Homeowners Associations: The New Foreclosure

Photo: Jeff Turner

Foreclosure

"I had no idea that they could foreclose," Tony Goodman tells me.

Neither did I, but Goodman's homeowners association did just that in April because he owed $769 in back dues.

"I owed the HOA very little money in comparison to what I owed my mortgage company and my mortgage company, which is Chase , bent over backwards to help me," Goodman adds. Even as he was working on a loan modification, Goodman's HOA, Lookout Canyon Creek in San Antonio, TXtook title to his home on the steps of the Bexar County Courthouse. They purchased the home for $2,019, about the amount of the dues plus attorneys fees.

Apparently this is not at all uncommon these days, as struggling borrowers let the dues slide, thinking it's more important to throw all their cash into their mortgage payments.

Thirty-four states allow for judicial foreclosures by HOAs, although the rules and redemption periods differ. The redemption period is the amount of time that a homeowner has to pay up all the dues and fees after the HOA has officially taken title to the home.

Texas has a 180 day redemption period.

Florida's is just 10 days.

"People don't understand that by failing to pay the association dues they can lose their home and be put in the street," says Florida attorney Robert Tankel. He represents HOAs in Florida and his business is positively booming.

The Housing Fix -- A CNBC Special Report >> See Complete Coverage

"I hear the words Nazi and Communist used interchangeably probably twice a week," he adds, but he's gone from a staff of one paralegal and a receptionist just a few years ago to 17 paralegals and a much larger support staff. Tankel makes no apologies for what he does.

"The associations and their boards of directors have a duty to the people who pay and the duty is to collect the assessments."

He does have a point, cruel though it sounds, when you know Tony Goodman's story.

But the fact is that there are plenty of homeowners who pay extra to be in these communities specifically for the amenities they offer.

It's not just about mowing the lawns and shoveling the snow, these communities are often safer and cleaner and appreciate in value faster because of that.

Andrew Fortin of the Community Associations Institutemakes a compelling argument, saying that in some cases now, where HOA's are having serious delinquency problems with dues, new buyers are having trouble getting mortgages. Apparently big banks want to see healthy HOAs. Also, the HOAs have to pay their own bills to the service providers in the community. If they don't get the dues, then they fall behind as well.

This is not to say that Tony Goodman hasn't been going through hell, trying to negotiate a repayment plan with the HOA. He says the attorney for the HOA doesn't return calls, and he's unsure, even if he is able to pay the HOA back, that he'll eventually get his house back.

Texas redemption rules favor the homeowner a bit more than in Florida. Tankel says that in Florida, with just a ten-day redemption period, HOAs can actually profit on foreclosures for a short time.

"We call that the race to the courthouse steps because if there's a first mortgage foreclosure pending and the first mortgage foreclosure beats us to the courthouse steps, then they wipe out the association's claim of lien," says Tankel.

Since the big banks on average can take over a year to foreclose on a home, the HOAs can swoop in, take title, boot the borrower, and either rent or sell the home for a good six to twelve months before the bank comes in with the far bigger lien and forecloses again. Most regular real estate investors don't touch HOAs because the risk is high and the time for profit short, but Tankel says there is a new breed of investor in Florida, wading into these waters.

Tony Goodman now has a job again and is trying to pay back the HOA. He has three more months on his 180 days.

"Not a day goes by that I don't think about it because it's my responsibility to take care of my family and I don't have any answers."

• Million Dollar Foreclosures

Questions? Comments? [e-mail]