Which properties in your portfolio are tied to an HOA? It may seem like an easy—or even irrelevant—question to answer, but many servicers surprisingly do not know. And that lack of awareness can result in diminished returns and portfolio risk. At the end of the life of the loan, when servicers are about to liquidate, foreclose, or sell the property, they must be aware of whether the loan is associated with an HOA so they can communicate with and retrieve critical data from the HOA. In fact, HUD now expects servicers to have an established relationship with the HOA to ensure the borrower is current on all payments.
In HUD’s Mortgagee Letter 2013-18, it states at the very bottom of one of the HOA-related clauses a very important point. And because it’s positioned at the end (almost as an afterthought), many servicers overlook it or do not pay much attention to the point. It states, “FHA expects servicers to: (a) implement procedures that will result in them being notified when mortgagors default on HOA fees, and/or (b) establish escrows for HOA fees.” That expectation changes everything. That expectation puts more pressure on the servicer to establish a working relationship upfront with the HOA and notify the borrower in the event of any defaults.
If servicers do not include the HOA as part of their foreclosure notice and communicate with the HOA in a timely manner, it could result in litigation and/or loss of revenue because the servicer is out of compliance with foreclosure proceedings. And remember, HUD now expects that the servicer will make all necessary payments on the foreclosure before it will even consider taking possession of the home.
Keep in mind, the HOA already has a vested interest in the borrower and property, which is very beneficial for the servicer if the servicer knows when and how to communicate with the HOA. The association effectively manages collections with the borrower and records liens early in the HOA delinquency. When servicers regularly monitor for HOA liens and engage with the HOA, they can see that happening early on and can react accordingly to protect their assets.
There are more than 350,000 HOAs in the United States. With such a large number, the likelihood of servicers having at least some HOAs in their portfolio is inevitable. Eliminate portfolio risk by determining which properties are associated with HOAs and actively monitoring those HOA properties. Servicers who do not have the means to track all properties themselves should consider outsourcing to companies that specialize in managing HOA liens on their behalf. Now more than ever, servicers must make the decision to resolve HOA claims before they risk losing their well-earned returns.