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To Foreclose or Not to Foreclose

To foreclose or not to foreclose, that is the question.

There continues to be a great deal of confusion and angst in the industry with respect to foreclosure. My goal is to provide you with the information you need to make an informed decision as to whether or not to foreclose for delinquent assessments and to remove any fears you might have.

The cornerstone to debt collection is leverage. Without leverage, there is no collection. In traditional debt collection, collection agencies use credit reporting, legal judgement and in the case of vehicle loans, repossession and home loans, foreclosure. HOA collections are not like traditional collections at all. HOA collection is a legal process that leads to foreclosure, but there is an assumption that the delinquent homeowner will pay somewhere along the path to foreclosure. The leverage is also different as it starts with the Notice of Lien, then follows with the recording of Default, and it finally ends with foreclosure.

Of these three, foreclosure is the greatest leverage tool that the collection agency has. If an HOA decides as a matter of policy that it is not going to foreclose, they are drastically reducing the leverage and therefore, hindering the chance for a successful collection of the debt that is owed to them. Additionally, having a no-foreclosure policy is likely a violation of the board’s fiduciary responsibility to their association.

With that said, given the climate prior to the passage of SB306 in October 2015, it’s not surprising that HOAs were reluctant to foreclose. In fact, this hesitation resulted from an effort to protect the HOA from lawsuits that would hurt the HOA, which is in line with their fiduciary responsibility.

However, please note that these issues occurred “prior to the passage of SB306.” Since then, things have changed. To my knowledge, there has not been one wrongful foreclosure suit filed in the state of Nevada on property that was foreclosed upon after the passage of SB306 that’s related to the Super-Priority. A lender has no reason to file a lawsuit since their first deed of trust is being protected through their payment of the Super-Priority which is being paid promptly after the recording of Default. In fact, lenders trip over themselves in their haste to make this payment. The investors bidding at the foreclosure auction now know that they cannot get clear title, so they are only looking to get the property to rent for as long as they can until the lender forecloses.

Because of the lender’s zeal to make this payment at the Default stage, foreclosure has become a thing of Fred Flintstone as The HOA is being made whole with this payment and the collection agency is getting paid most of their fees.

Of the accounts that Red Rock receives for collection, 73% are paid in full within 90 days, and 82% are paid in full within 150 days. This success has occurred because of our efficiency as a whole, as well as our efficiency in regards to getting accounts to Default in a timely manner in order to take advantage of the collection climate after the passage of SB306.

However, because many properties have old delinquencies, they are not being paid at the Default stage as lenders do not pick up on these old Default recordings. They will not pay the Super-Priority until the foreclosure stage, and if an HOA does not authorize the collection agency to move forward to this stage, nobody will get paid. In these cases, the delinquent assessments often exceed what is payable under the Super-Priority, so moving to foreclosure is the only way for the HOA to be paid in full.

Ahh, but now you say that the reasons I’ve mentioned above are not the main reason that you don’t want to foreclose. As a board member, you don’t want to foreclose because you feel bad about taking your neighbor’s home from them. To help alleviate your conscience, consider the following statistics.

Out of all the accounts that get to the foreclosure stage at Red Rock, 87% are paid in full or get on a payment plan that involves a 20% down payment. Of those, the majority pay in full.

In other words, it is very unlikely that even if you authorize a foreclosure, an actual foreclosure will take place.

In many cases, the delinquent homeowner is also an investor who is savvy and sneaky enough to know that not paying the assessments will not be a problem because he or she knows that you are afraid to foreclose. I know this because of an experience we had with a client that was not foreclosing, but then changed their policy. Lo and behold, five delinquent properties that were owned by investors all paid in full when they realized that the HOA had changed their policy. They had the money to pay all along, they just knew that the HOA “didn’t foreclose.” Once that policy changed, they paid.

Now the disclaimer, but it isn’t in fine print because I’m not a lawyer (all of my legal training comes from watching reruns of Matlock):

As always, please consult with your attorney before doing anything else.