There is a "vicious dog" that threatens unwary homeowner associations. It's called the "Home Equity Loan".  It doesn't even belong to the association but the community homeowners. It looks pleasant enough and promises never to bite. Some of your neighbors have acquired it hoping to make their lives better. But some come to find they've exchanged their hard earned long term home equity to pay off short term debt.

Home Equity Loans are being advertised that offer 100% to 125% of the appraised value of the home (more than the house will sell for). The lenders only extend such an offer because they are betting that real estate prices will continue to rise, eventually making a bad loan good. They are also betting that most folks will not want to lose their home. Both are bad bets as evidenced by the massive S&L failures of the 1980's. Those failures were based largely on bad home loans.

So what does all this mean to a homeowner association?

When the real estate market turns down (and it will) and prices drop (and they will) some homeowners may not be willing or able to continue paying either their home loans or their monthly assessments. If this happens, the association will have no home equity from which to recover the delinquent assessments. While the association technically has the right to collect money by other methods, if the debtor is unemployed, self-employed, abandons the home or leaves the area, those methods may be moot. If the delinquency is uncollectible, the other owners will have to ante up the money themselves. Ouch!

Moral of the Story: The association has no control over real estate prices and loose credit practices. But it can and should protect itself by enforcing a timely assessment collection policy so that delinquencies are stemmed quickly. Plan well and prosper. Fail and this dog will bite. 

For more on this subject, see www.regenesis.net

Published: April 5, 2000

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Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues. Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at .