From Market Watch, published: Jan 9, 2015
If you’ve fallen behind on your condo or homeowner association (HOA) fees, this might be a shocker for you: Your HOA or condo association might have the right to foreclose on your property.
And even for the vast majority of homeowners who never face foreclosure, the ripple effects of this little-noticed legal development could eventually be costly — in the form of higher interest rates and fees on your mortgage.
The number of Americans who live under the rules of a homeowners’ association has been steadily growing; by one estimate, nearly 80% of new construction is now governed by an HOA or condo association, and as many as 65 million Americans live in such properties. HOA fees, which can amount to $300 or $400 a month, typically pay for services that developments provide, such as landscaping, grass cutting and snow removal, as well as other capital improvements. And during tough economic times, it’s fairly common for squeezed homeowners to fall behind on those fees.
Super liens give homeowners associations the right to begin foreclosure proceedings against a property if the owner is seriously delinquent on HOA fees. And while mortgage lenders have traditionally had priority when it comes to getting their money back through foreclosure auctions or court judgments, super liens give HOAs the right to jump ahead of the lenders, and in some cases, even wipe out the lenders’ rights completely.
In August 2014, the District of Columbia Court of Appeals, the district’s equivalent of a state Supreme Court, ruled that not only was a condo association correct in foreclosing on a delinquent owner, but that under super lien rules the bank that holds the mortgage loses its right to the property entirely. A Nevada Supreme Court decision a month later came to the same conclusion. While those rulings only impact foreclosures in D.C. and Nevada, other state courts could follow their precedent, said Roger Winston, a real estate attorney and partner in the Bethesda, Md., office of law firm Ballard Spahr LLP.
“The court’s decisions have caught everybody off guard,” said Winston, whose firm represented lenders in the Nevada court decision. “It’s quite a mess out there.”
An HOA power grab
HOA liens, along with others, such as contractor’s liens (when a contractor who performs significant work on a home goes unpaid), have traditionally been known as “junior liens” and have been subordinate to the mortgage lenders. Now however, thanks to the “super lien” laws, the HOAs can vault over even the banks when getting paid in foreclosure.
“HOAs are getting more savvy,” said Jason Tufaro, vice president with Matt Martin Real Estate Management in Frisco, Texas, a company that works with both banks and HOAs on the topic. “They know the first thing an owner who’s in financial trouble will do is stop paying their HOA fees. The last thing they’ll not pay is the mortgage.”
Since the Great Recession and the subsequent real-estate downturn, many HOAs have struggled to get cash-strapped owners to pay the fees. Nearly 103,000 condos were foreclosed in 2010, at the height of the real estate crisis; almost double the rate of 2008, according to RealtyTrac, a real estate research firm. (Foreclosures have since declined as the economy improved.)
“Given the massive numbers of delinquencies, lenders weren’t moving as quickly as the HOAs would have liked,” when it came to foreclosing and making the HOA lien holders whole, said Joey Lubinski, a partner in Ballard Spahr’s Denver office. “If the lender isn’t moving forward to take the title themselves, then the HOA felt it had to step in,” he said.
Condo and HOA associations typically can only invoke super-lien status if they spell it out in the condo or HOA covenants. They also typically have to wait before they use this power: In Colorado, once six months’ worth of delinquent HOA fees are accumulated, a super lien is attached to the property. In Nevada, the super lien is assessed once nine months of delinquent HOA fees are accumulated.
“Nobody wants to foreclose on a home, and no community association board wants to foreclose on a neighbor,” says Dawn Bauman, senior vice president of government and public affairs for the Community Associations Institute (CAI), a Falls Church, Va.-based advocacy and trade group. The group represents 33,000 of the 328,000 homeowner associations nationwide, and filed a supporting brief in the Nevada case. “But sometimes — especially when the owner has abandoned the property — the association must act in the best interests of all owners and the community at large,” she said.
The CAI said it didn’t have precise information on how many foreclosures are initiated by HOAs; Frank Rathbun, the group’s spokesman, said the number is very small. Still, Ballard Spahr’s Winston says the recent D.C. and Nevada court decisions are likely to accelerate the number of HOA-initiated foreclosures. Prior to the courts’ decisions, the costs of proceeding with a foreclosure outweighed the delinquent amounts that an HOA could reclaim. “Now they’re going to get paid everything” if they foreclose, he said.
The court decisions have also raised concerns at the Federal Housing Finance Agency, which supervises government mortgage buyers like Fannie Mae and Freddie Mac. The FHFA worries that the court’s decision could hurt taxpayers and lending.
“(T)he mortgages supported by Fannie Mae and Freddie Mac must remain in first-lien position, meaning that they have first priority in receiving the proceeds from selling a house in foreclosure,” the agency said in a statement on Dec. 22.
Typically, in the case of a foreclosure due to non-payment of HOA fees, the lender will pay the delinquent fees in order to re-assume its place at the front of the line to get repayment, said Ballard Spahr’s Lubinski.
One way to avoid this issue could be to have lenders begin escrowing for condo and HOA fees like they do for property taxes and home insurance. But mortgage banks and HOA advocates agree that, given the large number of HOA and condo associations, this may not be feasible and could even raise costs.
Some fear banks could raise fees
Winston says the courts’ decision has mortgage lenders worried they’ll be left high and dry in the case of non-payment of HOA fees, and that fear is likely to impact borrowers.
“Just as home mortgages are underwritten based on your credit rating, it’s not far-fetched to say that…this paperwork and increased risk is going to get factored in to the cost of the loan,” Winston said.
Justin Wiseman, assistant counsel for the Mortgage Bankers Association, a Washington, D.C.-based trade group, declined to comment on whether the super-lien trend would raise costs for borrowers. Wiseman did say that it was imperative that states develop better procedures to notify lien holders like banks when an HOA attempts to foreclose because of delinquent fees.
But Tufaro, the Texas real-estate executive, agrees with Winston that banks will likely take into account the likelihood of encountering a “super lien” situation and adjust their rates and fees accordingly. “They’ll say ‘we’ll lend on this property, but you’ll have to pay more for it,’” he said.