Inside Mortgage Finance: Recent HOA Super Lien Rulings in Nevada Favor Mortgage Industry
Recent rulings in Nevada favor the mortgage industry when it comes to super-liens imposed by homeowners associations on loans in foreclosure.
Twenty-two states have super-lien laws that allow HOAs to take priority over first mortgages and foreclose the property to collect up to six months of unpaid fees. In 2014, the Nevada Supreme Court ruled that an HOA could extinguish a senior mortgage.
But the Ninth Circuit Court recently ruled that an HOA foreclosure sale extinguishing the first deed of trust is unconstitutional. In the case of Bourne Valley Trust v. Wells Fargo Bank, the court ruled that Bourne Valley seeking to purchase the property at an HOA foreclosure sale violated the first-lien holder’s due process rights.
Attorneys at Bradley Arant Boult Cummings said, “The tide may finally be turning in Nevada.” They noted that the court also found that there was sufficient state action to maintain a constitutional due process challenge, even though the HOA argued that a facial challenge to NRS 116 (Common-Interest Ownership) could not be maintained because there was no state action.
“This holding will affect many lawsuits in federal courts seated in Nevada, and may affect hun-dreds of lawsuits in Nevada state courts between mortgage lenders and investors who have bought HOA-foreclosed properties,” noted attorneys with Ballard Spahr’s mortgage banking group.
Another decision last week, this time from the Nevada Supreme Court, was made in favor of first-lien holders. In Stone Hollow Avenue Trust v. Bank of America, the court held that a mortgagee’s tender to the HOA of the super-priority amount of the HOA’s lien extinguishes the super-priority lien, even if the HOA wrongfully rejects the tender, said the law firm.
“By effectively reversing itself in Stone Hollow, the Nevada Supreme Court sent a clear signal to lower courts that the validity of these HOA foreclosure sales, where properties were usually sold for less than 10 percent of their fair market value, is tenuous in many cases,” said Bradley Arant Boult Cummings.
The Mortgage Bankers Association and other industry groups argue that HOAs should not be granted super-lien priority. “Private liens recorded after origination of a first-lien mortgage/deed of trust should not be able to move ahead of the first position mortgagee in foreclosure priority, nor be able to extinguish the mortgage when that private lien is unsatisfied,” said the MBA.
Daniel Goodwin, director of mortgage policy at the Structured Finance Industry Group, told Inside MBS & ABS that his group, like others, supports the concept of “first in time, first in right.”
He said this is so any private lien secured after origination of another private lien shouldn’t take priority over that deed of trust, or have the ability to extinguish it. “We just think it’s destabilizing and contrary to the heart and nature of secured lending. And we also think it ends up ultimately pushing up the cost of consumer credit if we start to see this happen in a lot of jurisdictions,” he said.
The SFIG official said he would prefer to see adoption of a national standard. “It’s hard for me to read too much into the local angles at this point,” Goodwin said.
The article was originally published in Inside Mortgage Finance.