Sperlonga has published a white paper entitled, The Hidden Threat of HOA Liens: Why Delinquent HOA Accounts are a Threat to Investor ROI and First Mortgage Lien Positions. The white paper, authored by Sperlonga Chairman Matt Martin and Senior Vice President Brent Stokes, details the pitfalls that HOA liens for unpaid accounts pose for the mortgage and residential mortgage backed securities (RMBS) industries. It is available on the company’s website at www.SperlongaData.com. Sperlonga is a subsidiary of Arlington, Virginia-based national real estate asset firm Matt Martin Real Estate Management (MMREM).
The white paper is being published in time for availability during the American Securitization Forum, an event taking place in Las Vegas from January 27-30, where HOA lien dangers for RMBS investors and issuers will be a hot topic of conversation. “The securitization industry has little understanding of HOAs,” said Jason Serrano, co-head of structured products and managing director for securities specialist at Oak Hill Advisors. “It must become educated quickly in order to safeguard investments in both the near term and over the long run.” He points out that there are over 25 million homes that involve HOAs, and his company has researched the problems they can pose when delinquent accounts are not properly managed. They have found that the scope of the problem is far larger than the industry realizes, particularly when considering that the majority of their pools involve newer homes, most of which include membership in one or more homeowner associations.
Matt Martin of Sperlonga says the problem affects virtually every lender originating loans and a very large proportion of defaulted properties. In so-called “super lien” states, HOA liens for unpaid accounts can take priority over mortgages and threaten first lien positions. New rules from Fannie Mae and HUD require servicers to monitor and resolve HOA delinquencies in these areas before their mortgage priority can be endangered, but that is far easier to require than it is to accomplish.
“There are over 350,000 HOAs in the country,” Martin said, “and the mortgage process has not historically tracked them in order to communicate on things like presenting claims for payments or monitoring delinquencies. Over the last 18 months Sperlonga has created the industry’s largest database of these HOAs and presently has the means to help the mortgage industry preserve the integrity of their first liens.”
Oak Hill Advisors’ Serrano believes it is time for the RMBS industry to take action to prevent a potential future catastrophe of HOA-related foreclosure and repurchase problems. “This is obviously seen as a problem by HUD and Fannie Mae, as they have taken action by requiring liens to be settled and HOA accounts to be kept current in all critical states,” he notes. “Why hasn’t the securitization market asked for similar protections? Our problem is proportionately larger, since a greater number of the assets in our trusts involve one or more HOAs on each property.”
Brent Stokes, co-author of the white paper, says that approximately one in five properties in the U.S. involves an HOA, but about 80 percent of new homes are HOA members, a testament to the growing popularity of community associations. “They are good for homeowners and for lenders, as they generally keep neighborhood maintenance standards high and maximize property values,” he says. “But as the white paper shows, there are pitfalls along with the benefits. Fortunately, there are resources available to minimize the dangers for lenders and investors, but they must first be aware of the problem.”
“This is a very real issue,” said Serrano. “Sperlonga is delivering a real solution to protect RMBS investors and the securitization market.”