Question: I've been the treasurer of our 30-unit self-managed condominium association for more than 20 years and until recently the handling of buyer and refinance escrows and other paperwork for property transactions was a breeze.
This year, though, mortgage lenders started asking for a fidelity bond for coverage of the association's working cash balance — something totally unrelated to the transaction's escrow account — with losses payable to the lender. The board refused to provide it, and one buyer's bank said it would not be able to close escrow without the board's proof that a fidelity bond was in place. The board told that bank, "then don't close!," but the bank relented and the buyer was able to close escrow.
We are finding that in order for a person's loan or refinance application to be completed to a lender's satisfaction, the lenders are imposing additional requirements that boards must be answerable for. Typically, lenders sought declarations that required the board to confirm association monthly dues will remain the same for the year and that there are no foreseeable special assessments. That is understandable as suddenly escalating assessments could make it hard for buyers to meet their monthly mortgage obligation.
But now, even beyond the fidelity bond, lenders are sending us complicated forms with many questions about the financial health of our association. And they want the signatures of two board members certifying the truth of the answers. All this is making board directors skittish and apprehensive about completing the paperwork.
The processing of buyer's and seller's escrow-related requirements has turned what was a one- or two-day process into a two-week ordeal with possible legal ramifications for the signatories. What's more, sometimes the questionnaires are just too complicated for our small association to complete.
What can we do about all this, and why is this even going on? Should we just purchase a fidelity bond to make at least that headache go away?
Perhaps the Legislature could pass a law adding the HOA monthly fees to the owner's monthly mortgage payment and property taxes. Wouldn't that satisfy lenders' concern that all fees and taxes are being paid and accounted for?
Answer: It appears lenders are getting more skittish about issuing mortgages to buyers of condominium units as the real estate market recovers from the housing bust, a time when lenders experienced a spate of foreclosures. Now, with prices once again reaching record levels, banks and other mortgage lenders look to be taking steps to protect themselves.
In this context, a fidelity bond operates as a type of insurance policy for the lender in case of financial problems at the association. There are many reasons a lending institution would require a homeowner association to carry such a bond, but those reasons go beyond simply ensuring that a borrower pays his or her mortgage and association dues. Even if dues are paid directly to the lending institution, there may be problems with the association's financial health that decrease the value of the asset guaranteeing the buyer's loan.
Any lender wants to minimize its risk. To do that, mortgage underwriters consider a borrower's credit rating, ability to pay and the amount borrowed. But a risk assessment for lending money to a buyer of real property located in a homeowners association requires additional assurances of reliable management and continued solvency.
As you have experienced, that analysis may include answering questions regarding the association's financial condition and stability that are verified by the board. If the association is mismanaged or has a history of mismanagement, then the lender's investment in the borrower's asset could decrease in value. Also, if the lender has to foreclose, then it may end up as the new owner of that property and a member of the association.
However, a bond serves only the lender's interests and the association does not stand to gain anything from incurring the cost of purchase. Once the board purchases a fidelity bond, there may be a presumption that the association is committed to purchasing the bond every year. If lenders want to reduce their lending risks they need to do so by dealing with their clients, not by asking the association and the other owners to pay for bonds to reduce the lender's risk. The job of the board and its directors is to serve association titleholders and members.
Requiring owners with mortgages to pay their HOA dues directly to their lender, as you suggest, might help guarantee that payments are made. However, such a requirement would provide no guarantee that the HOA would speedily receive those funds as they come due, and there could be lender handling fees charged for those services.
The law you propose would make the lender an intermediary between owners with mortgages and the association, and it would give the lender unusual leverage in its dealings with associations. Once the HOA dues are paid to the lender, the money could conceivably be held and used to influence association business.
Similarly, if an owner refused to pay HOA dues it would be up to the lender to collect and the association would be deprived of some of its more powerful tools for guaranteeing compliance, including assessments, liens and nonjudicial foreclosure.
Any owner without a mortgage would be forced to live in an association that is not in full control of its finances — and potentially subject to the whims of several financial institutions.