REQUIRED READING: During the past few years, missing or past-due payments from homeowner associations (HOAs) have crept onto servicers' radar screens, especially when those missing or past-due payments have caused delays in foreclosure resales. HOA claims take priority over first-lien positions in some states, making it next to impossible to sell properties until the HOA claims are resolved. In every state, both the servicer and the association typically lack contact information for each other, only adding to delays in resolving claims and selling properties.
The problem isn't going away anytime soon, as common-interest developments – which include single-family homes, condominiums, cooperative apartments and planned-unit developments – are rapidly increasing as a percentage of all housing in the U.S. According to the Community Associations Institute (CAI), HOAs are associated with roughly 80% of all new construction, governing an estimated 24.8 million homes and 62 million people in 2010.
Currently, one in five Americans lives 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. Consider that in 1970, there were only 10,000 HOAs; today, there are about 315,000.
‘Associations accommodate growth in ways that are consistent with smart-growth initiatives – they are predicated on density, require attractive design for marketability and are organized to meet the financial sustainability necessary to support the privatization of services and infrastructure,’ says Frank Rathbun, vice president of communications at the CAI.
What's driving this growth? The trend began in the 1960s and 1970s, when local municipalities started to require builders and developers to create communities that would subsidize many of the things that were traditionally the obligation of local or state government, according to Rathbun. Responsibilities such as road maintenance, snow removal, trash pickup and storm-water management were privatized or delegated to the new developments.
In essence, the local and state governments were requiring developers of residential properties to create community associations to take responsibility for these services so the municipality didn't have to. As it turned out, this was fine with homeowners, as they found merit with the concept.
The trend toward community-association-governed housing has rapidly increased as Baby Boomers age and retire. Boomers frequently seek a home that is maintenance free, such as a condo or planned unit development.
In addition, builders and developers are discovering that it is profitable to build new construction in communities with pools, community centers, golf courses and other recreational facilities. They are also finding that many new homeowners like to have at least some services, such as lawn maintenance and snow removal, provided. Naturally, subdivisions with recreational facilities and maintenance included require an HOA to administer and oversee these amenities.
Increasingly, developers are building communities centered around a certain feature or amenity, whether it is a pool, a marina or walking trails.
‘The developer can use a particular feature or features to market all sorts of things to potential buyers,’ Rathbun says.Â
What does this explosive growth in HOAs mean for servicers? It actually means a great deal.
With mortgage delinquencies, foreclosures and vacancies on the rise, it is not surprising that there has been a corresponding increase in past-due or delinquent HOA payments. It is difficult for an association to collect fees on vacant homes, and most homeowners will stop paying their HOA fee before they halt payment on their mortgage.
According to a recent CAI survey, 63% of associations now have delinquency rates exceeding 5%, up from 22% of associations in 2005. One in three associations has a delinquency rate exceeding 10%, and for almost one in 10 – or close to 30,000 associations nationally – the rate is more than 20%, the CAI survey states.
Considering that HOA homes represent approximately $2 trillion, or roughly 20% of all U.S. real estate, HOA account delinquencies can spell real trouble for mortgage servicers. That's because missing or delinquent HOA fees often snarl the resale of foreclosed and defaulted residential properties.
Lack of communication?
Unless there is a means of communication between the servicer and the HOA, a servicer may not even be aware that there are overdue association fees owed until a notice of foreclosure is filed. Resolving the back fees owed can significantly stall the foreclosure process, and legal fees and delays add up quickly.
First, the servicer needs to identify that there is even a problem with overdue HOA account balances, and then needs to reach out to the HOA to make a payment or to find a resolution. Often, there is no contact information available on the HOA, and likewise, the HOA probably does not have the proper contact information for the mortgage servicer.
Even when proper contact information is found and communication is made, it is not always clear exactly what the servicer's obligation is to the HOA. State laws vary greatly on how much a servicer is required to pay. The cap may be 12 months' worth of dues plus late fees and attorney fees in one state, and six months' worth of HOA dues in another state. Â Â Â
Servicers without access to a common database on such information can find themselves at a real disadvantage. Imagine a servicer paying upwards of $20,000 in past due HOA assessments and legal fees, when, by state law, the servicer was only required to pay $5,000. Yet overpaying on the amount owed to HOAs is something that happens all too frequently.
Making matters even more complicated, there are so-called ‘super lien’ and ‘non-super-lien’ states. In 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, which would certainly impact a decision on the modification.
Making the mortgage industry aware of the magnitude of the overdue HOA account problem, as well as of the potential impact on foreclosure resales, will go a long way toward heading off future problems.
Servicers can also be proactive in accessing information on delinquent HOA accounts that may be affecting the mortgages in their portfolio. That includes identifying which mortgages are associated with an HOA and which have overdue or delinquent HOA accounts, and then making sure to have the proper contact information on the HOA.Â
Equally important is being aware of the state laws governing the payment of HOA fees, including the statutory limitation on a servicer's obligation in each state.
Ultimately, communication between HOAs and mortgage servicers and investors will be the key to resolving overdue HOA fees on delinquent or foreclosed loans. It is something that is long overdue. After all, homeowner or condo associations are just as eager to communicate with mortgage servicers in order to get their claims resolved. Connecting the two parties is a big leap in the right direction.
Tim Walsh and Brent Stokes are executive vice president and senior vice president, respectively, at Arlington, Va.-based Sperlonga Data and Analytics. They can be reached at (888) 214-7314.
(Photo courtesy of Film Threat.)