Data and Analytics firm Sperlonga released a white paper that identifies the best means of complying with both government-sponsored enterprises’ rules on homeowners associations as well as preventing losses and penalties for investors in the securities industry.

The white paper, entitled “The Hidden Threat of HOA Liens: Why Delinquent HOA Accounts are a Threat to Investor ROI and First Mortgage Lien Positions,” analyzes the pitfalls that HOA liens for unpaid accounts pose for residential mortgage-backed securitization.  

During the past 18 months, Sperlonga, a division of asset management firm Matt Martin Real Estate, created the industry’s largest database featuring HOAs and “presently has the means to help the mortgage industry preserve the integrity of their first liens,” said Chairman Matt Martin of the firm.

Co-Head of structured products and Managing Director for securities specialist Jason Serrano at Oak Hill Advisors believes it’s time for the RMBS industry to take action to prevent potential risks of HOA-related foreclosure and repurchase challenges. 

“This is obviously seen as a problem by HUD [U.S. Department of Housing and Urban Development] and Fannie Mae, as they have taken action by requiring liens to be settled and HOA accounts to be kept current in all critical states,” he stated.

Serrano added, “Why hasn’t the securitization market asked for similar protections? Our problem is proportionately larger, since a greater number of the assets in our trusts involve one or more HOAs on each property.”

Homeowners and other community associations account for 350,000 HOAs in the United States, covering more than 25 million households. This represents every type of owned residential restate and involves 80% of new construction, according to Sperlonga.

Click on the chart to view the number of association-governed communities.

In about 16 states — including Alabama, Colorado, New Jersey and Washington — liens recorded by HOAs for unpaid fees can overtake first mortgage positions similar to the way tax liens do.

Thus, these ‘super lien’ areas are likely to increase in number, as additional states continue to recognize unpaid HOA accounts.

“As a result of the understandable concern over this issue, Fannie Mae and HUD now require servicers of loans falling under their auspices to proactively resolve HOA delinquencies that could result in endangerment to their first mortgage positions. With HOA information in short supply for servicers, however, this is far more easily mandated than it is accomplished,” the paper noted.

According to Sperlonga’s research, losses of $7,300 per loan are readily possible for certain classes of mortgages, which is a major threat to investors involved in RMBS portfolios.

There are 6.7 million HOA member first mortgages in the U.S. that are affected by outstanding liens. Unpaid principal balances are currently estimated at $11.8 billion, the firm noted.

Click on the graph to view non-current assets applied to homes involved with HOAs.

Going forward, Sperlonga included a list of points that servicers, lenders and investors need to identify when dealing with HOA risks.

Some of the points listed are: loan modifications and short sales are endangered by HOA issues, and real-estate owned property HOA payments must be proactively managed to controlled unnecessary losses.

“They [HOAs] are good for homeowners and for lenders, as they generally keep neighborhood maintenance standards high and maximize property values,” said Senior Vice President Brent Stokes of Sperlonga.

He added, “But as the white paper shows, there are pitfalls along with the benefits. Fortunately, there are resources available to minimize the dangers for lenders and investors, but they must first be aware of the problem.”

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