If you are working with a buyer right now and scooting around town showing property, you are already aware of which homes or units are within a homeowner’s association (HOA). Perhaps you know about the monthly fees and perhaps you are even aware of the additional assessments required of owners in certain HOAs. You may even already know that there are certain types of financing that could restrict a buyer from purchasing within some HOAs.
You see, some mortgage lenders do not want to loan on units or properties in an HOA that has a low level of owner occupancy. Others do not want to loan on units in an HOA where there is outstanding litigation. And, some mortgage lenders want to be absolutely certain that the HOA financials are in order before making a loan on a property in a specific complex or association.
During the Recession, money was so tight for some homeowners that they would forego both their mortgage payments and their monthly HOA fees. Not only did that contribute to the insolvency of banks and HOAs, but it also contributed to the number of foreclosures – foreclosures by both lending institutions and homeowner’s associations.
That’s right… homeowner’s associations can and will foreclosure on properties under their auspices if the outstanding fees are excessive.
HOA Foreclosure and the Super Lien States
According to Sperlonga (a company that “bridges the gap between mortgage servicers and community associations”), “in 16 states and the District of Columbia, liens recorded by HOAs for unpaid fees can supersede first mortgage positions much the way tax liens, mechanics liens and other similar claims do. These ‘super lien’ areas are expected to increase in number as additional states recognize the problem of unpaid HOA accounts and move to protect consumers.”
In the 34 states that are not “super lien” states, HOAs are still actively foreclosing. Throughout California, HOAs actively foreclose in order to recoup the monies owed. The HOA then rents the property month-to-month, waiting for the first lien holder of the foreclosed seller to foreclose on the property again. In that way, they collect what’s owed (and perhaps a bit more if the banks are slow to foreclose).
The practice of HOA foreclosures brings to light an even more complicated issue. That is, what happens to the outstanding mortgage loans? While Sperlonga’s data implies that these liens get wiped out and the HOA (now the rightful owner in the super lien states) can sell the property, the issue is not so clear-cut. Those mortgage loans don’t just disappear. Someone needs to work with the mortgage lenders to remove those liens. In the 34 non-super lien states, those liens will stay on title.
For this reason, the prospect of obtaining clear title is not quite so easy. Will the mortgagee claim that the HOA did not have the right to foreclose? Might there be some pending litigation between the HOA and mortgage lenders? What sorts of complications will arise for future owners of that property?
Who Is the Real Victim of HOA Foreclosure?
Lastly, the clearest victim here is the original owner of the property. While his (or her) home was foreclosed on by the HOA, the mortgage loan still stands—racking up additional unpaid fees and further wreaking havoc on the borrower’s credit score. Not only has the borrower lost his or her home, but there is still an outstanding loan hanging over his head.
Even though the mortgage lenders now seem to have policies in place to deal with unpaid loans, the HOAs haven’t developed those policies and procedures. That’s why we are continuing to see frequent HOA foreclosures. If you or your client is involved in something like this, it’s a sticky business. So, tread carefully and beware of the HOA.