Is Foreclosure Best Option to get Debt Paid?

Q. It seems in today’s economy that a lot of HOA foreclosures don’t result in a collection of the debt owed to the HOA. The owner either abandons the property, or the HOA lien is extinguished by the foreclosure of a superior deed of trust to a mortgage lender.

It seems the HOAs rack up a lot of fees to foreclose against homeowners that are going to walk away from the debt one way or the other. Is there a better option?

I get this question a lot. In the current market, there are a lot of homes that are “underwater,” meaning the amount owed on the mortgage(s) exceeds the value of the property. In cases like this, we often see owners who are willing to walk away from the property and abandon it to a lender foreclosure, or in some cases, an HOA foreclosure.

Some may question the wisdom of filing a lien if there is a mortgage foreclosure pending, or if the HOA has reason to believe a mortgage foreclosure filing is imminent. But in today’s market, workouts and short sales by lenders are more common, and having a lien in place is the only way to ensure that the HOA gets paid.

A claim of lien against a property creates a “cloud” on the title to the property. The lien must be paid for the owner to refinance or sell.

While HOAs don’t report unpaid assessments, liens, or foreclosures to credit-reporting agencies, they sometimes appear in credit reports because they’re picked up in public records searches. The negative report will create an incentive for many homeowners to pay the debt because they want to protect their credit rating.

So, one option would be to file a lien but not a foreclosure. Liens are enforceable (meaning they can be foreclosed) for three years after they are filed. The only other option to foreclosure is filing a lawsuit.

In my experience, filing lawsuits is less effective, more expensive, and time-consuming than the lien/foreclosure process. Lawsuits also expose the HOA to possible counterclaims, and can be drawn out for months or years.

While many owners pay when served with notice of a lien, others don’t respond until a foreclosure of that lien has been filed and they are faced with the possible loss of the property.

The HOA should find out what the owner’s situation is. Is there an absentee owner who was depending on a tenant to pay? Or maybe family can help with the debt.

Predicting which owners will pay and which ones will abandon the property is impossible. My advice: HOAs should have a written policy for handling delinquent accounts, including when foreclosure will be used, and for you to stick to the policy religiously.

The policy should be distributed to all owners. While there’s always a chance that an owner will walk rather than paying off a lien or foreclosure, the HOA has no way of controlling that decision, and should focus instead on what it can control – which is adopting a delinquency policy, publishing it, and enforcing it in a consistent manner.

If you do this, you’ll probably see your delinquency rates drop, as everyone will understand the consequences upfront. And homeowners in financial straits hopefully will work with the HOA to get the debt paid before a lien or foreclosure becomes necessary.

Originally published in the Charlotte Observer, September 24, 2010

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