It doesn't exactly send a terrible shiver down the spine in the same way as, say, IRS might. By comparison, HOA bears a somewhat comfortable ring — standing of course for homeowners' association. Yet for RMBS investors, the man from the HOA can has as chilling an effect as the dreaded taxman.
Few legal instruments threaten a first mortgage position like a tax lien, but HOA liens are one of them. In “superlien” states — those where pre-foreclosure delinquent HOA fee account liens can jump in front of the hallowed first lien — the situation is grave.
“The rate of HOAs trying to lien or even foreclosure on a borrower or REO is trending upward,” says Brent Stokes, senior vice president and managing director at HOA data and analytics specialist Sperlonga.
Post-foreclosure, things get messier. “Superlien statutes allow the HOA to carry as much as 12 months’ worth of borrower delinquent HOA dues, late fees, penalties and attorney fees past the foreclosure, and those delinquent HOA amounts by law become the responsibility of the investor that completed a foreclosure on the borrower,” adds Stokes.
But for homeowner associations, the situation is also messy, their backers insist.
“While many associations are cutting back where possible, insurance premiums have to be paid and the streetlights need to come on when it gets dark,” says Dawn Bauman, Community Associations Institute senior vice president of government and public affairs.
“The only place the association can turn to cover delinquency shortfalls is the homeowners who can pay assessments, which increases their housing costs,” the homeowner association advocacy group figurehead continues. “Association homeowners are tired of this and want their household budgets back. Many associations want to work out payment plans with delinquent owners, but this is hard to do when the property is abandoned or the servicer or lender won’t respond to association letters. The delinquencies go unresolved until someone buys the property or the note.”
It’s a significant problem, and one both sides appear determined to resolve.
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 real estate and involves 80% of new construction, according to Sperlonga.
Sperlonga, of course, stands to gain as the creator of a database that tracks outstanding homeowner association account balances. But it also released a white paper that drew attention to the level of threat tucked away inside securitization deals.
“In 16 states and the District of Columbia, liens recorded by HOAs for unpaid fees can supersede first mortgage positions, much the way tax liens, mechanics liens and other similar claims do,” Sperlonga analysts wrote in the January 2013 document titled “The Hidden Threat of HOA Liens: Why Delinquent HOA Accounts are a Threat to Investor ROI and First Mortgage Lien Positions.”
“These ‘superlien’ areas are expected to increase in number as additional states recognize the problem of unpaid HOA accounts and move to protect consumers.”
And the headlines in the more mainstream press don’t shirk from the reality of the fallout: “Now It’s the Big Banks That Are Getting Foreclosed On,” screamed one last year on CNBC.com. “Payback time: Florida homeowners foreclosing on banks,” declared another from earlier this year on CNNMoney.
With more than a quarter of U.S. states now classed as superlien jurisdictions, movers in the investments arena are worried. And more states want to follow suit, Stokes tells HousingWire.
“The securitization industry has little understanding of HOAs and it must become educated quickly in order to safeguard investments in both the near term and over the long run,” Jason T. Serrano, co-head of structured products and managing director at independent investment firm Oak Hill Advisors, is quoted as saying in the white paper.
An HOA account delinquency scenario can go something like this: When the HOA fees go unpaid and into delinquency, the relevant association gains an automatic assessment lien on the property in question, meaning it can foreclose in order to recover the past dues.
For servicers and investors, that spells trouble. “Investors will reimburse servicers for bringing a borrower’s HOA account current if the servicer catches the borrower HOA delinquency within six months,” says Stokes. “Investors will not reimburse the servicer for HOA late fees on REO properties. They require the servicers to preserve their first lien position, especially in superlien states.”
On the homeowner association side, there is a significant burden, say observers.
According to the Community Associations Institute data from 2011, more than 60% of community associations had an assessment delinquency rate of 5%. “This is a substantial increase from 2005, where CAI data showed only 22% of community associations reporting assessment delinquencies of greater than 5%,” says CAI’s Bauman.
“Putting a finer point on the issue, CAI’s 2011 national survey revealed that almost one in 10 associations had assessment delinquencies of more than 20%. However, as real estate markets are local, looking at some data from California can illustrate the impact in states hardest hit by the housing crisis.”
Here is what that means in practice: In 2011, nearly half of CAI’s California members who were participating in a delinquency survey reported rates between 11% and 30%. The statistics also showed that approximately 70% of delinquencies were at least 91 days past due, with 44% more than 4 months late.
“In response, CAI members have advocated for changes in state law that will, one, speed up the foreclosure process and, two, require changes in title to be recorded in a timely manner,” says Bauman. “The difficulty is that federal policy on foreclosure has been to slow the process down. For community associations, this mostly digs a deeper delinquency hole that traps both the troubled borrower and the association. The issue is that an association’s expenses do not stop — there is no time out.”
Last year, Stokes told HousingWire that by 2010, the mortgage industry began to realize that HOA assessment claims were beginning to spike.
According to the Sperlonga white paper research, losses of $7,300 per loan were readily possible for certain classes of mortgages — a major threat to investors involved in RMBS portfolios.
There were 6.7 million HOA member first mortgages in the U.S. affected by outstanding liens, it said. Unpaid principal balances were figured at $11.8 billion, the company noted.
Eight months on from the white paper’s release, Stokes indicates the picture has changed — not necessarily for the better.
“We are still receiving inquiries from servicers and investors large and small who are still having a frustrating time of actually identifying and finding the current contact information to the HOAs that are associated with assets,” Stokes said.
“HOAs are foreclosing on REOs because the servicer did not even know a property was part of an HOA and had not made a payment to the HOA. HOAs are foreclosing on borrowers before the servicers can complete a foreclosure and don’t even know it. Loans are being sold from investor to investor without even knowing that the HOA foreclosed on the borrower prior to the loan sale.”
There is one possible solution. Or so says Stokes.
He suggests that servicers and investors can mitigate the HOA risk by monitoring loan portfolios to ascertain what slice is associated to HOAs and scrutinizing HOA account payment histories, especially in superlien states. They could also “manage HOA risk starting day one after foreclosure for maximum leverage versus at the closing table with no negotiating leverage.”
CAI’s Bauman appears to bear little sympathy. In a barbed putdown, she derided investor awareness of association delinquencies, insisting her group was committed to pushing for “priority lien laws” in states where superliens are not currently available. All of this, she says, is with the aim of protecting community association homeowners.
“Quite frankly, it’s a bit surprising that investors are only now discovering that association delinquencies must be dealt with if they want a clear title because assessments are lienbased,” she said. “CAI has raised this issue with FHFA, FHA and Congress with respect to the GSEs’ bulk REO transactions, FHA’s distressed note auctions, and other federal foreclosure avoidance policies. It is unreasonable for investors or policymakers to assume that associations will simply eat what are sometimes substantial delinquencies.”
