Ever since the mortgage crisis and its accompanying spike in assessment delinquencies, policy makers have been working to address the question of who should pay the cost of collecting past due assessments. Surprisingly, in many states that answer is….. you.
Imagine your neighbor has racked up more than $500 in late fees on their credit card, and they expect you to pay the late fees. That is the scenario playing out in statehouses across the country when it comes to HOAs and condos. Lawmakers in several states are limiting the ability of community association boards to recover the cost of collecting past due assessments. It is not unfair to note that such policies are equivalent making you pay the late fees on someone else’s credit card bill. The well-meaning, but misguided effort may result in higher assessments, or worse, an inability to obtain mortgage financing for HOAs around the country.
The collections debate began shortly after the housing collapse in 2008. Community Associations saw a huge spike in assessment delinquencies as residents struggled to pay mortgages for homes that were worth only half the mortgage amount. Stories would emerge of unscrupulous collection companies, hired by association boards, who would levy tens of thousands of dollars in late fees on small past due assessments. Legislators in many states took action, in some cases looking for positive solutions for associations and in other cases, hamstringing associations trying to collect past due funds owed the community.
On the positive side, states like New Hampshire, Maryland and Nevada passed priority assessment lien laws. Sometimes called Super Liens, these laws provide that in the event of a foreclosure, monies owed the community association are paid first, before proceeds, if any, flow to the mortgage holder. Banks do not favor such solutions of course. Because the foreclosure for past due assessments by the community can extinguish their claim to money owed under the mortgage.
Other states took or attempted more drastic action. Nevada, in addition to passing the priority lien legislation, capped collection fees at just under $2,000. Texas had a vigorous debate on amending the state’s constitution to prevent an association from foreclosing due to assessment delinquencies, but ultimately limited action to banning the use of third party collection firms by associations. Maryland recently passed legislation that limits any late fees and fines on past due assessments to no more than the past due amount.
Worse still is how such laws are playing out in various markets. In Nevada, although it was understood that the cost of collecting past due assessments should be included as part of the monies collectable under the state priority lien act, and such understanding was affirmed by a state agency, the state is currently in the midst of a firestorm of litigation on the matter. Investors are buying up massive numbers of properties in Nevada. To reduce the cost of acquiring these assets, they are challenging the ability of the associations to include collection costs in the priority lien amounts. In fact, banks, investors and the state (which ok’d collecting such costs in 2010) are now all suing HOAs and management companies for collection fees they claim were “illegally” collected.
Sound finances in community associations are increasingly critical to ensure a vibrant community, but also to qualify for many federally backed mortgages. The Federal Housing Administrations Condominium Program requires that a condominium association have no more than 15% of units 60 days late in their assessments for a buyer to obtain an FHA mortgage.
More critically, current tools like priority liens provide mechanisms to recover past due assessments and collection costs from the underlying value of the property if the unit owner is unable or unwilling to cover such fees. Allocating the cost of collection to the parties responsible for triggering such costs is not only fair, it also prevents increases in assessments that may push other homeowners into financial distress. At the end of the day, residents and companies that serve them need to be fully engaged in these debates to ensure the implementation of policies that support financially strong communities.