Home Owners Associations (HOAs): Hidden Property Risk to Mortgage Lenders?
Today, nearly 80 percent of new construction in the U.S. is governed by an HOA or condo association. As many as 65 million Americans live in such neighborhoods. There are many benefits for homeowners who live in neighborhoods governed by an HOA. The positives include maintaining expensive amenities like pools and tennis courts, providing landscaping maintenance and snow removal, and resolving disputes between neighbors.
But for lenders, the presence of an HOA can present a “hidden” risk.
During the economic downturn of 2008, many states began allowing HOAs to seek recourse to recoup delinquent fees and assessments. As a result, many HOAs began relying on a system of liens to ensure repayment of past due amounts. In many cases, these liens are satisfied by the foreclosure process. Depending on the state, HOA liens can be placed without notification and supersede existing lien holders – including the mortgage lender.
For example, Florida state statutes allow an HOA to file a lien against a property after 12 months of delinquency on dues and/or assessments. However, the HOA is not required to file a Record of Lien. This means that they are not required to inform any other lien holders of the new obligation. Without notification of the lien, mortgage lenders have no opportunity to work with their borrower or the HOA to remediate the past due amounts.
In addition, Florida is considered a “Super Lien State”. This means that any lien filed by an HOA takes a priority position over all other lien holders – including the mortgage lender. In many cases, the mortgage lender does not find out that their collateral is at risk until the foreclosure process has begun. To make matters worse, HOAs may attach additional charges and fees such as interest, late charges, attorney’s fees, and other processing fees to the lien. Often these fees can be excessive, and inflate the amount owed to the HOA considerably.
How do lenders combat these risks? The best mitigation strategy is to ensure reliable communication between the lender and the borrower regarding HOA fees and assessments. A clear understanding of the statutes and covenants of the HOA governing the property before closing is a priority. Periodic monitoring of HOA status during the life of the loan is essential to initiate any lender remediation strategies prior to the lien and foreclosure process.
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Avanta Risk Management is a property risk management, data analytics and service provider specializing in HOA solutions. We provide a platform that helps identify, analyze, evaluate, mitigate and proactively monitor property conditions that affect your portfolio. We use life-cycle risk management concepts and leading technologies to simplify the process and eliminate the challenges of data acquisition. We help reduce your Financial and reputational risks and enhance the customer experience for your clients.
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