Delinquent homeowners owe homeowner associations (HOAs) about $1 billion in back dues, according to a Bloomberg News source, and the HOAs desperately want that money back — in some extreme cases in order to survive.
What are these HOAs, where can they be found, and who belongs to them?
Often the lender and/or its servicer can’t figure it out and doesn’t know where to turn to find the answer. That’s where Sperlonga Data & Analytics of Arlington, Va., comes into play. Sperlonga, a subsidiary of national real estate asset firm MMREM, has painstakingly built the country’s most extensive HOA database.
There are approximately 350,000 HOAs in the United States, and Sperlonga has so far registered more than two-thirds of them.
Before the Great Recession, the real estate industry didn’t think there was a need to catalog HOA identifications, said Brent Stokes, a Sperlonga senior vice president. "The mortgage industry didn’t think there was a need to know every HOA associated with every property or to track a borrower’s payment history. That was before delinquent HOA obligations became an obstacle to timely, profitable, or even easy disposition of a property through a short sale or REO sale."
In addition, Stokes said, "HOAs are trying to stick to their guns in regard to what is due them."
Since the great mortgage meltdown starting five years ago, condo and gated community homeowners have walked away from millions of residences where they were significantly underwater in their mortgages. That left a huge problem for the HOAs that need to collect fees from homeowners to continually maintain and improve properties.
The banks have been swamped with these empty properties, often stalling in any attempt to formerly take control of the units, which has led to all kinds of problems, from squatters to HOA bankruptcies.
Over the past couple of years, HOAs have fought back, either suing the lenders to force them to take control of the property or taking control themselves by gaining first-lien positions, and are thus in a position to sell the abandoned units and keep the proceeds.
That’s not what the lenders want to see happen because they would be losing their investment.
The problem is that lenders, government entities, and government-sponsored enterprises such as Fannie Mae use third-party servicers to handle delinquent and foreclosed properties. Sometimes the servicers completely miss the HOA problem and the lenders lose the property, which is why Fannie Mae and HUD (U.S. Department of Housing and Urban Development) earlier this year issued new guidelines to servicers about HOA delinquencies.
For example, Fannie Mae maintains HOA claims be satisfied in order to preserve the GSE’s first-lien position. Specifically, "Fannie Mae requires servicers to protect the priority of the mortgage lien and to clear all liens for HOA dues and condo assessments on properties acquired through foreclosure or deed-in-lieu of foreclosure."
Recently, Stokes said, there was a case where JPMorgan Chase went 19 months on an REO it owned without paying the HOA fees. The HOA foreclosed on the property, literally wiping out JPMorgan Chase’s investment.
Fannie Mae and HUD are now requiring servicers to make sure they do whatever is necessary to not lose the first-lien position or get foreclosed on, because if the servicer lets that happen there will be a penalty that can include the repurchase of the entire loan.
HOA obligations have also been a problem for investors. Indeed, one of the reasons Sperlonga was founded was because these HOA obligations would arise at the worst time and screw up a pending deal.
Matt Martin, CEO of MMREM, said he constantly found HOA claims cropped up at the last moment to derail transactions and often included inflated amounts that were not the responsibility of his clients.
"It was a huge problem and one that was growing rapidly," Martin said. "I was very surprised to learn that data and contact information on HOAs was not available anywhere, so we decided to develop our own database."
Investors have taken the Sperlonga database to heart.
Portfolio investors and their servicers have the biggest need for the database at the moment, Stokes said. "It’s the investors who are looking at pools of loans, and they want to do the due diligence to find out if there are any harmful outstanding HOA obligations. The servicers, both large and small, have these existing portfolios of nonperforming loans and have no idea how far behind delinquent borrowers are on HOA payments."
He added, "It’s the servicers who are doing short sales or doing the loan modifications and are realizing they should do the HOA investigation at the beginning of these processes so they don’t get to the end and find out at the last minute there are obligations and they have wasted a whole lot of time for nothing."
Conversely, the HOAs are in the same murky waters. They face situations where a borrower or a bank owner has not paid HOA obligations and they don’t have a clue as to who is the right contact or even which servicer is handling the property.
"We help the HOAs find out who the investor/owner is of the REO property, who the servicer is and we put them in contact," Stokes said. "The investor/servicer can decide if the first mortgage lien position is at risk and whether it should be remediated."
The 350,000 or so HOAs in the country represent about 25 million individual addresses.
This, in some regards, is just the tip of the coming iceberg.
One in every 10 homes is part of an HOA, according to the Community Associations Institute (CAI), a Falls Church, Va.-based trade group, and 80 percent of every new construction will be part of an HOA. The CAI also estimates about 60 million people now live in residences where there are HOAs.
"The HOA obligation is going to become just as much of your consumer credit life as your cell phone bill," Stokes said. "Consequently, the past history of payment to an HOA will become a standard indicator of a borrower’s ability to pay the risk associated with lending."