In the high-stakes game of musical foreclosure chairs, increasingly the odd men out are homeowner associations. As homes sit vacant, homeowner groups see their community property values decline, and fees and charges go unpaid. To fight back, associations are getting creative about recouping their money — and they’ve painted bull's-eyes on the backs of banks to get it.
While there is no hard data on how many homes with HOA ties have slipped into foreclosure, it’s a good bet that a significant number of the 2.2 million U.S. foreclosures last year impacted homeowner associations. There are, however, some solid numbers on lagging HOA fees. According to The Miami Herald, more than 60% of Florida condo and homeowner associations say that 50% of their units are currently two months or more behind on their association payments.
Consequently, when homes go under, HOAs feel the brunt. Typically, struggling homeowners stop paying their homeowner association fees before they stop paying their mortgages. When home association fees go unpaid, HOAs must dip into their own pockets to shore up cash reserves.
That leads to a vicious circle of sorts, where depleted homeowner association accounts mean that HOAs can’t pay for lawn and swimming pool maintenance, building renovations and utility bills. After a while, HOA neighborhoods become blighted, thus further reducing the value of existing homes and driving more solvent homeowners away in the process.
But homeowner associations are fighting back, primarily through a process known as a “reverse” foreclosure.
In essence, reverse foreclosures force banks — and not delinquent homeowners — to pay for home association fees. When homeowners stop paying their mortgages, banks can file a notice of foreclosure to protect their financial interest in the property. It’s then up to the bank to lay out the timetable for the actual foreclosure — and many banks drag their feet because they don’t want a money-losing investment on their books (in many cases, foreclosed homes in HOA communities are “underwater” or worth less than the amount owed on the mortgage.)
But foot-dragging on a foreclosure process can financially strap homeowner associations. As long as a property is in foreclosure, HOAs can’t get their hands on those much-needed association fees — they’d much rather see the bank sell the property to a homeowner who can afford the mortgage and the HOA fees.
Since banks won’t play ball with HOAs, the associations have turned to the reverse foreclosure. With a reverse foreclosure, the HOA can file its own foreclosure notice and take the title of the home. Under this scenario, banks can’t sell the home — the bank lien gets in the way — but they can go to court and legally force banks to take back the title of the home, and thus be responsible for paying all the home’s HOA fees. In one recent ruling, a Florida circuit court forced HSBC Bank (Stock Quote: HBC) to not only pay a foreclosed home’s association fees, but also legal fees and court costs, as well.
Banks in the Sunshine State do have some support. By Florida law, banks and mortgage lender can’t be held liable for more than 12 months of past-due HOA payments, or 1% of the total mortgage amount, whichever is less. But that’s still a year’s worth of association payments HOAs can pry out of banks on foreclosed homes through a reverse foreclosure.
It’s not exactly a bonanza, but bank payments to HOAs through the reverse foreclosure process may buy homeowner associations just enough time to get back on their feet — and keep their communities up and running until the housing market puts more families back into HOA properties.
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