When money is tight, a homeowner looks for expenses to trim, and sometimes may skip some bills altogether. But beware: falling behind on homeowners' association dues can trigger a foreclosure, even if the debt is only a few hundred dollars.

This often-overlooked trap appears to be snaring more and more homeowners as the recovery lags and unemployment stays high, according to an analysis by HSH Associates, the mortgage-data firm. Many states make homeowners' association foreclosures fairly easy, and the associations have a variety of incentives for acting quickly when a member is in arrears, HSH says.

Dues are used for things like exterior maintenance and road repair.

“Homeowners' associations (HOAs) have a history of foreclosing on owners to collect relatively small sums of money,” HSH says. “For example, in one California study, the median amount owed in HOA foreclosures was just over $2,000 ... One family even lost their home because of a $120 HOA arrearage!”

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That same study showed that foreclosures by mortgage lenders involved debts averaging more than $190,000, HSH says.

In most cases, an association’s threat to foreclose is enough to make the homeowner catch up and the foreclosure process is halted, but often not until the terrified homeowner caves into paying onerous penalties.

Why are homeowners' associations so strict? It seems a bit surprising. After all, your friends and neighbors may hold many of the association’s seats.

One reason, says HSH, is to protect other association members. Many lenders refuse to approve mortgages in developments where more than 15% of members are delinquent in dues. That could make it impossible for the neighbors to sell, and it can drive down home values.

There have also been reports of unscrupulous board members using foreclosures to scoop up properties at fire-sale prices and turn them around for a quick profit. In other cases, associations, their attorneys or property management companies see foreclosure threats as an easy way to earn a few thousand dollars in fees, fines and interest paid by the delinquent homeowner.
“In 33 states, an HOA does not need to go before a judge to collect on the liens. This is called non-judicial foreclosure and it's a big hammer in the hands of an abusive HOA,” HSH says.

Many states exempt homeowners' associations from the restrictions imposed on foreclosures by mortgage lenders and other lien holders. In some states, bankruptcy rules, homesteading laws or mandatory mediation requirements prevent the lender from foreclosing, but not the association.

“In California, for example, associations may begin the foreclosure process only 75 days after a missed payment was first due, while a tax collector must wait five years before beginning the foreclosure process for a tax lien,” HSH says. “Associations are not required to go through a court to foreclose, as a property owner would to evict a tenant.”

When a foreclosure does result in the seizure of a home, it may be sold at auction for far less than it's worth, since the association may care only that it gets the few thousand dollars it is owed. That can obviously be devastating to the homeowner.

Some associations, trying to maximize income from threatened foreclosures, refuse to take partial payment and tack on fees for things like unkept lawns that might otherwise be overlooked, according to HSH. The goal: to assure the homeowner owes the minimum required by the state before a foreclosure can proceed.

So what can you do if you find yourself in the grips of a hostile association? While your first instinct may be to fight back and challenge the charges, HSH says the rules so strongly favor the association that it’s more prudent to pay the sum required. Then, once you’re out of danger, you can go to small claims court to demand a refund.

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