Issues related to default risk and losses associated with delinquent owners of condos and other multifamily units represented by community associations—otherwise known as HOAs—resemble an iceberg many in the industry still fail to see, according to Sperlonga.
“To safeguard investments in both the near term and over the long run” the securitization industry has to improve its poor understanding of HOAs, as the number of homes that involve HOAs has grown to over 25 million and can pose serious problems if delinquent accounts are not properly managed, says Jason Serrano, co-head of structured products and managing director for securities specialist at Oak Hill Advisors.
The problem affects especially lenders and servicers of very large delinquent mortgage loan portfolios in so-called super-lien states, where HOA liens for unpaid accounts “can take priority over mortgages and threaten first-lien positions,” says Matt Martin, chairman of an Arlington, Va., affiliate of MMREM that specializes in HOAs and asset management.
“There are over 350,000 HOAs in the country,” he said.
Fannie Mae and HUD require servicers to monitor delinquent HOA payments and advance funds to cure HOAs delinquent 60 days or more. Sperlonga's experience has shown that losses of $7,300 per loan or more "are readily possible for certain classes of mortgages," Martin says, posing a major threat to all investors, and particularly for those involved in residential mortgage-backed securities.
Given the size of the risk, it is no surprise Fannie and HUD require servicers to monitor and resolve HOA delinquencies before their mortgage priority can be endangered.
Martin and Sperlonga’s SVP Brent Stokes detail the pitfalls that HOA liens for unpaid accounts can pose for commercial and residential mortgage-backed securities in “The Hidden Threat of HOA Liens: Why Delinquent HOA Accounts Are a Threat to Investor ROI and First Mortgage Lien Positions.”
They have found that the scope of the problem is far larger than the industry realizes, “particularly when considering that the majority of their pools involve newer homes, most of which include membership in one or more homeowner associations.”
The white paper found that there are approximately 6.7 million HOA member first mortgages in the country that are affected by outstanding liens, with a principal balance of roughly $11.8 billion. Reportedly, HOA-related losses happen to all lenders, even the largest banks in cases when HOA forecloses on a property.
For example, in one case study where Sperlonga researched over 200 loans, 156 of the loans in that sample portfolio involved HOAs and up to 129 of them had noncurrent accounts. Collectively these HOA liens affected over $8 million in first-mortgage balances.
Fannie and HUD requirements in effect since January and new requirements added by the regulators may cost lenders, servicers and investors millions in losses. Which is why, according to Serrano, the RMBS industry must “take action to prevent a potential future catastrophe of HOA-related foreclosure and repurchase problems,” and require that first liens are settled and HOA accounts are kept current in all critical states.
The mortgage-backed securities market should ask for similar protections, he says, since the problem is proportionately larger.
Sperlonga reports that approximately one-in-five properties in the U.S. involves an HOA, and about 80% of new homes are HOA members, indicating “the growing popularity of community associations.”