You have probably heard about foreclosure in your community at some time or another or may even know someone who has experienced one. Nobody likes the word foreclosure and for all parties, foreclosure is something to tread carefully, but it is important for homeowners’ association boards to understand what they are and how they impact their association. Simply put, a foreclosure liquidates an asset, or collateral for repayment security of the debt, to fulfill an outstanding debt. As a homeowners’ association, you have access to foreclosures, which is a method of collecting on the debt of delinquent assessments. However, other methods – including past due billing policies, collection agencies, and abstracts of judgment – serve as tools to utilize before engaging in foreclosure. In this article, you can explore the processes involved in these particular tools.
So, how do these tools come into effect? Prior to the sale of any home within the association, a lien is placed on each property at the time the governing documents are filed. The lien serves the purpose to require homeowners to follow the association rules, and associations can only foreclose on delinquent assessments. While the declaration allows for various fees and fines to be collected from homeowners, generally missed payments are not sufficient to sue and foreclose on a property. If a homeowner accumulates delinquent assessments, then an association’s attorney publicizes the lien, allowing for financial complications such as complicating the title on the home, preventing the home from selling or being refinanced, and even foreclosing on the home entirely.
Before pursuing a foreclosure, there are other tools available to handle delinquent assessments. First, a past due billing policy assists in managing assessment debt. The policy designs a multi-step process to allow homeowners a chance to rectify their late payment(s) before associations take any major action. A successful past due billing policy creates consistent expectations for all homeowners and an unwavering procedure in handling delinquent assessments. Educating homeowners is key in lowering rates of missed payments; however, policies do not solve every situation.
If a homeowner still accumulates a delinquent past due billing policy, a collection agency can help associations pursue debts. A third-party agency can lessen resentment between homeowners and board members, as the board members would be removed from directly pursuing the collection. Keeping professional records of liens, an agency functions as another resource to validate noticing a lien. Agencies provide another hand in the attempt to claim debts, although, in some cases, it is still not enough.
If previous collection attempts prove unsuccessful, an association can pursue an abstract of judgment, which functions to create a judgment lien. Prior to acquiring a judgment lien, an association must have sued the owner, obtained a finalized judgment, and abstracted the judgment. Clouding a homeowner’s title, the judgment serves as a notice of money owed and can follow a credit report for up to ten years. If a homeowner is accruing enough delinquent assessments, an association can exercise the power to foreclose on the home through an abstract of judgment, regardless of the mortgage being up-to-date.
What does all this mean for your association? If both the state law and association declaration allow delinquent fees to justify publicizing a lien against property, and the association can provide proper notice to validate the judgment lien, then an association can continue with the foreclosure. However, the governing documents must explicitly state the existence of the lien prior to the homeowner purchasing the home, or the association cannot foreclose on the home due to the Texas Homestead Act.
All of this begs the question, “What are the long-term effects of foreclosures on homeowner’s associations and their memberships?”
Firstly, a foreclosure imposes difficulty on the affected homeowner’s ability to purchase another place to live or to receive a future loan. Foreclosures cause homeowners to lose their biggest asset and accrue negative credit. Additionally, in some cases, associations can be held liable in wrongful foreclosure lawsuits. Secondly, neighborhoods with large numbers of abandoned homes are negatively impacted by decreasing the value of surrounding homes. Thirdly, increased foreclosures destabilize the housing markets, creating an adverse effect on the economy.
Considering their many unfavorable effects, foreclosures should be considered only when absolutely necessary. Fortunately, there have been efforts at diminishing the inevitability of foreclosures. Some possibilities are listed below:
- Inform homeowners of their responsibility in annual assessments and the significance of missing payments to help prevent misunderstandings down the road.
- Instate the previously-discussed past due to billing policy to handle collecting the balance of missed assessments without pursuing the foreclosure process.
- Offer an early bird discount to incentivize homeowners to pay assessments.
- Initiate a payment plan to provide an easier way to pay assessments for some families who cannot provide the full amount at once.
- Utilize a management company as a provider for support for your association to alleviate any complications of the collection process and offer guidance in deciding for or against a foreclosure.
Some foreclosures are necessary, but they are not entirely unavoidable. Here at Boardline, we try to find solutions with both the homeowner’s and association’s best interests, helping you successfully navigate the tools at your disposal.
Related: Visit SpectrumAM for more HOA Management updates!