Should Lenders be Allowed to Restrict Loans Based on Mandatory HOA Dues Participation?

Ok, this week I came across an important loan funding issue that I believe needs correction.

One of my clients wants to purchase a condominium in a complex where his son lives. He wants to use the condo as his second residence when he comes to visit and he has a sizable down payment. My client also has a great retirement income from being in the military.

Unfortunately, homeowners in the complex are behind on their mandatory HOA dues and the lender uses a threshold of 15% above which they'll not lend. My client has contacted a number of lenders with the same result.

I live in a great neighborhood with a voluntary HOA that is unaffected by such lender prohibitions, but it made me think what the effect of their lending requirement has on neighborhoods with mandatory HOA's. Is it really a way for lenders to protect their assets or is it a way for them to discriminate against the poor?

In a tumultuous real estate market like we have, it is increasingly common to have homeowners in arrears on the dues. In addition, I understand that HOA dues are likely the first place where homeowners can - and do - postpone payment while they wait for their situation to improve. Delay long enough and the homeowner can and will be foreclosed upon by the HOA.

Unfortunately, prohibiting lending in these neighborhoods results in a cascading effect in both home/condo prices and HOA participation rates. Buyers can't purchase because of the lenders practices and HOA participation rates can't improve either. Prices continue to fall accordingly. While the practice can and does affect both low and high priced communities, entry level and poorer communities are hurt most because they constitute a higher fraction of the housing market.

My suggestion: lenders should NOT be allowed to use HOA participation as a criteria in their lending.

In a perfect world, I believe HOA's should be voluntary (or, at least that portion of the dues that supports administrative overhead should be). In my own neighborhood governed by unpaid homeowners, HOA dues pays to maintain common areas and cut grass. The amount of the dues is kept at 10% what mandatory HOA's charge because it goes directly to the bottom line - actual expenses (rather than administrative costs).