yet, in what can only be considered a mass delusion, made these loans anyway. Was it greed? That’s a tempting thought, but even the greediest money managers can sense a disaster in the making and find ways to avoid it--perhaps like not making the loans in the first place? No, that would be too simple. I think it’s more a case of a lot of professional people who were too used to believing in the infallibility of their decisions coupled with the pressure to churn out enormous profits to keep their positions intact. A form of “greed” to be sure, but way more sophisticated, at least on the surface. Here we have a large number of very smart people who perhaps were too insulated from the real world...”

 The New York Times , October 23, 2008:

“...(Alan) Greenspan has long praised computer technology as a tool that can be used to limit risks in financial markets. For instance, in 2005, he credited improved computing power and risk-scoring models with making it possible for lenders to extend credit to subprime mortgage borrowers.

But at a hearing held today by the House Committee on Oversight and Government Reform, Greenspan acknowledged that the data fed into financial systems was often a case of garbage-in, garbage-out.

Business decisions by financial services firms were based on "the best insights of mathematicians and finance experts, supported by major advances in computer and communications technology," Greenspan told the committee. "The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades a period of euphoria."

 A quote from Warren Buffet in his annual letter to investors:

 "As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out--and what we are witnessing at some of our largest financial institutions is an ugly sight."

 Amen.

Saturday, October 11, 2008

Home Ownership for Everyone? Obviously Not.


The American dream of home ownership has been overstated and misrepresented. If you have any remaining doubts about that, take one more look at the wreckage caused by the sub-prime and even the prime, mortgage crisis and tell me that it is an illusion. People are losing their homes to foreclosure at a rate not seen in decades, if ever. Many if not most, of those homes were lost by people who could not afford them in the first place. Driven to commit 30, 40, 50% of their net income to house payments by price inflation that turned out to be the work of the sugar fairy, these unfortunate individuals and families were put into an economic straitjacket, often by unscrupulous mortgage brokers. The saga of "liar's loans" where almost anyone could walk into a mortgage broker and get approved for a mortgage without the apparent or real ability to pay, is now old news. But the wreckage still remains and the pain of hitting the affordability ceiling hard still stings. For the millions of people who were led to the edge of the abyss by the "dream" and then pushed over,  we think it's time to remove home ownership from its place as America's best investment and view it instead as just one of several ways to provide shelter for your family.  More to come, stay tuned.

Sunday, October 5, 2008

California Used Car Lemon Law Tips

Sergei Lemberg, an attorney specializing in lemon law [link: http://www.lemonjustice.com/ftc_used_car_rule.php], is sitting in the guest blogger’s chair today. He’s outlining some of the ways that consumers with used car lemons can get justice.

 I don’t know anyone who doesn’t feel at least a little bit of trepidation when they buy a used car. Always lurking in the back of your mind is the thought that you might just be buying someone else’s troubles. Unfortunately, although every state in the nation has a new car lemon law, few states have lemon laws covering defective used cars.

Although California’s lemon law doesn’t apply to used vehicles, portions of the Song-Beverly Consumer Warranty Act (which incorporates the lemon law) do apply to used vehicles. California also has a Car Buyer’s Bill of Rights, which includes the opportunity for used car buyers to purchase a two-day cancellation option for vehicles under $40,000.

The Car Buyer’s Bill of Rights also prohibits car dealers from advertising a used vehicle as “certified” if the odometer does not indicate the actual mileage of the vehicle; the vehicle was a voluntary lemon buyback; the title was branded as a lemon buyback, manufacturer repurchase, salvage, junk, non-repairable, flood, or similar designation; the vehicle was damaged by accident, fire, or flood, unless it has been repaired to safe operational condition; the vehicle has frame damage or was sold “as is”; or the seller failed to provide the buyer with a complete inspection report of all components inspected.

 That doesn’t mean that all is lost, however. There are a number of other ways consumers can take action if they find they’ve purchased a lemon. Federal laws, like the Magnuson-Moss Warranty Act and the FTC Used Car Rule, as well as state Unfair and Deceptive Acts and Practices laws, can provide you with a cause of action if you find that you have a used car lemon on your hands.

And What Will Community Associations Get?

Ok, the Feds just approved $700 billion to "bail out" struggling financial institutions. Great news for struggling financial institutions but what about other struggling institutions, say like cities, counties, and yes, community associations? Cities and counties maintain our local infrastructure, and, increasingly, so do homeowners associations. And all three have major budget shortfall problems. Cities and counties rely on property taxes to balance their budgets. The free fall in housing prices means a free fall in property tax revenues. Community associations also rely on a form of property tax--annual assessments, and while they are not keyed directly to the value of property, they nevertheless are impacted when home values fall. 

In most cases a fall in value, coupled with the whole mortgage mess,  will translate into delinquent assessments, or assessment receivables which are wiped out in a foreclosure. No statistics are available yet, but it is pretty clear that foreclosures and the general recession in our economy is beginning to be felt by community associations as delinquencies climb. And, of course, it was already bad enough--major shortfalls in association budgets due to years of neglect by boards of directors. Now, this problem could be multiplied exponentially as owners default on their annual assessments in increasing numbers.

As far as we can tell, there is nothing in the recent legislation to assist local governments, including homeowners associations. Loosening credit could help, of course, but associations cannot simply borrow their way out of serious budget shortfalls. This economic issue is one that has of yet received little or no attention from anyone. It's time to start paying attention.