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New Type of HOA Litigation Gives Lenders Pause on Home Financing

As if lenders weren't already nervous enough about their risk exposure when lending to developments under HOA litigation, there is a new trend that may really put a crimp on lending activity.  Frustrated homeowners are now getting their HOAs to initiate suits on the banks directly.  Apparently, overwhelmed banks in certain highly distressed areas with years of backlog paperwork are being sued by the HOAs to force foreclosure on delinquent homeowners.

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The motivation of the homeowners is quite understandable.  With so many delinquent, irresponsibly self-interested homeowners failing to contribute their monthly dues, the associations are underfunded and must lean heavily on the remaining, diligent homeowners.  Since the banks are still trying to sort out who owns the repackaged loans on these properties, the foreclosure process often drags on for years.  So, the homeowners are taking a legal path to get these properties out of limbo and get new contributing homeowners.  Once in a while, this approach works so it's likely that more HOAs will be pursuing this path.

Unfortunately, just like other HOA

litigation, this does not help potential buyers when it comes to getting financing.  With a third of Californians living in developments with HOAs, this could potentially slow financing even further as the pool of potential HOAs going into litigation goes beyond the newer construction buildings,

which normally involves suits with the builders.  And, since HOAs are seeking remuneration directly from the beleaguered banks, the financing hurdle for those developments may be even higher than for other types of HOA litigation.

If you'd like to learn more about the potential impact of HOA litigation on availability of financing and how to work around the different types, please contact us.

Michael Cheng