Foreclosure is the process in which a homeowner loses his home because he fails to pay his creditor, usually because he misses his mortgage payments. This affects the homeowner, the mortgage lender and the homeowners' association (HOA). The HOA also has the power to foreclose on a property in certain circumstances.
An HOA maintains the common grounds in an area in return for the payment of a regular fee from the residents. It is a nonprofit organization, and membership is mandatory for all homeowners in the area who want to obtain insurance from the Federal Housing Authority (FHA). The HOA has the power to specify a set of covenants, which detail the acceptable code of conduct in the neighborhood.
Impact in a Lender Foreclosure
A foreclosure adversely affects the HOA in charge of the area. A homeowner facing financial difficulties usually stops paying the HOA fees before he stops missing his mortgage payments. This forces the HOA to use its own cash reserves to cover maintenance fees. As the balance of its cash reserves declines, the HOA has to halt some of its maintenance activities, leading to a general deterioration of the neighborhood.
After filing a notice of foreclosure, a lender sometimes takes a long time to complete the foreclosure process. As long as the lender does not foreclose, it can still list the full value of the loan as an asset in financial statements. Once the lender sells the property, it has to record it as a loss. This leaves the HOA without a homeowner to pay the fees. In such a situation, the HOA can carry out a reverse foreclosure, which involves taking the title of the foreclosed property, forcing the lender to take the title in court and making the lender liable for the outstanding HOA fees.
A foreclosure more commonly occurs because the homeowner misses his mortgage payments. However, an HOA also has the power to carry out a foreclosure process against a homeowner who fails to pay his HOA fees, whether or not he also owes mortgage payments. Even if the homeowner owns the property free and clear, he may still face a foreclosure if he misses a few HOA fee payments.
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