The price of being a good neighbor can be steep for banks foreclosing on condominiums and homes in planned communities.
In 16 states and the District of Columbia, homeowners associations have "super lien" priority ahead of the first mortgage, meaning they get to collect unpaid dues and assessments before a bank can foreclose. (In the other 34 states, HOAs are wiped out by a foreclosure.)
Many financially-strapped homeowners associations are holding up loan modifications, short sales and the sale of foreclosed properties as they try to strong-arm servicers into paying amounts above and beyond delinquent dues. Some homeowners associations have even initiated foreclosure proceedings against banks. Others are demanding that thousands of dollars be set aside in escrow accounts to cover needed repairs before a foreclosed home can be sold.
"It's a hot topic because the fees can grow quickly," says Cameron Larkin, a vice president of finance at Nationstar Mortgage Holdings Inc., a top subservicer for Fannie Mae. The highest charge Larkin has seen was $39,509. He called the amounts "pretty amazing, where the dues are as high as $20,000, and it's layered with legal fees."
Jon Goodman, president of the Denver law firm Frascona, Joiner, Goodman and Greenstein P.C., says HOAs are so overwhelmed by foreclosures "they are desperate to get any nickel they can."
"The argument that HOAs should be senior to everything is like property taxes — they are part of preserving the collective value of the neighborhood," says Goodman, who represents servicers, HOAs and investors in distressed properties. "Lenders make loans in those states mindful that they have to deal with a six month super-lien, but not other junk expenses. The question is, are the associations going overboard? Maybe it's a case where they should get $500 but they're asking for $3,000."
The statutes governing HOAs vary state to state, but in states where super-lien priority exists, HOAs can generally collect up to six months of overdue fees and dues. In Florida, though, the lender has an obligation to pay 12 months of assessments and dues, or 1% of the unpaid principal balance of the loan, whichever is the lesser amount. In Nevada, an obligation to pay up to nine months of unpaid dues is standard, but the statute there has been interpreted to include late fees, collection fees and any violations for the nine months before the bank took control of the property.
