Randall Patterson wrote a great expose in 2005 of how Texas homebuilders use “mandatory arbitration” contracts to avoid responsibility for badly built houses:
Jordan still remembers her pleasant illusions of arbitration—how much “more civilized and nice” it sounded than just suing someone, “like a mom who sits down with her children and says, ‘Now, this is the way I see it. Now you two go do what’s right.’”
What she found instead seemed neither pleasant nor fair. The Arbitration Association informed her that she would be expected to pay half of the arbitrator’s fees— roughly $1,500 a day for the arbitration itself and $750 for a preliminary study of the problem—plus half of the charges to rent the hearing room and hire the stenographer; plus the cost of expert witnesses, if any; plus, if she wanted one, the cost of an attorney. Plus, since the proceeding would conclude all disputes against the builders, if she wished to file a counterclaim seeking reimbursement for the cost of her property, there would be an additional filing fee of $8,500.
The arbitrator would be chosen from a list of lawyers and mediators. His decision would not be required to have any basis in law, could nowhere be appealed, and would likely come with a gag order. Jordan filed for hardship relief, but her builders’ lawyer, William S. Chesney III, insisted that she get none. She wrote long, emotional letters to her “solutions manager” at the arbitration firm, who shared them with Chesney and began sending her bills. It was like reasoning with a machine, she says, and in her letters and fliers she let the world know about her outrage—about the “shocking costs” of binding arbitration, the “stacked deck” of the arbitrator, that “henchman for torturing victims [of] the builders.”
It’s no accident that state legislatures have favored the homebuilders. The industry, whose primary goal is self-protection against consumer litigation, is one of the most powerful lobbying organizations in the country, and can easily outspend consumer organizations to gain unfair access to elected officials. it has also funded front groups such as Texans for Lawsuit Reform, Citizens Against Lawsuit Abuse, and Americans for Lawsuit Reform, and many similar organizations in other states, which act as surrogates for the builders while claiming to represent the interests of common citizens.
Homebuyers incorrectly assume the biggest investment of a lifetime comes with adequate consumer protection. In Texas homebuyers like Jordan Fogal have learned that the laws have been so skewed in favor of the builders that a major defect can ruin a family financially, physically, and mentally. Yet state legislators across the country trust the homebuilders to advocate for consumer protection.
Houston attorney Wendy Laubach has written about the dangers of foreclosures initiated by homeowner’s associations (HOA’s):
Perhaps any decision to sue or foreclose on a homeowner should require ratification by neighborhood vote after disclosure of the circumstances. Would the neighborhood have voted to victimize a man in my client’s circumstances back in 1995? Or would it have voted to waive the legal fees accrued to that date (which, bear in mind, at that time consisted of the cost of prosecuting a lawsuit they hadn’t even yet properly served on the homeowner). This HOA didn’t even know he was ill when it sued him. It didn’t know anything about him. It didn’t check with his neighbors to see what the situation was. Why not?
I asked, how could you sue him without even finding out why he wasn’t returning your letters? Why didn’t you know he was in the hospital? Their answer was, how could we possibly be expected to take the time the effort necessary to inform ourselves of the condition of all of our neighbors? Three-quarters of the residents of thisHOA don’t respond to their mail.
Well, then, I say something’s really wrong. If the answer is“too much trouble and not enough time,” this is not a community-oriented organization that should be given so much power. If a community organization is worth protecting, preserving, and buttressing with extraordinary legal powers, it should be of the sort that identifies and helps people in my client1s circumstances, not puts guns to their heads.
If it doesn’t, no amount of unproven “protection of property values” can justify its tactics.
This article was written in 2000. Here is excerpts from Senate testimony by Laubach. Here’s a somewhat more balanced position about the issue by Christopher Durso. Durso argues that the threat of foreclosures is a red herring; the real threat is the imposition of penalty fines:
All this might be fine, Haruff says, except it almost never happens that way. “What happens is, the actual foreclosure never comes to fruition,” Haruff says, “the reason being that the homeowner is intimidated and threatened with the loss of their home if they don’t pay the fine for leaving their garbage can out too long or planting a shrub that’s the wrong size.” If a homeowner ignores or overlooks the fine, an attorney usually gets involved, and next thing you know a $100 fine has turned into a $5,000 debt. “That’s where the problem really lies,” Haruff says, “in this intimidation and threats with these fines.” There’s also the fact, she says, that foreclosed homes are often sold for a fraction of their appraised value. It’s all too much, too fast.
Haruff is echoed by Rob Edwards, a legislative aide to Texas Sen. Jon Lindsay, who chaired a subcommittee that heard testimony about association behavior. “I think what we found was that the actual loss of property was not a problem,” Edwards says. “What was a problem was the threat and subsequent attorney fees that accompany that threat that were a little out of line with what we thought was reasonable for associations.”
Indeed, the more people you talk to, the more it becomes clear that the issue is less that association foreclosures happen; rather, it’s how they happen. In states that allow nonjudicial foreclosures, including Texas and California, the howls of outrage can be particularly loud. The perception is that associations use nonjudical proceedings—which are also performed by attorneys but don’t involve lawsuits or oversight by the courts—to railroad through foreclosure after foreclosure. But in fact, Meyer notes, associations usually use them because they’re faster than full-blown legal proceedings and cost about a quarter as much. They’re particularly attractive to associations on a tight budget. And the savings is even passed along to the homeowner whose house is being foreclosed on, because there aren’t as many attorney’s fees that accumulate. So in places like Texas, where you can go either way, which type is used more often—judicial or nonjudicial? “I’d say it’s a pretty good toss-up,” says Marc D. Markel, Esq., a partner with Roberts Markel Guery PC, in Houston. “A lot of people prefer judicial foreclosure because you have a judge looking over the documents.”
Also, for Texas real estate nerds, here’s data collection and analysis of Texas foreclosures