Super Lien Solution Calms Creditors

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A bill slated to take effect this October should lessen the considerable angst caused by a controversial Nevada Supreme Court ruling last year. In September 2014, the state’s high court decided that a Home Owner Association (HOA) foreclosure sale for failure to pay HOA fees could take priority over a mortgage and extinguish a first deed of trust. The decision drew the vehement objections of lenders and put Nevada front and center on a hot-button issue still being debated in several states. The new bill, SB 306, is intended to remedy the most divisive portions of the upheld statute.

“Extinguishing property rights is no inconsequential matter,” said Federal Housing Finance Agency (FHFA) general counsel Alfred Pollard during testimony on the new bill before the Nevada State Legislature Judiciary Committee this past April.

The measure, signed into law in May, substantially revises the provisions that govern foreclosures related to HOA liens. The new law changes the type and manner of notice that must be provided to lien holders by an HOA regarding any HOA deficiency and HOA sale, amounts that can lawfully be included in the super-priority amount, and the location of an HOA sale. The measure also provides a 60-day redemption period for the owner of the property and first lien holder following an HOA sale. Presently, there is no redemption period.

With respect to advance notice, the new law requires that the two most important notices concerning the HOA lien and foreclosure sale—the Notice of Default and Election to Sell, and the Notice of Sale—be provided by certified mail to any lien holder. Additionally, the Notice of Default and Election to Sell must specify the exact super-priority amount. Previously, HOAs and collection agents would simply identify the total HOA lien amount due, and lenders and loan servicers were left to guess at the super-priority amount. In many instances, lenders and servicers attempted to calculate on their own the super-priority amount and would tender such payment to the HOAs, only to have the funds rejected as insufficient.

In addition, a first lien holder now has up to five days prior to an HOA sale to satisfy the super-priority amount; meanwhile, the HOA or its agent must record an affidavit indicating that proper notices were sent to the first lien holder. No such requirement previously existed.

The new law also caps the amount of costs and fees that an HOA can levy as part of the super-priority amount at approximately $1,350, and it prohibits attorneys’ fees from being included as part of the super-priority amount.

One case central to last year’s Nevada Supreme Court decision involves a house sold in Las Vegas in 2007 with a mortgage loan for $885,000 originated by Bank of America. The owner defaulted on the loan a year later and Southern Highlands Community Association foreclosed on the property. The association sold the house at auction to an investment firm for $6,000, the amount the homeowner owed in delinquent HOA dues. When Bank of America tried to schedule its own foreclosure auction, the investment firm filed to stop the action, claiming that the mortgage had been extinguished at the point of sale.

The case caught the attention of the FHFA. In order to protect Fannie Mae’s and Freddie Mac’s property rights, the FHFA intervened in two other Nevada cases last year in which an HOA extinguished a mortgage. In December 2014, the FHFA released a statement warning organizations that labeling mortgage loans with super-priority lien status would not push mortgages backed by Fannie Mae and Freddie Mac into secondary position.

Pollard noted in his April testimony in Carson City that the FHFA generally believes the extinguishing of a first mortgage is an inappropriate approach for the collection of past due HOA assessments. He suggested that any HOA notice of owed monies should not only be designed to prompt a unit owner to pay any deficiency, but should also give lenders an opportunity to protect their position by addressing the deficiency if the unit owner does not.

Under the provisions of the new bill, the mortgagee, after receiving timely notice, will have until five days before the foreclosure sale to cure the HOA dues deficiency themselves in order to avoid possibly losing hundreds of thousands of dollars when the HOA extinguishes the first mortgage. The new bill also calls for any HOA notice related to a super-lien to be published in a “public place” such as a newspaper or a county website, and provide that if a payment is made to the HOA for the amount of the dues deficiency no later than five days before the foreclosure sale, then the HOA cannot legally extinguish the first lien.

Pollack expressed concern about the remaining legal entanglements but in testimony called the changes the bill will bring about “prudent.”

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