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Lenders trying to foreclose on properties that have HOA assessment liens face a number of pitfalls, and a recent decision by the Nevada supreme court looks to make it worse, not better, for lenders, servicers and investors.
The court upheld a law that allows homeowners associations to foreclose on homes ahead of first-mortgage providers, giving HOA assessments “super-lien” status that extinguishes first deeds of trust.
The case in question involved a US Bank property with a first-lien amount of $880,000. The property also had an HOA lien of $6,000, which was given first priority, resulting in a loss of $874,000 for US Bank.
Unfortunately, Nevada is just the tip of the iceberg — 20 other states have laws that grant super-lien status to HOA assessment liens, and the precedent set in Nevada will be felt throughout the country. There are nearly 3,000 HOAs in Nevada, covering more than 500,000 properties. But nationwide that number balloons to 350,000 HOAs, covering 25 million households.
A strategy is needed.
As a recent case study by MMREM HOA Risk Mitigation, formerly Sperlonga found, “Mortgage origination has largely ignored HOAs in the documentation process, particularly when loans are passed on to investors. As a result, most lienholders and servicers are unaware of their presence on the loans under their care.”
Lenders need to get out ahead of this potential time bomb by taking these three steps:
1. Know when HOA liens are in place
Many lenders may be unaware of HOA liens in place, or that an HOA is even involved with their properties. “The lack of a unified database for HOA information, a centralized place for HOAs and loan servicers to contact one another, has led to an emerging crisis for both parties,” according to the Sperlonga case study. The main issue is that HOA delinquency goes unrecorded, until a lien is filed and the HOA may already be in the process of foreclosure.
2. Name the associations in the foreclosure sale
The correct names and contact information for HOAs or condo associations are critical for this step. Unfortunately, the majority of HOAs are small and may not be managed professionally. Often the HOA officers change annually, and tracking and updating HOA information represents a significant amount of work for lenders and servicers. Properly naming the HOA in the foreclosure proceedings is vital for lenders to qualify for any type of state statute of limitation such as ‘Safe Harbor’ in Florida. This is also a requirement in the servicing guidelines for FHA (2012-11)
3. Take action before an HOA foreclosure
Lenders need to be forewarned about past due assessments, interest charges, and other fees in order to make the best decisions when foreclosing on properties with HOA liens.
All of these crucial steps require robust data gathering and monitoring capabilities. Using in-house resources to obtain and update this data can be a precarious exercise for lenders, who are already stretched thin by increasing regulatory mandates
Matt Martin Real Estate Management offers HOA services that track, monitor and update HOA data to provide lenders, servicers and investors with the information they need at the right time, which is essential to protect them from the threat of losses from HOA “super liens.” MMREM HOA Risk Mitigation can protect first lien holders through due diligence efforts specifically geared to HOA data gathering and monitoring.
To find out more about how MMREM can protect you, click here.