REQUIRED READING: As if mortgage servicers didn't have enough on their plates today, they are also facing a lesser-known, but increasingly common problem: dealing with homeowners associations (HOAs) and delinquent HOA fees when servicing loans on condominiums or planned unit developments (PUDs).
In particular, servicers are finding that delinquent HOA fees can cause delays in reselling foreclosed and defaulted residential properties. Often, a servicer is not even aware that there are overdue fees owed to an association until a notice of foreclosure is filed. At that point, late and legal fees can mount quickly, and the time spent resolving the back fees owed can severely delay the foreclosure process. Identifying, delivering and resolving outstanding account balances related to association fees is not always easy. Rather, it is a problem costing the servicing industry an enormous amount of time and money.
There is no easy way to quantify the size of the HOA problem in default mortgage servicing, but it is safe to say the issue is huge: Industry-wide losses total hundreds of millions of dollars annually, as many servicers are finding out when dealing with the hundreds of thousands of HOAs out there.
The following are just some of the problems servicers are seeing today with regard to overdue HOA fees.
Lack of communication with HOAs. It is a real challenge for servicers to communicate with associations. Often, even the name of the association is missing from loan files, and there is no contact information readily available.
Overpayment of past-due HOA fees by servicers to associations. There is often confusion regarding the exact amount of the delinquent fees servicers need to pay. Adding to the confusion, statutory limits on what servicers are required to pay to HOAs vary by state.
For example, an HOA may file a request for $20,000, but the statutory limitation that a servicer is required to pay to the HOA in a particular state may be capped at $5,000. Unfortunately, many servicers are not aware of the state limitations. That means that when faced with a request by an HOA for $20,000, some servicers will pay $5,000, some will pay $10,000 and some will pay the full $20,000 requested. There is very little consistency in the approach to dealing with HOA requests for fee payments.
Pushback from the HOAs. Associations are becoming much more aggressive in pursuing claims on delinquent HOA fees in recent years. Ten years ago, late fees were not nearly as big of an issue with HOAs. Today, especially in states such as Florida, where delinquencies tend to be higher, associations have become very persistent in their attempts to collect overdue fees.
Super lien vs. non-super lien
As noted, the statutes on what servicers are required to pay to HOAs vary from state to state. Sixteen states and the District of Columbia are considered ‘super lien’ states. That means that in those states, HOAs have priority ahead of the first mortgage, so an association is legally able to collect unpaid dues and fees before a bank can foreclose upon a property. In the remaining 34 states, overdue HOA fees are eradicated by a foreclosure.
Even within the so-called super-lien states, rules on how far back HOAs can collect differ. In some of those states, HOAs can collect up to six months of unpaid fees and dues. In other super-lien states, the lender may be obligated to pay up to 12 months of unpaid dues, and sometimes late fees and legal expenses. HOAs have been known to get pretty creative with the legal fees, too, in hopes of making up shortfalls in other uncollected cases. Claims for $1,000 in unpaid HOA dues can arrive with another $5,000 or more in thinly justified legal fees.
Although overdue association fees are wiped away in the non-super-lien states in the case of foreclosures, the fees are still owed in a loan modification, because there has been no transfer of title. Knowledge of that information on overdue HOA fees can be critical to a servicer's decision on a loan modification. Although a modification may substantially reduce the monthly mortgage payment, borrowers with six months or more of past-due association fees will still face a large financial strain on their monthly cashflow to make the back HOA payments.
This makes access to information on a borrower's history of making HOA payments a critical piece of the decision-making process in loan modification or other loan disposition strategies. In most cases today, the information is simply not accessible.
The magnitude of the problem
What is the best way to measure the size of the losses associated with the delay or mishandling of HOA payments? Right now, there is no consistent way of measuring losses, and they are often not tracked specifically by individual servicers. The total amount requested of servicers by HOAs may be significantly different from what is actually owed by law, and the amount actually owed may be significantly different from the amount eventually paid.
But to give an idea of the magnitude of the cost associated with inefficiencies in dealing with HOAs, I often ask servicers to consider the number of loan modifications that are ‘broken’ in their portfolio. Then I ask them to break that number down further: How many of those broken modifications could have been prevented or could have had an alternative disposition for loss mitigation if information were available that the borrowers were severely delinquent on their HOA fees? An analysis of our database of HOA fees reveals a direct correlation between late or missing HOA fees and broken loan modifications.
Over and over, servicers are seeing similar scenarios: A borrower who has not been making his or her mortgage payment for three months approaches the lender for a modification. Unbeknownst to the servicer, there is a strong possibility the borrower has not paid his or her HOA fees for at least six months or more. Having access to that information would undoubtedly influence the decision on a loan modification.
Another major challenge in HOA fee management is that regulations seem to change almost daily, making it even more important for servicers to stay on top of it to ensure they are not paying a year's worth of past-due payments when they are only legally required to pay six months' worth. Too often, servicers are paying for a whole year's worth of overdue fees when they were not legally required to pay anything.
What steps should a servicer take to prevent these headaches? Be proactive with this issue – try to get in front of it. The problem is not going to go away. Associations are becoming more sophisticated with how they file liens, and they are also becoming more aggressive. Too often, servicers are just reacting to the problem when it happens, rather than taking steps to get ahead of it.
Matt Martin is chairman of Sperlonga Data & Analytics, an Arlington, Va.-based firm specializing in homeowner association solutions for mortgage servicers and investors. He can be contacted at (703) 766-5777, ext. 201, or firstname.lastname@example.org.