Can my homeowners association really foreclose on my home?
Homeowners associations (HOAs) have a history of foreclosing on owners to collect relatively small sums of money. For example, in one California study, the median amount owed in HOA foreclosures was just over $2,000; in all other cases it was over $190,000. One family even lost their home because of a $120 HOA arrearage! Learn how to avoid an HOA foreclosure and how to sidestep the ways some HOAs use to try to take your home.
There are many laws in place to protect homeowners from foreclosure by their lenders or other claimants. Borrowers are protected from mortgage lenders foreclosing with bankruptcy proceedings, through homesteading, and through forced mediation in many states. But HOAs don't face these same restrictions.
In California, for example, associations may begin the foreclosure process only 75 days after a missed payment was first due, while a tax collector must wait five years before beginning the foreclosure process for a tax lien. Associations are not required to go through a court to foreclose, as a property owner would to evict a tenant. Also, homeowners do not receive the benefit of the homestead exemption when their house is foreclosed upon by an association, as they would in the case of any other money judgment.
Why foreclosure is the preferred collection method
Why should HOAs use foreclosure to collect relatively small amounts when there are other effective ways to get their money, such as small claims court? There are a couple of reasons. In many cases, there are attorneys on the HOA board or working for property management companies who make a lot of money providing foreclosure services. HOAs have the power to run up several thousand dollars in late fees, interest, fines and attorney charges for a delinquency that may total only a few hundred dollars. They then use the threat of foreclosure to collect that amount. This has led critics to call the procedure a "shakedown racket." There have also been allegations of board members who push for foreclosure, buy the properties themselves and flip them for big profits.
The Dallas Morning News and NPR report that HOAs are foreclosing with little warning to folks who miss their monthly dues. In one case, a soldier in Texas had his house sold at a foreclosure sale while he was in Iraq. His wife was suffering from depression and missed two monthly payments (total arrearage= less than $1,000). The $300,000 home fetched $3,500 at auction (the buyer reportedly flipped it for a 3,700 percent profit). And that's the real crime -- the devastating loss of home equity due to the massive discount of the home's price at a foreclosure sale. So the family would have received almost nothing after the HOA took its late payments and piled on the collection fees.
In 33 states, an HOA does not need to go before a judge to collect on the liens. This is called non-judicial foreclosure and it's a big hammer in the hands of an abusive HOA. Since the start of the recession, Texas foreclosure filings for delinquent HOA assessments have increased from about 1 percent of all home foreclosures to more than 10 percent, according to an NPR report. And in Texas, it only takes 27 days for a homeowner to go from missing an HOA dues payment to being homeless.
Some methods include
There are attorneys who advertise that they help HOAs earn extra money by foreclosing on owners who miss payments. One practice is refusing to accept partial payments. The homeowner comes in with a partial payment, which is refused, and he or she is told that the balance is even higher due to late fees and collection charges. In some states, there is a minimum amount that must be past due in order for the HOA to foreclose. If that's the case, the HOA and their lawyers work at getting homeowners past that threshold by piling on fees and refusing to accept anything but payment in full. Once the amount owed gets big enough, they pull the trigger and take the house.
Other methods involve hitting you with minor infractions, such as the state of your shrubbery, then adding big fines and finally foreclosing.
If you tangle with your HOA, your best bet is to pay what they say you owe, then take them to small claims court to get it back.
If you can't get caught up, and the HOA racks up huge fees and you are in danger of foreclosure, a bankruptcy filing can discharge all of the past-due HOA dues and the attorney fees, and save your home. But if the HOA hits you with additional charges after you file, you're on the hook for them as well.
The HOA's side
With the mortgage foreclosure epidemic, many HOAs find themselves in trouble. Homeowners let payments slide and associations with more than a 15 percent delinquency rate find that members can't sell their properties because mortgage lenders don't finance anything in an HOA with a high delinquency rate. So the answer for them is to swoop in and foreclose before the mortgage lenders do (once that happens the HOA claim is often extinguished), take possession of the property, and rent it to get the dues current so that members can sell their homes.
Ironically, at a time when most mortgage lenders are bending over backwards (using various modification programs) to work with borrowers, HOAs are breaking records for fast foreclosures. So while you could be negotiating with your lender to save your home, your HOA could be positioning itself to sell your home on the courthouse steps at the same time.
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