The homeowners association (HOA) market boasts cumulative operational fees that reach as much as $35 billion annually. In fact, over the last two decades alone, there has been a 3,000% increase in the total number of property management companies across the country.
Currently, there are more than 300,000 HOAs in the U.S., with each governed by its covenants, conditions and restrictions. These HOAs maintain a cumulative $2 trillion in total real estate. As servicing companies continue managing records of properties in default, having good working relationships with HOAs is critical to mitigate losses after the foreclosure sale.
Why is this? Because any unpaid fees or dues – nationally averaged at $5,000, including late fees, interest and attorney's fees – tied to HOA obligations can hinder or even prevent the completion of a home sale. This results in financial and reputational risk for servicers.
In better times, the sale of real estate owned (REO) property was typically a straightforward process: The real estate agent and the asset manager would identify the HOA and, collectively, reach an agreement regarding any amounts due. But increases in foreclosure volumes, coupled with increases in the average time from delinquency to foreclosure for HOA properties, have complicated the situation.
In the first quarter of 2007, for example, the average length of time for a foreclosure from delinquency to closing was 151 days. In the first quarter of 2011, that number had more than doubled and the typical foreclosure process averaged 400 days.
As properties fall into default and time accumulates until foreclosure, unpaid HOA dues and penalties escalate. Many borrowers simply forfeit making payments to the HOA, and by the time a lender has initiated a foreclosure, the borrower has already been delinquent on his or her HOA dues for a substantial amount of time.
Compound this problem by multiple properties in default in the same community, and the financial viability of the HOA can be severely threatened. At that point, the HOAs are often forced to exercise their right to place a lien on the property, which must then be cleared before the asset can be sold.
Sometimes, the lender accepts the total claimed amounts due as collateral damage and foots the bill, but this can take a heavy toll on servicers. In the ‘super lien’ states (there are currently 16 plus the District of Columbia), servicers are required to pay anywhere from six to 12 months of backdated dues prior to the sale of a foreclosed property.
To protect their interests, lenders today must proactively work in conjunction with HOAs to identify and resolve any outstanding HOA commitments early on in the REO process. If not, they risk losing a substantial amount of leverage in the transaction. Once a property is under contract, the servicer does not want to jeopardize the closing, so it may be willing to quickly pay a stated amount in order to keep things moving forward, rather than complete the time-consuming and expensive back-and-forth negotiation between lenders and HOAs.
For lenders with large regional or national footprints, this becomes a continually more complex process because they must manage the laws and requirements for HOA obligations in accordance with different state and local laws. Lenders need operational capabilities in place to not only quickly identify an existing HOA relationship and eliminate any liens recorded against a property, but also support productive ongoing relationships with the HOA.
Quickly and easily identifying HOAs is much easier said than done. There is no active directory for lenders to utilize, and even the simple compilation of a list requires extensive amounts of research.
As with fingerprints, no two HOAs are alike. These associations can vary in size, from small organizations staffed by community volunteers, to very large organizations that represent hundreds or thousands of properties in a given area. Some HOAs are controlled by large regional or national property management companies that are highly organized, and move quickly to refer delinquent dues and fees to attorneys for collections and lien filing, making it imperative that servicers be equipped to move equally fast in order to protect their interests.
But once the HOA has been identified, servicers must begin an often-complex process to pinpoint the exact amounts they are responsible for. If all parties have maintained strong communications, then there should be no surprises for the servicer come closing time, and the amount should be reflective of the true, legally responsible amount due. If a lender is nearing the closing, and the HOA has not been correctly identified nor any outstanding payments confirmed, then the lender should be ready for the resulting delay, which could add as much as 30 days to the closing.
Geography also plays a big part in the process, as real estate law varies from state to state. In some sates, it is more difficult to negotiate the fee back to the statutorily required amount than in others. Working closely with the HOA to confirm the original, correct amounts due in a timely manner can save lenders an average of $3,000 per file. In states with the highest numbers of foreclosures and HOA properties (such as Florida, Nevada, California and Arizona), this can yield even more significant savings.
In Florida, for example, the average savings between the amount paid by the servicer and the amount on the original statement averages over $6,000. Even independently, this is a substantial reduction, but when you consider that some lenders are dealing with thousands of foreclosures, the resulting cumulative savings are extraordinary.
The issue of HOA management will continue to remain an important one as lenders manage their REO portfolios in response to the ongoing foreclosure issues. Lenders understand and support the importance of financially strong and viable HOAs, as they are critical to supporting the real estate values in their communities. The key is in having the right processes in place and access to qualified, trained individuals who fully understand the differing case law requirements between states, and who are able to communicate effectively with HOAs to successfully negotiate the correct payment amounts.
In the end, servicers and HOAs are working toward the same goal. By quickly identifying and resolving outstanding HOA issues, servicers protect themselves while honoring the financial obligation to the HOA.
Stacey Bayley is senior vice president of asset management for ServiceLink, a Fidelity National Financial company headquartered in Coraopolis, Pa. She can be reached at (800) 777-8759.