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Mitigating HOA Risks for Mortgage Servicers and Lenders

Mitigating HOA Risks for Mortgage Servicers and Lenders

Homeowners associations (HOAs) play an important role in the mortgage industry, impacting over 25 million housing units and more than 68 million people across the U.S. HOAs encompass 61% of all new single-family-home construction, and this number is expected to grow. The health of an HOA, as well as its bylaws, can impact the value of homes. That’s why it’s more critical than ever for both lenders and servicers to procure HOA information about the properties they may be funding and those in their portfolios.

Lenders must consider several factors about HOAs when underwriting a loan. They must know if a given property is located within an HOA, if the HOA is in good standing and if the HOA has the funds necessary to maintain the neighborhood.

For mortgage servicers, HOAs pose unforeseen risk and costs. In certain states, for example, liens recorded by HOAs from delinquent accounts take priority over a first mortgage, resulting in a “super lien.” When this occurs, the HOA can foreclose on the property – superseding any other liens – which could lead to significant losses for servicers.

The Challenges of Mitigating Super-Lien Risk

Proactively mitigating super-lien risk can be a very challenging task for servicers, and in many cases, at-risk properties are easily overlooked. In some states, HOAs are not required to record liens, making it difficult for servicers to identify delinquencies. Additionally, a few judicial foreclosure states allow HOAs to foreclose without going through the court system, complicating HOA lien discovery. Furthermore, some states, such as New York and Texas, are not defined as super-lien states, but allow an HOA to foreclose on a property if specified in the association’s governing documents.

Given these challenges, how do servicers create and maintain an effective risk mitigation strategy to protect the properties in their portfolios from HOA foreclosures? Black Knight suggests a three-step process: identification, verification and monitoring.

Step 1: Identification

The first step is to discover which properties are within an HOA and determine risk exposure. Black Knight offers an automated solution that leverages extensive nationwide data, including public records and title plant information, to locate the properties associated with an HOA.

Step 2: Verification

For non-performing loans, Black Knight suggests taking HOA research to the next level. After identifying the loans subject to an HOA, Black Knight can verify the HOA name and contact information by conducting phone interviews with questionnaires specifically designed to uncover the correct details.

Step 3: Monitoring

It’s also critical for servicers to have an ongoing lien-monitoring process. Black Knight’s HOA solution takes a comprehensive approach that discovers at-risk properties in both judicial and non-judicial foreclosure states. In addition to searching public records for court filings, recorded liens and notices of default, it looks for notices of sale to identify potential HOA liens or foreclosures in states where HOAs can foreclose without going through the courts.

Helping Lenders Save Time and Reduce Costs

Mortgage lenders also need an accurate and thorough solution for procuring essential HOA data. The solution needs to be fast and affordable since cycle times and costs are among the biggest challenges loan originators face today. Black Knight’s HOA solution for lenders provides reliable, quality data within 1-3 days, expediting the underwriting process, driving efficiencies and reducing the costs associated with obtaining HOA data.

All of our comprehensive HOA solutions are customizable to meet a client’s needs, and can be integrated into third-party platforms and bundled with other Black Knight products.