Working with homeowners associations (HOAs) and condo owners associations (COAs) often leads to confusion among servicers – and that confusion may lead to problems during the lien process.
During a recent interview with MortgageOrb, Damon Paxson, vice president of HOA solutions at LRES, a national residential and commercial real estate services company providing valuations, real estate owned asset management, HOA, and technology solutions for the mortgage industry, discussed why it is so important for mortgage servicers to fully understand the complexities behind working with these properties so they can keep themselves protected from having to pay any unnecessary fees.
Q: What are some of the biggest differences between servicing HOA/COA properties and servicing traditional residential properties?
Paxson: First, servicers should find out whether there is a HOA on the property, and then they must be able to identify whether it’s in a super lien state. The difference could be as simple as how they go about proceeding with a foreclosure for a defaulted borrower/homeowner. A super lien is a category of lien that is given higher priority than most other types of liens and, in some fashion, will survive the servicer’s foreclosure. Each state determines the specifics of the powers it grants HOA. To add to the confusion, there are substantial differences from state to state, so servicers must keep track of such differences to avoid unintended losses.
For servicers that have determined they are servicing a property that has a HOA, it is vital they have an effective way to manage and recognize communication that comes from the association. The HOA already has a vested interest in the borrower and property and has routines in place to monitor properties for violations of the codes and bylaws, which is good news for servicers. The association is also going to effectively manage collections with the borrower, and it does a good job of recording liens early in the HOA delinquency. Servicers should have an effective way to see that happening early on and react accordingly to protect their assets.
Also, at the time of foreclosure, the servicer is now the homeowner and, in turn, has to pay dues on time or be subject to late fees and fines. In addition, as the homeowner, the servicer is required to comply with the bylaws of the association, so servicers must be aware that this is all part of the process when working with such properties.
Q: Why is it so important for servicers to fully understand the complexities behind working with HOA/COA properties?
Paxson: Servicers are required to include the HOA as part of their foreclosure notice and must communicate with the HOA in a timely manner. If servicers are unaware of the timeline required to respond to a HOA, or the time to allot for the HOA to respond back, they could find themselves with a clouded title or lien and miss out on a sale – or find themselves out of compliance with foreclosure proceedings, which could result in litigation. It can also result in loss of revenue if they are not able to get reimbursed for the advances paid to the HOA because they had not followed the servicing requirements. Many servicers are unaware of this very real risk.
Q: What are some of the more common misconceptions within the industry regarding the HOA/COA lien process?
Paxson: Many servicers believe they do not have to worry about the HOA until after they foreclose on the property and will deal with the HOA lien on the property at that time. We commonly hear an assumption that after they foreclose, the HOAs in super lien states will automatically reduce their balance due in order to be in compliance with state statute and/or whatever the servicer pays the HOA will be reimbursed. Or if the HOA is in a non-super lien state, many servicers think the past dues will be automatically wiped out and liens removed altogether and they just have to start making payments moving forward.
This is a very high-level-risk assumption – and in most cases, servicers quickly learn that the HOAs might not be aware of the state statutes and will still demand money or will not release liens even if they are not compliant with the state statute. This can result in additional time and money, and usually, legal fees are involved.
Servicers also forget that a HOA can actually foreclose the borrower/homeowner ahead of the servicer (even in non-super lien states), usually meaning the servicer has to restart or amend its foreclosure process (if it has even started it), which can greatly impact its cost of servicing. A troubled relationship or breakdown in communication between the servicer and the HOA can greatly increase the risk, and any misunderstandings about who is responsible for paying past dues can lead to expensive and time-consuming litigation.
Q: What are some tips for servicers to help safeguard their lien positions?
Paxson: For any new loans servicers acquire, they should identify up front whether the properties are tied to associations. That way, they can capture all of the HOA information on the portfolio and they understand early on that there is one more party that they have to communicate with regularly throughout the process. Servicers should prepare clear documentation that enables them to take action if they need to when the time is right, including recording a request for notice at the time of origination or portfolio acquisition.
Tracking all properties accordingly is a very detailed and lengthy process, so servicers that do not have the means to do it themselves should outsource to companies that specialize in monitoring HOA liens for them. These third parties clearly communicate with HOAs on behalf of the servicer and establish clear terms regarding which delinquencies are the responsibility of the servicer. Specialty firms take the staffing worry away from servicers, provide the niche expertise needed, and help keep servicers’ margins healthy.