Court rulings in unpaid HOA fees raise risk in RMBS, SFR deals

Moody’s: Newer deals have provisions to mitigate risk

A new report from Moody’s Investors Service spotlights how recent rulings by the highest courts in Nevada and Washington, D.C. on unpaid HOA fees raise risk in residential mortgage-backed securities and single-family rental securitizations.

Moody’s analysts say that a lien foreclosure by a homeowners association for unpaid fees may extinguish the lien of a mortgage lender are credit negative for RMBS and SFR deals.

“The rulings increase the risk of losses on loans secured by homes whose owners fail to pay HOA or condominium fees and the association then files a lien that it later forecloses on,” Moody’s analysts say. “Although the population of Nevada and Washington D.C. loans is a very small proportion of the overall RMBS universe, the risk could extend to properties in other states if more courts or legislatures adopt this legal interpretation.

“However, the new legal certainty in Nevada and Washington D.C. provided by these cases is likely to lessen losses over time from current disproportionate levels because HOA foreclosure purchasers will become more willing to bid at levels closer to the market values of the properties,” they say.

Moody’s analysts say that more recent SFR and RMBS deals they have rated since the court decisions include provisions to mitigate this risk.

“However, we expect some losses on loans in legacy RMBS owing to this because (1) servicers typically do not track delinquent HOA and condominium fees, and (2) servicers are unlikely to receive all notices of HOA foreclosures because the public records for many loans do not list the servicer as the current contact,” they say. “Least at-risk are loans with low loan-to-value ratios whose borrowers are current.” 

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