Homeowners’ Association (HOA) liens can be risky undertakings for mortgage lenders. HOA liens are designed to protect homeowners’ associations by ensuring their members keep up with fees owed. Unfortunately, when a homeowner falls behind on payments, a homeowners’ association can seek to collect by threatening or placing a lien on the property, which can, in turn, affect mortgage lenders. For instance, lenders may become responsible for paying HOA fees on the property, in which case they need to know how much a property owes per month.
To proactively avoid these obstacles, mortgage servicers need to be aware of the risks associated with HOA liens and when these liens are in place. Here’s what you need to know:
- How HOA liens work
- How they can impact lenders
- What states have super lien policies that can increase lender risk
- What steps lenders can take to reduce risk exposure for its properties and borrowers
How Do HOA Liens Work?
When a homeowner fails to pay monthly fees or any special assessments, a HOA typically warns the owner of its intent to place a lien on the property for unpaid dues. The homeowner has a set interval to pay what is owed – which varies by state. If the homeowner has not paid the delinquent amount by the end of this grace period, the HOA will record a lien with the county recorder, serving public notice that the homeowners’ debt must be repaid immediately. This action makes it difficult for the homeowner to refinance or sell the property, creating a strong deterrent to failing to pay fees.
The HOA can even seek to collect the debt through foreclosure after the lien has been recorded. State regulations provide homeowners’ associations with these remedies, in part, to ensure the HOA remains solvent for regular and necessary expenses by ensuring all homeowners are contributing.
How Can HOA Liens Affect Lenders?
While HOA liens are designed to protect homeowners’ associations, unfortunately, they can represent significant financial risks to lenders. A lender who wants to protect its asset may step in to pay the delinquent HOA dues and any fees incurred.
HOA liens can dissolve a lender’s collateral entirely if the HOA forecloses on the property. This is a reality in super lien states that allow HOA liens to take priority over all other liens against the property, including mortgages. The homeowners’ association may elect to sell the property to investors for the HOA lien amount, often a fraction of the first mortgage balance. The property at that point is clear of the first mortgage and associated lender. In this scenario, if the lender wishes to retain its position, it may be forced to pay the super lien amount.
If a homeowner defaults on both the HOA dues and mortgage, the lender becomes responsible for paying regular HOA fees – along with any late charges, interest or special assessments – until the property is sold to cover the mortgage debt, which can take months or years. During that time, the lender must remain current on the HOA dues to prevent a HOA lien from being recorded.
What Super Lien States Represent Increased Risks for Lenders?
The following 23 states now treat HOA liens as super liens. Super lien laws are currently in effect in:
- Alabama
- Alaska
- Colorado
- Connecticut
- Delaware
- District of Columbia
- Florida
- Hawaii
- Illinois
- Louisiana
- Maryland
- Massachusetts
- Minnesota
- Nevada
- New Hampshire
- New Jersey
- Oregon
- Pennsylvania
- Rhode Island
- Tennessee
- Vermont
- Washington
- West Virginia
The specifics of super lien policies vary geographically and are subject to change, so lenders should check applicable regulations.
How Can Lenders Minimize HOA Lien Risks?
To protect lenders from associated HOA lien portfolio risks, it’s critical to stay ahead of the HOA curve. We’ve outlined proactive steps to help lenders minimize HOA lien risks:
- Maintain sound mortgage underwriting processes to identify potential borrowers who are financially more likely to default on HOA fees or already owe HOA fees.
- Know when HOA liens are involved. Using a comprehensive HOA database, such as that provided by DataTree, ensures lending decisions are informed of HOA lien risks applicable to specific portfolio properties.
- Require borrowers to pay into impound accounts when there is high risk of HOA liens. HOA Lien data from DataTree enables servicers to research, locate and neutralize HOA lien risk nationwide - on a single property or portfolio of any size.
- Track HOA monthly payments to work with borrowers and ensure properties do not become at-risk of HOA liens.
- Pay off past-due fees for delinquent borrowers to avoid HOA liens.
- Review property records and foreclosure notices to secure senior lien claims.
- Conduct attorney reviews and challenge any illegal bills charged by homeowners’ associations.
Following these guidelines can help mitigate your risk exposure associated with HOA liens.
Proactively Protect Your Assets
HOA liens are designed to protect homeowners’ associations but can expose lenders to increased financial and portfolio risks. To protect your business’ risk exposure, it is vital for lenders to be informed of all HOA property data.
This requires you to have accurate HOA data applicable for the borrowers and properties in question. DataTree provides HOA data and HOA lien data solutions as well as access to qualified HOA data experts for mortgage servicers to protect their assets. Our HOA data solutions provide comprehensive access for hard-to-find HOA contact information, including names, fees and contacts across all 50 states and +2,300 counties nationwide. DataTree’s HOA lien information delivers critical lien data, association contact details and property and ownership information from one source and is available in +1,400 counties.
Fill out a form to get in touch with our team and discussion your HOA data needs or call our data experts at 866-377-6639.