Tiny island shows legacy of Prop. 13's tax limits
Lido Isle residents pay as little as $714 in taxes on homes where median sales price is $1 million.
9.29.03 Ashley Powers & Kimi Yoshino L.A. Times
John M. Franco voted against Proposition 13 in 1978. The Los Angeles city employee feared the sweeping tax
measure would wreck local government finances.
25 years later, he still thinks the property tax-limiting law is bad for govt. But Franco, now retired, can appreciate
the benefits better than most: Because of Prop. 13, he pays only $2,240 in property taxes on a 2 story home he
bought in 1968 on Lido Isle, quiet jewel of a community surrounded by Newport Harbor. A neighbor who
bought a smaller home only yards away in 1999 pays nearly 7 times as much.
Franco, 65, is well aware that his good fortune means a loss for cash-hungry local govts. "I can be a living example
of why I thought this was a bad idea," he says.But the flip side of Prop. 13, Franco and many of his neighbors say,
is that it has allowed them to stay on Lido Isle as home prices soared. "Taxes would have gone up to the point
where, for heaven's sake, three-fourths of the people couldn't afford to live there," said Jane Howlett, 81, who until
recently lived on Lido Isle. "You have mansions on one side and old people in small houses on the other."
Prompted by tales of Californians being taxed out of their homes as property values rose in the 1970s, Prop. 13
capped increases in the assessed value of property at 2% per year, thereby limiting property taxes, which are
generally about 1% of the assessed value.
Though partial reassessments can occur under some circumstances, homes are usually reassessed at market
value when they are sold. This means that in a rapidly escalating market, a home that recently changed hands will
be taxed far more heavily than an identical nearby property that has had the same owner for decades.
Even now, Prop. 13 continues to spark debate, most recently in the campaigns of candidates hoping to be governor
if Gray Davis is recalled 10.7.03. Some candidates have suggested the state's fiscal crisis shows that the law
should be altered, perhaps by exempting commercial property. But the law's central mission, protecting
homeowners from escalating taxes that go with California's perennially hot real estate market, is considered
sacred.
Perhaps nowhere in the state are the law's effects more dramatic than on the coast. "What you could buy 12 years
ago for $400,000 or $500,000 is now $1.1 million if it's in good shape," said Newport Beach real estate agent
Sharon Grimes. "And it's not the house that has gone up so much; it's the location. It's the land."
Lido Isle is a prime example. Once considered marginal property, it has evolved into a desirable neighborhood.
Because of Prop. 13, multimillionaires here live alongside middle-class retirees. County records tell the tale: out of
about 900 homeowners, nearly a quarter pay $2,000 or less, as little as $714, in property taxes a year. Another
10% pay $20,000 or more, with the highest, more than $100,000, levied on a $10-million beachfront home.
Jane Howlett's late husband made good money as a chemical engineer, but she doesn't know if the couple could
have afforded their lifestyle without Prop. 13. She sold her house for more than $1 million last year to move into a
nearby retirement community. But she was paying taxes on the assessed value of only $141,538.
"When we moved in, these houses were nothing," Howlett said. "Now, my God, we couldn't have moved there on a
plot. You hold on to that property if you have any brains at all."
Residents say there's something special about Lido Isle, once a haven for movie stars, though only Rat-Packer
Joey Bishop still resides there. In this neighborhood, there are no gas stations or grocery stores, just homes, a few
tennis courts and a sense of community and tranquillity.
Designed after a beach in Venice, Lido is criss-crossed by streets with such names as Via Lido Nord and Via
Genoa, and tree-lined walkways. Boats, from dinghies to yachts, drift at anchor behind the homes close-packed
along the shore. Tiny parks dot the island's periphery. Drive over the bridge that connects Lido Isle to mainland
Newport Beach and time stops, or, at least, pauses. Children ride their bikes in the streets. The women's club
organizes fashion shows & Easter parties. During the summer, residents sip wine and mingle at the Yacht
Club during Friday-night barbecues.
That's a long way to come for a place once so undesirable that owners held a "disposal sale" in 1932 to sell lots as
cheaply as $550. By 1935, most of the 800-plus lots remained unsold. Agnes Blomquist, who contributed to the
book "Newport Beach: The First Century," wrote that she looked at the acres of salt grass and weeds and said,
"Why do you want to come to this God-forsaken spot?"
But over time, Lido evolved, first as a vacation spot for Angelenos & inlanders looking for a weekend escape,
and later, in the 1970s, to a residential community where people settled year-round. It is also a place people do not
leave: one-third of Lido Isle's residents have lived there for more than 20 years.
"In recent years, compared to the rest of Newport Beach, I think Lido Isle has been undervalued," said real estate
agent Alison McCormick, a third-generation Lido resident. "But in the last 2 years, people go, 'My gosh, beaches, a
yacht club, playgrounds. You've got docks, tennis courts.' It's like a year-round vacation, really. It's become quite
popular."
The median sale price is about $1 million, according to the 2000 U.S. Census, with an accompanying property-tax
bill of about $10,000. Homes on the water sell for significantly more. The isle, once a collection of single-story
beach cottages, has become somewhat "mansionized," Howlett said. These days, homes are knocked down to
make room for bigger ones.
Milton Spielman, retired patent attorney who sold his home for $1 million, rocked on a patio chair in back of his 2
story, 4 bedroom home just days before moving and mused: "This isn't much of a house, I don't think." He bought it
as a summer home, rented it in the winters and moved to Lido full-time in 1985. Strolling through the neighborhood,
Spielman said he believes he's "at the bottom of the scale on Lido Isle."
"I can walk down the street and see a brand-new mansion, probably cost 4 or 5 million, modeled after an Italian
castle or something," said Spielman, 79. "You feel pretty lucky to be here." If taxes had increased along with market
value, Spielman said he probably would have sold and moved somewhere more modest. "Property's done nothing
but go up in the beach areas," he said.
In the last year, the median home price statewide jumped 19.1%, according to the California Assn. of Realtors.
That's evidence, officials from the Howard Jarvis Taxpayers Assn. said, that Prop. 13 is as necessary as ever. "It
resulted in the stabilization of neighborhoods and allows people to stay in the neighborhood where they bought
homes and not be forced out by increasing tax," said group's executive director Kris Vosburgh. "The basic benefit
to both new & old home buyers is that you know what your taxes are going to be from year to year. One
doesn't have to shudder in fear."
Cameron Quinn, 56, another Lido Isle resident, is also a beneficiary of Prop. 13. His parents bought his house in
1966 for $45,000. After they died, the house, and the benefits of Prop. 13, passed to him. The criminal defense
attorney lives there with his wife and 18-year-old daughter. They pay $966 in property taxes for the home assessed
at $95,403.
"Where else could we go where it would be less?" Quinn said. "The fact that the taxes are low is a salvation." He
calls it a financial security blanket and a far cry from the Costa Mesa condominium where the couple first lived, with
not much more than a television, a bed and an old piano. To the Quinns, this Lido Isle home is more than just a
bargain. It's where he brought his wife after their first date, where his piano-teacher mom and family friends greeted
them with a serenade.
It is also a legacy, passed from mother to son. And it will be passed on again, from father to daughter. "We wouldn't
move," said his wife Neeta Quinn, 57. "This is where we're going to die."
More Californians at risk of losing homes
1.24.07 David Streitfeld
The number of Californians defaulting on their mortgage loans is rising rapidly, according to figures released Tuesday, providing striking evidence that more people are at risk of losing their homes. Default notices jumped 145% in the last three months of 2006, accelerating a trend that began in late 2005 as home sales started to cool.
It was the largest number of default notices in any three-month period since 1998.
Analysts said the increase was not worrisome yet. But if the number continues to escalate, it could drag down home values in certain communities, they warned.
"So far, this isn't alarming," said DataQuick Information Systems chief analyst John Karevoll, which compiled the data. But if default notices "keep going up at this rate, it could get nasty fast," he added.
Home markets that are most vulnerable include the Inland Empire and the Central Valley, both of which drew throngs of first-time buyers even as the housing boom was ending. Such homeowners are the most at risk of losing their homes because they have relatively little equity in their properties, making it harder to refinance their mortgages.
Default notices are the initial step in the foreclosure process. In the fourth quarter of last year, lenders issued such notices to 37,273 borrowers across the state, warning them that they were at risk of foreclosure, compared with 15,196 during the same period a year earlier, DataQuick said.
Not every notice of default leads to a foreclosure, when a property is seized and sold to pay the mortgage. But foreclosures also are on the rise. There were 6,078 in the last quarter of 2006, up from 874 a year earlier.
Defaults and foreclosures fell steadily starting in the late 1990s as housing prices took off. In those heady days, practically anyone needing money to pay bills could refinance, cashing out equity from what seemed to be an endlessly refilling piggy bank.
In a stagnant or falling market, that option isn't available to recent buyers or those who have visited the pig once too often. Instead, many of those who are unable to make their payments must either sell the property or let the bank take it over.
During the mid-1990s, this process reached its peak as quarterly default statistics routinely exceeded 50,000 and foreclosures topped 15,000. (The housing stock has grown since then, making the 1990s numbers even worse by comparison.)
That era was one of the grimmest in modern California history, marred by the Los Angeles riots, the Northridge earthquake and an economic recession, all of which contributed to the collapse in home values. Today, the economy is healthy and unemployment has rarely been lower.
"I really don't see any distress out there," said Pacific Capital mortgage broker Chris Comer in San Marcos CA. "Most people getting notices of default are figuring out ways to get those mortgages current by any means possible so they're not kicked out in the street."
Most people, but not everyone. 66-year-old retired insurance agent James Brown in Salinas CA has a history of heart trouble. When he had an operation in 2005, he said, "the doctor gave me a 50-50 chance I'd die on the table. So I did a stupid thing: I refinanced the house."
Brown's goal in tapping his equity was to give his wife, Monica, a $100,000 cushion after his death. But he didn't read the paperwork carefully, and didn't realize that his monthly loan payment would skyrocket.
There was also a problem with the operation: It worked.
A year or two earlier, that would have been nothing but good news. In the early part of the decade, Brown recalled, "property values went crazy."
"People pulled up in Silicon Valley and went to Salinas, and paid here what they had been paying there," he said.
But Brown awoke to a different world. With the new loan, his payments went to $4,500 a month from $2,900. The $100,000 in equity he pulled out of the house went to his medical expenses and other bills.
The property has dropped in value to $750,000 from $899,000, leaving him without enough equity to refinance. He arranged to sell the place, but the prospective buyers couldn't qualify for a mortgage.
In September he gave up and stopped paying the mortgage. He's now in default, speeding toward foreclosure.
"Three times a week, they call and say, 'Where's my money?' " he said. "If I hadn't survived, everything would have been fine."
Brown's situation illustrates a potential wild card in the housing market that barely existed a decade ago. Lenders have invented all sorts of newfangled loans, many of which are reset to higher interest rates after a fixed period. The ability of borrowers to repay such loans, particularly in a weak market, is untested.
"People are living on the edge, and they can't help it with the price of houses," said Costa Mesa mortgage broker Barbara Swist helping Brown sort through his options. "They have good jobs but they bought over their heads, buying into the American dream."
That's also the opinion of Durham NC based nonprofit advocacy group Center for Responsible Lending. Last month, the center issued a lengthy analysis explaining how millions of so-called sub-prime loans would soon turn bad. Sub-prime loans are made at higher rates, and include more onerous terms, to borrowers who don't qualify for lower-cost "prime" mortgages.
Sub-prime foreclosures would increase the most, the authors concluded, in states that had seen strong price appreciation during the boom. That would include New York, Virginia, Maryland and particularly California.
The borrowers most at risk are naturally those who bought most recently. The center estimates that a quarter of the sub-prime loans made in the Central Valley city of Merced last year will result in foreclosure. That would be the highest rate in the country, based on the center's calculations.
Eight other California cities, including Vallejo, Bakersfield, Fresno and Stockton, were among the top 15 projected foreclosure rates. That geographic focus is consistent with Tuesday's DataQuick numbers. The Central Valley, with about 6.5 million people, had 8,531 defaults and 1,646 foreclosures in the last three months of 2006. Los Angeles County, with 10 million people, had fewer of each.
For the state as a whole, the Center for Responsible Lending projects a failure rate of 21.4% for 2006 sub-prime loans, a level exceeded only by Nevada and Washington, D.C.
Foreclosed homes are typically sold at a discount, which can hurt property values of nearby houses. Yet even a jump in foreclosures, said, one of the report's authors Ellen Schloemer, isn't by itself going to bring back the dark days of the early and mid-1990s.
"It won't crash the housing market," she said. "There's still a lot of people who will buy homes and keep them. As long as no life event comes along that pushes them over the edge, they'll probably be OK." But, she added, they shouldn't get too confident.
Homeowner groups' power to foreclose is under attack
Lawmakers say boards have gone too far by seizing and selling units over minor disputes
6.7.04 Daniel Yi L.A. Times
Poletown
Alarmed by a flurry of horror stories, state lawmakers are rushing to resolve a long-standing complaint about
homeowners associations: the power that they have to seize properties without going to court. By law, associations are entitled to foreclose on the homes of members who fail to pay their dues. Though most residents pay their bills before their houses are actually sold, thousands have lost their homes, sometimes over disputes involving a few hundred dollars. "It's legalized extortion," said state senior citizens advocate Marjorie Murray, many of whom live in condominiums & private communities run by associations. "Why should homeowners associations have such a power?"
Some homeowners association leaders say they need so-called nonjudiciary foreclosure powers, which allow them to take property without seeking a judge's approval, to keep neighborhoods looking tidy and to protect property values. Without such powers, associations would have little ability to require homeowners to pay assessments that cover the costs of such projects as new roofing in a condominium complex or landscaping services & street maintenance in a gated subdivision.
"Unless & until these debts are collected, the remaining homeowners must make up the difference, and that is unfair to them all," said Community Associations Institute lobbyist Skip Daum, a trade group whose members incl homeowners association boards, community managers and lawyers.
The Assembly & Senate, responding to recent high-profile cases, are considering 2 bills this year that would limit homeowners associations' nonjudiciary foreclosure powers. "One of the doctrines of our laws is that the penalty or remedy should fit the violation," said Assemblyman Darrell Steinberg D-Sacramento, whose bill banning nonjudiciary foreclosure passed the Assembly at the end of May. "Taking someone's home obviously should be the last resort."
Controversy over nonjudiciary foreclosure stretches beyond California as legislators from Arizona & Texas,
among others, have attempted, with mixed results, to limit the power of homeowners associations. Still,
associations in many states can simply auction a property after deeming a bill overdue and filing notices with the
county.
An estimated 8 million Californians, about one-fourth of the state's population, live in communities governed by
homeowners associations. About 2,500 residential developments governed by associations are built in the state
each year, the California Research Bureau says. 40% of new single-family homes sold are in homeowners
associations, the Public Policy Institute of California says.
As they grow in numbers, homeowners associations, a form of private govt whose elected board members enforce community rules and levy assessments, have come under criticism, even ridicule, over seemingly trivial
regulations, incl what lawn ornaments residents are allowed to have or what color they can paint a front porch.The ability to take someone's home is such an extraordinary power that its use should be limited, even banned, critics of the practice say. Some associations are too quick to resort to foreclosures, sometimes over relatively small amounts, the critics say. Because the associations have little interest besides recovering the dues they are owed, homes are sometimes sold for pennies on the dollar, leading to huge losses for individual homeowners.
In Tom & Anita Radcliff's case, their association sold their home in less than a year over what began as a
$120 bill. Citing financial & health problems, the couple didn't pay the annual dues. Their Copperopolis CA
home, appraised at $277,432 and w/ $30,000 lien on it, was auctioned for $70,000 December 2003. The sale left the retired couple with about $68,000 after subtracting unpaid assessment & collection fees, and without their house.
"It just didn't occur to me that someone would foreclose over $120," said Anita Radcliff, 64. "It was outside the
realm of my reality." Their homeowners association, Copper Cove at the Lake Tulloch Owners Assn, atty Mike
Woodbury, said the couple were given warnings & opportunities to avoid the sale. "It is the obligation of the
homeowner to pay the assessments," he said.
The couple filed a lawsuit in March, alleging among other things that the foreclosure was an abuse of collection
laws. They are being allowed to stay in the home until the lawsuit is resolved. Melissa Colburn of Chula Vista, CA sued her homeowners association after it sold her $230,000 two-bedroom townhome for $5,150. Colburn, expert on hazardous materials, said she wasn't receiving her homeowners association bills because of a mail mix-up. She got an eviction notice in late 2002 from the man who bought her home, Carlos Sosa. "I thought it was a joke," she said. "I almost threw the piece of paper away."
Colburn, 35, settled her lawsuit and reclaimed her townhome at the Villas at Eastlake Shores Owners Assn. In the process of building her case, Colburn found that her association's law firm, Peters & Freedman, had acted as a trustee in other foreclosures in which Sosa had bought properties. In one case, Sosa paid $2,515 for a house in Escondido and, in another, $2,987 for a condominium in Bonita, according to property records in Colburn's lawsuit.
Colburn accused the law firm and Sosa of colluding to sell foreclosed homes at rock-bottom prices. Sosa & David Peters, of Peters & Freedman, denied the charges in court filings. Sosa did not return calls, and Peters declined to comment specifically on the case, citing the settlement's confidentiality agreement. "Foreclosure is a small part of our business," said Peters, whose firm represents nearly 600 associations in Southern California. "It is certainly not a profitable part of our business."
It would have been a potential windfall for Sosa, who stood to make as much as 20 times his investment. Colburn said her townhome had nearly $100,000 in equity after subtracting the $130,000 in mortgage still owed to her bank.
Experts say such profits are possible in part because auctions held by homeowners associations are not widely advertised, and associations are typically interested only in recovering dues & collection fees they are owed.
By law, the bids start at the amount owed, and any anything above that goes to the original homeowner. The buyer assumes some prior liens, such as the mortgage.
California homeowners associations can auction a property in as little as 6 months, far more quickly than county tax collectors, for example, who must give homeowners 5 years to pay. Their power is similar to that of a mortgage bank, which technically owns a home until its loan is paid and can auction a property without a judge's review if the borrower defaults.
Actual sales of homes are rare. About 1% of all foreclosure actions begun by homeowners associations end with the home being sold, according to the Community Associations Institute, which conducted a survey in 2002. Most homeowners faced with the prospect of losing their home at auction pay their debts, the trade group
maintains.
Based on the institute's numbers and estimates of the number of California homes governed by homeowners
associations, that 1% represents several thousand foreclosed homes in recent years. Hundreds of thousands of others are threatened with the action every year. Because there is no judge reviewing the process, the critics say, those who believe they are being wrongfully targeted have little choice but to pay their associations or file costly lawsuits.
Lawmakers would like to curb the trend and offer some protection for individual homeowners. A bill introduced by Sen. Denise Ducheny D-San Diego would prohibit homeowners associations from foreclosing for debts of less than $2,500 and assure that those who are drawn into foreclosure receive at least a portion of their equity: up to $50,000 for a single adult, $75,000 for a family and $150,000 for senior citizens.
"There is an increasing share of our population who" live in places with homeowners associations, Ducheny said. "And that raises all sorts of question about how they are governed which the Legislature has considered [in the past]…. But nothing is as visceral as someone losing their home."
The Senate passed the bill unanimously last month. Ducheny's bill is likely to be combined into a compromise bill with Steinberg's Assembly bill, which passed 69 to 10 and seeks to ban the practice altogether. A final version should reach the governor's desk later this year.
Banks really do prefer foreclosure
New study says loan servicers lack financial incentive to modify mortgages.
10.20.09 Mark Huffman MSN Money
At the start of the foreclosure crisis, personal-finance experts urged struggling homeowners to contact their lenders if they started to fall behind on their mortgages. The lenders want to do everything they can, homeowners were told, to avoid a foreclosure. Now, the experts aren't so sure that's the case.
Consumers who have jumped through a frustrating series of hoops to achieve a mortgage modification, a lower interest rate or more manageable payments, are convinced that conventional wisdom is flawed.
Jason, of San Diego, said he's become frustrated trying to complete a loan modification.
"I have gone through the modification process but have been denied, although no clear explanation was provided," Jason told ConsumerAffairs.com. "I have been seeking assistance and guidance from quite a few bank representatives and have only received rude, misguided information."
In the last year ConsumerAffairs.com has received hundreds of complaints from consumers who said they followed loan-modification instructions, faxing requested documents repeatedly, only to have their applications disappear into a black hole.
"I faxed papers repeated times and was told that I need to fax more or that they never received them so they can start a modification," Maria, of Sussex, N.J., told ConsumerAffairs.com. "I made payments and they never credited my account. Now they call in October 2009 and they tell me that they stopped the modification because I never faxed out the papers. Is this a joke?"
Regardless of the loan servicer, the story seems to be the same. Consumers start down a road they think will lead to a modified mortgage, only to meet a wall of incompetence and indifference at the mortgage company.
"We sent all information requested by certified mail," Regina, of Whitefish Bay, Wis., told ConsumerAffairs.com. "As the others have described, we have had to make contact. They do not respond. The usual answer is 'Whoever told you that is wrong.' I actually have a tape of one of their agents stating, 'I can't be responsible for what someone else told you.' Should they not be required to respond in writing? Is this not a govt-funded program?"
The Treasury Dept did, in fact, begin a loan- modification program in March to encourage loan servicers to modify troubled loans to prevent foreclosures. But the process has proved slow, and for many, frustrating. Meanwhile, foreclosures continue unabated.
A new report by the National Consumer Law Center says it's no mystery why loan servicers seem to be dragging their feet in modifying troubled mortgages. The report suggests these companies actually stand to profit if the troubled property goes to foreclosure.
The report, "Why Servicers Foreclose, When They Should Modify, and Other Puzzles of Servicer Behavior," reveals that servicers, unlike investors or homeowners, generally don't risk losing money on foreclosures.
"One common-sense solution to the foreclosure crisis is to modify the loan terms in more instances," said Diane Thompson, an NCLC attorney and author of the report. "Foreclosures are a costly ordeal for the homeowner, the lender, and the community. Yet they continue to outstrip loan modifications because servicers have no incentive to help borrowers stay in their homes."
In almost every case, the loan servicer doesn't own the loan. It's simply a company, usually a bank, hired to collect the money from the homeowner and deliver the funds to the investors who own the mortgage. The investors lose money if the property goes to foreclosure, but the servicer doesn't.
Homeowners seeking to save their homes by modifying unaffordable loans typically deal with servicers. That is why the financial interests of servicers have the potential to hurt homeowners, the report says. Financial incentives encourage servicers to ignore the interests of homeowners. For example, the report suggests that servicers often deny homeowners principal and interest rate reductions because as servicers they find it profitable to offer repayment plans or forbearance agreements that do little to reduce homeowners' debt burdens.
"Loan modifications inevitably cost the servicer something," the report says. "A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified, and no penalty, but potential profit, if the home is foreclosed."
The NCLC report also found that the lack of third-party oversight allows servicers to pursue foreclosure instead of effective loan modifications that would benefit homeowners as well as investors. While credit-rating agencies and bond insurers do monitor servicers, their oversight too often encourages servicers to foreclose.
The NCLC report includes a detailed examination of loans in foreclosure from 1995-2009 and how components of servicer compensation affected the likelihood and speed of foreclosure. It also looks at the rise of the servicer industry as a byproduct of securitization, and the oversight of servicers by credit-rating agencies and bond insurers.
"The people who could change the way servicers are doing business: Congress, the administration, and the Securities and Exchange Commission, and the market participants who set the terms of engagement: credit- rating agencies and bond insurers, have failed to provide servicers with the necessary incentives to reduce foreclosures and increase loan modifications," Thompson said.
The report suggests that rule changes remove the financial incentives for servicers to block modifications and mandate loan modifications before a foreclosure as a matter of law. Until it does, the report says, the foreclosure crisis will continue.
"I feel that I have been set up to lose my house," Alesea of Kinston, N.C., told ConsumerAffairs.com. "Where is the justice in this?"
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