HUD Passes More HOA Burdens Onto Servicers
The U.S. Department of Housing and Urban Development is keeping servicers of first-lien government insured loans on multifamily unit properties on a shorter leash.
As of Jan. 1, 2013 lenders and servicers are expected to do whatever is necessary to protect HUD from losses related to Federal Housing Administration-insured mortgages on multifamily condominium properties.
In an effort to keep the appropriate responsibility balance between all parties involved in a condominium lending transaction HUD changed its policy to ensure servicers take their share of foreclosure related losses.
Since the FHA insurance protects lenders against losses by reimbursing them if borrowers default, the new guidelines are designed to ensure the servicers of such loans are hold responsible if HOAs, or the homeowner associations that are in charge of maintaining these buildings are past due on their payments.
Despite the fact that HOA delinquencies and foreclosures tend to result from a chain reaction, condo owners are required to pay dues to HOAs generating the revenue necessary to pay, among others, servicers of condo loans, going forward mortgage servicers may even face noncompliance penalties.
Matt Martin, founder and chairman of Sperlonga, an Arlington, Va.-based company that specializes in connecting HOAs with mortgage lenders and servicers, expects HUD’s requirements will turn into a challenge for many lenders and servicers primarily because despite all the changes implemented by the mortgage servicing industry due to the foreclosure crisis, when it comes to HOAs many servicers have not changed.
“They have not traditionally maintained a database or tracked the HOAs associated with a property after origination,” he said.
In June 2012 HUD updated its Mortgagee Letter 2012-11 changing the agency’s policy on properties associated with an HOA during foreclosure actions.
It is not a small deal, says Brent Stokes, senior vice president of Sperlonga’s data and analytics division.
As of January HUD requires that servicers name and properly serve the HOA in any foreclosure proceedings in order to eliminate or minimize HUD’s responsibility for unpaid HOA fees. Once a foreclosure sale is completed, the servicer must notify the HOA of the servicer’s interest in the property and pay HOA assessments not eliminated by the foreclosure prior to conveying it to HUD.
“Lenders and servicers who aren’t prepared to deal with HOA delinquencies and liens that can jeopardize HUD first lien positions” may face significant consequences, he said, even repurchases or reconveyance of properties.
According to the HUD Mortgagee Letter, servicers must “take any action necessary to protect HUD’s interest” when a foreclosure is brought by an HOA on a property securing an FHA-insured mortgage.
What makes things wore for servicers, he added, is that servicers who do not comply with the new guidelines “may miss out on reimbursements by HUD for payment of pre-foreclosure HOA fees, interest and late fees.”
HUD’s Mortgagee Letter also requires servicers must ensure that any pre- or post-foreclosure HOA fees or liens “are removed from the property prior to conveyance to HUD.”
It notes that as long as servicers follow the new guidelines on properties associated with HOAs HUD will reimburse the full amount of payments of HOA fees incurred between the date of foreclosure and the date of transfer of title to HUD.
Servicers may also receive reimbursement for penalties, interest and other related fees and charges incurred by the borrower and paid by the servicer, according to the letter, but “HUD will not reimburse any penalties, interest and/or late fees sustained after the foreclosure sale or deed in lieu of sale.”
“Servicers should be aware that that HUD breaks downpayments by jurisdiction based on whether the HOA fees survive or are eliminated by foreclosure or deeds in lieu of foreclosure,” Stokes notes.
If the mortgaged property is in a jurisdiction where pre-foreclosure unpaid HOA fees survive the foreclosure, the servicer needs to ensure all fees and liens are paid or removed from the property. In jurisdictions where unpaid HOA fees are extinguished by a foreclosure, the servicer must make sure that any post-foreclosure HOA fees and liens claimed by the HOA are resolved.
Since 2011 over the last 18 months Sperlonga has built a national database that contains two-thirds of the country’s HOAs and developed technology that helps HOAs submit claims for payment to the correct servicing contacts. The company serves as a mediator between lenders and HOAs that need to settle claims.