HOA Super Liens or COA Super Liens
10 Things You Should Know about HOA and COA Super Liens.
One excellent authority on the rules regarding HOA Super liens and COA Super Liens in the various states remains the matrix published by Hugh Lewis ; however, state level changes routinely take place and new proposals are being considered in state houses across the country. Servicers that do not keep pace with the changes to these rules will find themselves lacking information
critical to the risk mitigation process.
What are an HOA Super Liens?
Lewis traces the origin of the HOA super lien back to three statutes passed back in the early 1980s: the Uniform Condominium Act [UCA], adopted by the Commissioners on Uniform State Laws in 1980, the Uniform Common Interest Ownership Act [UCIOA] and the Uniform Planned Community Act [UPCA], both of which were adopted by the Commissioners in 1982. Prior to this time, any lien claimed by an association would be junior to the mortgage on the property. As LRES has written in previous
white papers, HOA fees were an afterthought prior to the financial downturn because they posed little, if any, risk to the investor holding the note. At most, these associations could hold the servicer to six months’ worth of common expense assessments under these three Acts.
This type of risk gave associations a sort of limited priority over the lien of a first mortgage. A revised version of the applicable section (3-116) of the Uniform Common Interest Ownership Act was adopted by the Commissioners in 2008. Under the revised rule, the association’s super lien would protect not only the six months’ worth of assessments, but also reasonable attorney fees and costs arising from the association’s foreclosure. As Mentioned above, eight states have adopted this rule, but each one is slightly different. Each state determines for its own residents and lenders who serve them the specifics of the powers it grants HOA/COAs and assigns to their liens , in terms of duration, assessments secured, attorney fees, super lien status, required notices, and statutes of limitation .
The differences can be significant. For instance, HOA super liens in Colorado cover up to six months’ worth of delinquent assessments, while a similar liens in Nevada protects nine months’ worth of assessments. Which states allow legal fees to be included in the priority and which states limit the amount of the legal fees? Knowing that a lien may be a HOA/ COA super lien is fairly easy. Knowing exactly what that means to the servicer is not.
Are There Different Regulations Governing HOAs vs.COAs?
Given the complexity of state banking and real estate regulations, it seems obvious that HOAs and COAs would be treated differently by the various states. In truth, some states make no distinction between the two types of associations and others do. In states where the two are treated similarly, they are likely lumped in with many other types of community associations. In states where there are distinctions, the differences may hinge on what appears to be very minor things, such as the way insurance is treated or when the association was established. Just about every element involved in this aspect of real estate has been hotly debated by lawmakers, lobbyists, and attorneys for the financial services industry. In addition, these associations are being coached to demand super lien status in their states. Each state has its own way of treating these entities and their liens . In some states it can create very serious risks for our industry .
In Massachusetts, for instance, COAs have been handed significant power. Like the other super lien states, the liens these associations impose are superior to the mortgage, but unlike other states, COAs in Massachusetts can impose rolling liens (depending on the sum). While most states allow HOA/COAs to collect overdue fees up to a certain limit, Massachusetts allows COAs to place a new lien on the property every six months. A servicer can go through the work of paying off COA liens, even negotiating around a possible foreclosure, only to discover shortly afterward that a new lien has been placed on the property and the process must begin again. This isn’t just tedious, because in this super lien state, if the COA forecloses, it can remove the investor’s lien. This controversial rule went all the way to the state’s Supreme Court and was upheld. Could something like this happen in other states? Servicers who understand the true nature of these risks are keeping watch to find out, especially when they recall that in 2015 60 percent of new single-family home construction fell into the domain of one of these associations.
Can an HOA/COA Foreclose in Non-Super Lien States?
Most definitely. Some servicers assume that since their lien has priority, foreclosing on a junior lien is of no consequence because the association cannot expunge the investor’s lien. The truth is that foreclosure always has dire consequences, especially for the borrower. In non-super lien states, an HOA/COA can foreclose on its lien and evict the borrower from the property. It can then rent out the home to recoup its losses and continue to do so until the first lien holder forecloses on its lien. Once the borrower is out of the home, the chances of curing the default are extremely low. Further, the borrower will have no interest in making any payments of any kind to the servicer.
The bridge will be burned and the servicer will be forced to move forward with foreclosure. Because the HOA/COA will hold title to the property, the foreclosure and REO processes can be complicated. But there are even worse risks that the servicer faces. The servicer has a high reputation risk for allowing a junior lienholder to foreclose ahead of them. Consider, for instance, the case in which the borrower holds a Home Equity Conversion Mortgage (HECM) reverse mortgage. If the lender is advancing funds to the borrower but is not aware that an HOA has foreclosed and evicted the borrower, the servicer may find it difficult to explain this situation, should the Department of Housing and Urban Development (HUD) call on them. This is the kind of situation that will quickly find its way around the industry and the servicer’s business will suffer accordingly.
What Impact Does Safe Harbor Have on HOA/COA Super Liens?
Safe Harbor is primarily a function of Florida statute. If a servicer expects to limit the money due to delinquent HOA fees, they must name the HOA as a defendant in the mortgage foreclosure action in their initial foreclosure complaint. The statute is also unique in that if a lender intends to assign their mortgage to a subsidiary and maintain Safe Harbor protection, they must assign the mortgage to a subsidiary prior to the entry of final judgment of foreclosure.
The Florida statute is written in such a way that it prevents lenders from assigning their final judgment of foreclosure to a wholly-owned subsidiary and maintaining Safe Harbor, which would then allow the full balance to be demanded by the HOA. Most states do not have Safe Harbor statutes while other states might not use the term “Safe Harbor,” but have similar functioning statutes. In Illinois, the statute states that if the new owner (servicer) makes a payment to the HOA within 30 days of foreclosure, all past due HOA fees are wiped out. However, if a payment is not registered with the HOA within that time period, the association can claim all unpaid fees. In Illinois, we have found that most servicers are often encountering HOAs that refuse to post a payment from someone who cannot show clear title to the home.
Additionally, servicers in Illinois often find it very difficult to get a new title within 30 days of foreclosure. While there are industry best practices for working with these associations , without a good understanding of the Safe Harbor laws in the various states, servicers will not be effective in managing this risk.
Is There a Difference in the Way HOA/COA Super Liens and Foreclosures are Managed in Judicial vs. Non-Judicial States?
All HOA/COA delinquencies and liens should be managed under a set of best practices that includes active monitoring of association fees, contact with the association throughout the foreclosure process, and active negotiation in order to reduce any liability as much as legally possible. Each investor should be aware of an HOA’s or COA’s ability to foreclose in non-judicial states and the length of time needed to complete a foreclosure, which dictates how long the servicer has to respond to avoid the foreclosure.
When the servicer initiates the foreclosure, regardless of it being judicial or non-judicial, Fannie Mae, Freddie Mac, and HUD require the servicer to “protect the priority of the mortgage lien and to clear all liens for delinquent homeowners’ association (HOA) dues and condo assessments on properties acquired through foreclosure or deed-inlieu of foreclosure. ”Do Super-Liens Set a Cap for Servicers/Lenders’ Maximum Liability for HOAs/COAs?
Most states have some limit on the fees they can recover. But many states allow the association to add on attorney fees and other expenses.
Other states leave that up to Safe Harbor laws that provide maximum liability protection for the servicer, but only in the event that its procedures are followed, which can often be difficult, if not impossible, to do.
As of this writing, only Massachusetts provides for rolling liens, which essentially put no limit on the servicer’s liability as long as it owns the real estate.
Who Is Responsible for Paying HOA/COA Dues for a Short Sale Property?
Short sales are never easy and the presence of an HOA/COA further complicates the matter. If association fees are unpaid at the time a short sale is negotiated and/or a lien has already been placed, the association can issue an estoppel letter outlining the fees and demanding payment. If the servicer does not agree to pay the fees, the deal could fall apart.
In some cases, the delinquent homeowner may attempt to bring the HOA/COA bill current in order to facilitate the sale and get clear of the mortgage. In other situations, the servicer pays the fee to speed the deal on to the close, or the buyer may be enticed to pay the fee for a desirable property. Too often it comes down to an additional negotiation that threatens to derail the entire deal. Some of the complexity can disappear if the servicer has a savvy negotiator who is qualified to meet with the HOA/COA and make a deal. But be forewarned: association leaders have been briefed on this and know they have some clout.
What is an Estoppel?
If “estoppel” is a strange term to you, that’s probably because you have previously used the term “ledger” or “payoff demand.” An estoppel is simply a document, sometimes in certificate form, that is used in mortgage negotiations to determine financial obligations, such as outstanding amounts due. Lenders require estoppel documents as a matter of course in the settlement of loans and usually want to see a detailed itemization, breaking down all individual charges by date.
Many state government regulators want to see this information as well. In fact, most states require an estoppel letter from the HOA in the escrow documents when the title is transferred.
Are There Different Rules for HOAs/COAs for Reverse Mortgages?
Ninety-eight percent of reverse mortgages are in the form of a HECM loan, which is guaranteed by HUD through Federal Housing Administration (FHA). FHA has recently proposed a rule that many have found hard to decipher. On one hand, the rule can be interpreted in a way that suggests HOAs will be waving their lien status in the case of foreclosure. On the other hand, it could mean that servicers are responsible for HOA liens even after loan assignment!
The FHA is expected to clarify its proposed rule change, but the matter has yet to be resolved. Again, one of the biggest risks here is that the HOA/COA will foreclose and the servicer will not be aware of it. Significant reputational risks are present here and could result in damage to the servicer’s business.
Who Has Responsibility for HOA’s/COA’s Assessments at the Bank Servicing the Loan? Finally, to add one final layer of complexity to this set of questions, let’s take a look at the responsible party for HOA assessments within the financial institution. Traditionally, this has not been a part of anyone’s list of top priorities. In some shops, responsibility lives in the Escrow/ Loan Administration department where they can be expected to own it for the life of the loan. For other clients, we have found that the responsibility is based on the status of the loan. This would mean that whether your department is customer service, collections, home retention, bankruptcy, foreclosure or REO, it is assumed that you have a process to monitor and mitigate HOA risk.
To this extent, we have found many examples where the servicer was unaware that an HOA had foreclosed and that the borrower was no longer an occupant. Even when the responsibility lands squarely on someone’s desk, it is very unlikely that the executive has the training or experience to know how to keep track of the many changes and be effective at negotiating with these associations. In most cases, communication problems, inconsistent strategy, and unintentional errors plague servicers due to a lack of standardized procedures and effective training.
As you can see, each of these answers, while accurate and correct, only touches on the most obvious aspects of the questions. In every case, legal experts could argue both sides and are likely to do so. Servicers who do not have trained and experienced staff to monitor HOA/COA liens and work out problems before these organizations foreclose on their liens will need to seek out suitable partners to help them navigate these issues.
22 States with HOA Super Liens or COA Super Liens
- District of Columbia
- New Hampshire
- New Jersey
- Rhode Island
- West Virginia
Other Resources to Learn About HOA Super Liens