Foreclosures by Homeowners’ Associations Rising as Their Financial Condition Worsens

While foreclosures are falling on a nation-wide basis, one category that is an exception is foreclosures filed by homeowners’ associations against members that are delinquent on their fees. And on a more general basis, due to defaults and slow payments, in aggregate, reserves of HOAs have fallen and many have scrimped on services and maintenance as a direct result of the housing bust. Foreclosures by bank servicers has produced an adverse feedback loop: homes in foreclosure sit vacant, often for lengthy periods, and they don’t pay fees to the HOA. That produces shortfalls in the HOA’s revenues versus their needs. Thus when a homeowner now goes into arrears, the HOA has less ability to cut them slack and work out a payment or catch-up plan.

This phenomenon is broader than you might imagine. Homeowners’ associations aren’t just a fixture of condominiums in Sunbelt states like Florida and Nevada. 63 million Americans live in residences that are in HOAs, and 80% of new homes sold are subject to these arrangements. They aren’t just a way to pay for common services in multi-family housing; they are increasingly an example of privatization of formerly public services. As a new Reuters story explains:

Homeowner associations first took off in the 1970s as local governments looked for a way to offload costly services, such as snow removal and road repair. Municipalities have encouraged their growth since through tax incentives and zoning laws… 

But people who buy houses in an association often don’t bother to read the agreements that spell out what covenants owners are obliged to observe. They may unknowingly forfeit the right to fly a flag in the front yard, let a shrub grow any old size, or allow their kids to shoot hoops in the driveway. Homeowner associations typically have the right to place liens against wayward residents. Either through a court or state-regulated process, they can then foreclose on houses worth hundreds of thousands of dollars even for a few hundred dollars of unpaid debt, much like a municipality can for unpaid property taxes or a bank for a few missed mortgage payments.

The article starts with the story of a woman who ignored her annual $48 HOA fees, thinking they didn’t apply because she didn’t use any of the services they funded. She lost her home over $288 in unpaid HOA fees. She said she never got any notice that a foreclosure action was underway. Another ignored notices, assuming they were fines because his children were leaving their bikes outside. He lost his $350,000 home to $900 in fines.

But unlike a municipality, which will continue to charge property taxes once a home is foreclosed (they become the bank or investors’ problem), a HOA can’t assess fees to a party if it hasn’t signed a HOA agreement. That is putting many of these groups under financial stress:

About 70 percent of association-governed communities are underfunded, up 12.5 percent from 10 years ago, according to Association Reserves. The average association has financial reserve accounts – the amount required to maintain infrastructure and common areas – that are only funded at 52 percent, down from 60 percent a decade ago, its research shows. 

Tyler Berding, an attorney whose firm is consulting with a San Francisco condo homeowner association, suggests the problem is one of governance. “It’s very much akin to the public pension crisis,” he said. “Homeowners’ associations are simply not putting enough money away to make the repairs and replacements they will have to make over time.” The condo in question is having to levy a $70,000 special assessment against each resident to restore the building.

Because these associations are private and not required to report information, it’s impossible to know how often they are foreclosing or facing serious financial shortfalls. The Reuters account feature anecdotes of how some of these organizations, often run by inexperienced volunteers, have engaged in fine-collection strategies that look an awful lot like cops going on a traffic-ticket binge to help fill a local budget gap. That’s producing more and more calls for restraints on the HOAs’ powers:

Over the past decade, a citizen movement has grown to curb the power of homeowner associations, which remain largely unregulated. Nevada is just one state that has appointed an ombudsman to field complaints from homeowners; California and others have passed statutes limiting the assessment increases boards can make without consulting homeowners.

It’s not clear that this recourse is effective, but it is at least a step in the right direction. And we’re almost certain to see more of both trends: more and more shifting of the burden of municipal services onto homeowners and more efforts to increase accountability and curb abuses. In the absence of more detailed provisions, a “loser pays” provision for litigation files against HOAs would hopefully curtail some of the worst behavior as well as producing incentives against filing frivolous lawsuits.

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