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White Paper Addresses Dangers of HOA Liens for Lenders, Investors

In a newly-released white paper, ""Sperlonga"":https://www.sperlongadata.com/index.html,a division of ""Matt Martin Real Estate Management (MMREM)"":http://www.mmrem.com/ that serves the mortgage industry through its homeowner association (HOA) database and services, details the monetary threat delinquent HOA accounts can pose to the industry and outlines its own solutions to the problem.

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About 25 million households in the United States are part of at least one of the estimated 350,000 HOAs in the country. Furthermore, HOAs are increasing in popularity with about 80 percent of new homes having an HOA attached to them, according to Sperlonga.

""The securitization industry has little understanding of HOAS,"" said Jason Serrano, co-head of structured products and managing director for securities at ""Oak Hill Advisors"":http://www.oakhilladvisors.com/ in New York, according to the ""white paper."":https://www.sperlongadata.com/docs/TheHiddenThreatOfHOALiens-1.28.2013.pdf

Serrano warns the securitization industry ""must become educated quickly in order to safeguard investments in both the near term and over the long run.""

HOAs can cause significant monetary losses to investors in cases of default. In 16 states and the District of Columbia, HOAs hold ""super-lien"" status, meaning their lien outweighs all other liens--even that of the investor.

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When servicers work through loss mitigation options on defaulting loans, they are often unaware of the associated delinquent HOA account.

Servicers may proceed with a short sale or deed in lieu only to discover later there is an outstanding HOA account associated with the property. The original homeowner is often unable to pay, and the new homeowner is often either unable or unwilling to pay.

The debt then falls to the investor. ""Knowing that the average delinquent HOA obligation is approximately $7,500 and that 1 in 5 households are associated with an HOA, the total HOA risk to the securitization world is in the tens of millions,"" Sperlonga stated in its white paper.

Fannie May and HUD passed new rules regarding HOAs in 2012, shifting significant responsibility to servicers.

Under the new rules in effect this year, servicers must protect the first-lien position of Fannie Mae and HUD, even in super-lien states. If an HOA account is 60 days or more delinquent, the servicer must pay the debt to protect Fannie and HUD.

However, according to Sperlonga, HOAs are historically difficult to track. In fact, in cases of default servicers are often unaware of the existence of an HOA.

""[T]he problem posed by the lack of an established monitoring capability makes compliance with this requirement all but impossible for the mortgage industry,"" Sperlonga stated.

In 2010, recognizing the growing impact of HOAs, Matt Martin, owner of MMREM, established Sperlonga to provide industry-wide solutions to the growing problem.

Sperlonga can track HOAs, monitor accounts, and warn servicers when one of their borrowers defaults on his or her HOA account.

While HUD and Fannie Mae have taken steps to protect themselves against HOA debts, Serrano wonders, ""Why hasn't the secutization market asked for similar protections?""

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