Homeowners association claims pose serious threats to servicers and investors. The number of associations in the U.S. is estimated to be between 300,000 and 350,000 and more than 80% of new construction homes are part of an HOA.
Since one out of every five households belongs to an HOA, lenders and servicers must understand the necessary rules and regulations and exercise extreme caution when processing these delinquent properties.
Successfully managing delinquencies has always presented a challenge for servicers, but recently the process has an added layer of complexity, as more borrowers also become delinquent on homeowner association fees.
Portfolios with high volumes of real estate owned, underwater or foreclosed properties can be riddled with HOA liens, burdening the servicer with the task of identifying the appropriate parties and negotiating a series of individual deals to free properties up to market or sell.
Data from Sperlonga shows the portfolio risk nationwide, and the scope of the uphill battle is evident: out of 1 million homes in HOAs, 200,000 of those are in delinquency, and the average amount of delinquency is $7,200.
This might seem like a relatively minor issue, but there are instances where money due to an HOA actually takes priority over that of the principal mortgage — effectively halting a short sale, foreclosure or preventing the property from entering REO status. Currently, 21 states have what is known as “super-lien” status, giving past-due amounts priority over any existing mortgage, and according to Sperlonga, 42% of all delinquent loans are located in these states.
Additionally, 34 states allow nonjudicial foreclosures, which means the association has the right to foreclose without a formal court proceeding.
Suppose a nonjudicial foreclosure is commenced on a property by a bank and an HOA and at the foreclosure sale, a real estate investor purchases the property and receives and records a trustee’s deed.
Following the sale, the investor can hold that the foreclosure sale by the HOA eliminates the bank’s first priority lien, as happened in September in the case of SFR Investments Pool LLC v. US Bank. The Supreme Court of Nevada ruled in favor of SFR Investments, splitting the HOA lien into “superpriority” and “subpriority” components. The court ruled that the superpriority piece could be foreclosed upon nonjudicially and such a sale would extinguish the first priority lien.
In order to protect the first-lien position, the GSEs require servicers to identify and notify HOAs during foreclosure proceedings. If proper notice is not given, the servicer has not satisfied compliance and is in jeopardy of having to repurchase the loan. Locating an HOA for every delinquent property becomes a necessity.
Servicers must leverage national registries and databases to capture the property addresses for each residence contained within an HOA and determine if a particular property has just a single (or multiple) HOAs. Once that is established, the servicer is still left to find the right contact at the management company to communicate and negotiate with.
Once located, it is imperative that servicers quickly find out if HOA dues are current or delinquent and determine which course of action should be taken to preserve the first-lien position.
Often, the best way for servicers to handle these cases without becoming overwhelmed or having to face additional losses is to retain a third party with the resources and experience in handling HOA delinquencies, and should be considered a necessity when portfolios include many homes with HOA obligations.
Rosie Biundo is senior director of product marketing at Equifax Verification Services.