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Delinquencies, Condo Associations and HOAs


Question:

The three-month delinquency rate on HOA dues in 260 homeowner associations run by Merit Property Management in California has increased to 5.3 percent in March from the 2.8-percent delinquency rate in June 2008. The rate could be a precursor of another wave of foreclosed homes in the state.

In the first quarter, California had 230,915 foreclosure filings, 45,784 of which are real estate owned homes, based on a report from RealtyTrac.

According to Merit Property, HOA delinquencies began to rise in December 2007, when it increased significantly from only 0.8 percent in March of the same year.

The delinquency rate for HOA dues is significant because it is a concrete indication of financial hardship for homeowners, since homeowners default on their HOA dues first before defaulting on their monthly mortgage payments. HOA delinquencies which are not resolved can lead to pre-foreclosure notices and ultimately to lists of foreclosed homes.

In March, notices of pre-foreclosure increased in California after the state suspended filings that could lead to more foreclosed homes during the first months of the year.

Andrew Schlegel, vice president for finance at Merit Property, said that delinquency rates have increased to 15 percent in some Merit homeowner associations. Schlegel contends that the rise in notices of pre-foreclosure and HOA delinquency rates may usher a new wave of foreclosed homes in California.

Homeowner associations, which are a group of condos, townhouses or other residential developments, operate like small municipalities. They charge HOA dues to pay for common services such as security, landscaping and other association services.

Around 60 million families reside in homeowner associations, which have already reached 300,000 in number around the country. When mortgage lenders write mortgage loans for homes in community associations, they first ask the HOA's management company for the HOA's delinquency rate.

For prospective home buyers, it is advisable to ask HOA delinquency rates before buying a property in community associations.

Renters of homes in community associations are also advised to check their lease contracts if they are obliged to pay HOA dues, so they can compute their total monthly rental costs.

Owners of homes in an HOA cannot exclude themselves from the community association because their homes are within the jurisdiction of the HOA and they are obliged to comply with the HOA bylaws. Refusal to pay HOA dues and comply with bylaws can lead to legal action.

Managers of HOA communities have been warning homeowners to pay their HOA dues as they modify or refinance their loans to prevent their homes from becoming foreclosed homes. They are reiterating that HOA can still pursue foreclosure proceedings if they continue to ignore their HOA dues.

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