Laws that give homeowners association debts "super lien" priority over all other claims have been a long-standing threat to servicers. But it wasn't until a pair of recent court rulings came out in favor of HOAs that industry vendors started to look at their existing data and technology to develop products for servicers to manage these risks.
There are super lien laws on the books in 21 states, plus Washington, D.C. Historically, they've rarely been invoked, but when they are, the results can be devastating for mortgage debt holders. In a Nevada case ruled on last year, the first-lien mortgage holder lost its claim to an $885,000 debt because of $6,000 in delinquent HOA dues.
"That gave everybody the awareness that this is not something that they should take lightly," said Ann Song, vice president of REO management for LRES, an industry vendor that recently launched HOA lien services for originators, servicers and investors.
Part of the problem is that super liens are just one of myriad industry challenges to keep vendors busy in the wake of the foreclosure crisis. So until the Nevada case and a similar ruling in Washington, D.C., brought more widespread attention to the issue, both servicers and vendors have had bigger fish to fry.
"I don't know if they are late to the game but I would say that with the Nevada ruling, a lot of people woke up and said, 'Here's a bigger problem,'" said Jason Tufaro, a vice president at Matt Martin Real Estate Management, whose Sperlonga unit was one of the first firms to sound the alarm about super lien risks four years ago.
Vendors that have flooded the market with super lien-related products include Black Knight Financial Services, CoreLogic and LRES, as well as a partnership that incorporates services from MMREM and Equifax.
The vendors all say their services can identify properties subject to super-lien laws and check for active HOA liens. LRES and MMREM will also help servicers negotiate HOA lien disputes. (The two vendors are both REO management companies, while LRES also has an appraisal services unit.)
Much of the information used to research HOAs is in the public record, but how the data is aggregated and the automation used to search it varies between vendors. Black Knight culls data from its title plant operation to identify homeowner associations' conditions, covenants and restrictions from title insurance policies. The vendor is still rolling out its product to all of the super-lien jurisdictions.
Instead of a title plant, CoreLogic has an extensive property information database for its HOA product, as well as an outsourcing unit that it could leverage to offer escrow services for HOA dues something the Nevada court's decision suggested could be a remedy for junior lien holders.
The stakes associated with a servicer losing a super lien dispute are certainly high, but there are viable legal challenges servicers can pursue. However, those prospects are complicated by jurisdictions that allow nonjudicial foreclosures proceedings. And even when there is a strong enough justification to win a legal challenge, it doesn't come cheap.
"If I'm a servicer and I'm trying to dispose of a property, but now I'm in litigation or need to clear up any outstanding liens with an HOA, that just adds to them holding the property longer than they really anticipated and having to pay more to maintain the property," said Tufaro.
Besides the recent court rulings, there are other reasons that more easily justify the expense for servicers to use these new services. One out of every five homes today belongs to a HOA, according to MMREM estimates, and the average HOA delinquency is $7,200, said Rosie Biundo, senior director of product marketing at Equifax Mortgage Services.
"Let's say Nevada happened again which who knows if it will it's not going to necessarily represent an $800,000 loss, but it will cost to cure any of the outstanding fees, fines, penalties that are there, plus securing an attorney," Biundo said. "Those significantly add up."
Also, the number of HOAs has grown.
"We've seen more than 20% growth in the last 10 years," said Dori Daganhardt, a vice president at Black Knight Financial Services.
And while servicers certainly could have benefitted more from super lien monitoring products when foreclosures were at their peak, the magnitude of the strain the industry was under would have implementing those services difficult. With the volume of new defaults on the decline, that's no longer the case.
"They're not as buried as they were two years ago," said Matthew Heidenreiter, vice president of compliance and management solutions at CoreLogic.