Here’s a fact you may not be aware of: properties governed by homeowner associations are the most rapidly growing form of housing in the U.S. today. Nearly 80% of new home construction is connected with an HOA or community association, according to the Community Associations Institute, the trade association representing HOAs.
It’s a trend mortgage servicers should pay attention to.
Over the past few years, it’s become clear that unpaid HOA fees can cause big problems for servicers, particularly in managing defaulting or foreclosed properties. Among other things, late or missing HOA fees can cause foreclosure resales to come to a grinding halt.
Why the boom in properties associated with an HOA?
It began in the 1960s and 1970s, when local municipalities began to require builders and developers to create communities that would subsidize many of the things that were historically funded by state and local governments.
More recently, the movement toward community association-governed housing has been fueled by the retirement of baby boomers. Moving to a maintenance-free community holds a good deal of appeal to today’s retirees.
And if you think HOA-governed communities are mainly for those living in a one- or two-bedroom condo, think again. New construction associated with an HOA comes in a wide range of sizes and types, from the smallest condominium to grand multimillion-dollar single-family homes.
Today, 20% of Americans live in a home associated with an HOA. The percentage is much higher where there has been more new construction in recent years, in states like California, Arizona, Texas, North Carolina and Florida, according to data from the CAI. With an estimated 6000 to 8000 new community associations forming every year, communities governed by an association will soon become the norm.
For mortgage servicers, the boom in HOA-governed housing is important for a few reasons.
First, there’s the matter of missing or late HOA fees delaying sales and resales of properties. Often the servicer isn’t even aware there is an HOA associated with a property until a problem arises. Finding contact information—or even the name of the association—can be difficult, which causes another hitch in resolving HOA claims.
Servicers should also be aware that in some states, HOA fees take precedence over the mortgage.
In the so-called super lien states—which include 16 states and the District of Columbia—HOAs have priority ahead of the first mortgage. That means an HOA can, by law, collect unpaid dues and fees before a bank can foreclose upon a property. In the remaining 34 states, overdue HOA fees are wiped out by a foreclosure.
In the case of loan modifications, HOA fees are still owed because there has been no transfer of title. Unfortunately, a servicer may not even be aware of a borrower’s past due HOA fees when considering a loan modification. Having that knowledge would almost certainly help servicers in making decisions on modifications.
So, what can a servicer or investor do? Align yourself with a company that provides access to a comprehensive database of HOAs, including contact information for each association, and that also offers help in negotiating with HOAs to resolve claims fairly.
After all, HOAs aren’t going away any time soon. In fact, they’re growing!
Timothy M. Walsh is executive vice president, Sperlonga Data & Analytics.