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48 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T SERVICING THE LATEST How Servicers Can Prevent HOA Liens From Cutting into Investor Profits LRES released a recent white paper discussing the impact homeowner associations have on servicers and investors and steps servicers can take to mitigate risk. H omeowner associations have been a conten- tious issue in the hous- ing industry for several years. Because an HOA can fore- close on a property for unpaid association fees, servicers are at risk of significant losses for homes under an HOA. Furthermore, investors can potentially lose their entire stake in a property when an HOA forecloses. "Since no investor would consider this acceptable, ser- vicers are left in need of a better method of managing the HOA lien process," LRES stated in a recent white paper. "Homeowner associations are very important to the housing industry as a whole, which is why it is extremely important for servicers to have a good understanding of the risks to be mitigated and the requirements for doing so," said Roger Beane, LRES Founder and CEO. LRES found that there are 350,000 HOAs in the United States. Together, these organiza - tions claim more than 25 million households as members, which means one out of every five households in the country is subject to HOA rules and fees. "That makes these organiza- tions significant partners in the housing economy and makes it very dangerous for any servicers to ignore the fees and fines they levy or the liens they place on the homes that serve as collateral for mortgage assets," LRES said in the report. According to LRES, in 21 states and the District of Columbia, these associations can file a lien that is superior to that held by an investor who holds the rights to a first deed of trust: Alabama, Alaska, Colorado, Connecticut, Delaware, Florida, District of Columbia, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Washington, and West Virginia. LRES offered the following solutions for an effective HOA lien strategy: • Servicers should develop a deep understanding of the risks HOAs pose and the actions they can take to minimize their impact. The actual risk any individual servicer faces is dependent upon the portfolio it services. Once the risk exposure is known, the servicer can undertake any remedial action required to clear existing HOA liens. • When the loan enters default, constant monitoring of loans that may be impacted by unpaid HOA fees must be actively monitored. This work must continue after foreclosure and until the REO is sold back into the market. In this way, the servicer can protect the investor's interest. • Avoid HOA foreclosures by quickly remediating HOA liens. A good third-party real estate information provider with the capacity to identify problems, gather the information, and negotiate solutions is a critical element to any servicer strat - egy for mitigating this risk. "Investors can potentially lose their entire stake in a property when an HOA forecloses."