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Law360 (October 6, 2020, 3:50 PM EDT) --
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| Amy Sorenson |
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| Kelly Dove |
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| Tanya Lewis |
With such significant personal and financial impacts on borrowers also came significant financial impacts on lenders. While the effects of mortgage defaults were widely reported, lenders also sustained substantial losses as the result of a then little-known Nevada law that permitted homeowners associations, or HOAs, to foreclose on properties with unpaid HOA assessments — wiping out lenders' first position deeds of trust in the process.
The legal effect of a foreclosure of these statutory superpriority HOA liens — amounting to nine months' worth of unpaid HOA assessments, often only a few thousand dollars — on a lender's deed of trust became one of the most hotly litigated issues in the Nevada state and federal courts for more than five years. Ultimately, such HOA super priority lien foreclosures resulted in an estimated $1 billion in lender losses.
As the country is now gripped by the COVID-19 pandemic and its accompanying restrictions on travel and large gatherings, Nevada's economy has once again been hit especially hard. Unfortunately, the economic downturn seems likely to once again result in increased mortgage and HOA assessment defaults in Nevada.
Below, we summarize the history of Nevada's HOA foreclosure litigation over the last decade, discuss 2015 amendments to the HOA foreclosure statutes that provide lenders increased opportunities to protect their secured interest, and hypothesize about the road ahead, outlining actions lenders may want to consider now in preparing for the next wave of potential HOA foreclosures.
The 2008-2009 financial crisis opens the floodgates for Nevada superpriority lien foreclosures.
Before the 2008-2009 financial crisis, Nevada Revised Statutes 116.3116 was a little-known section of Nevada's common interest community laws that allowed a homeowners association to place a lien on a property for that homeowner's unpaid assessments, and foreclose on that interest if they remained unpaid.[1]
As the recession and particularly the housing crisis battered Nevada, property owners became delinquent on their HOA dues on a sweeping scale. Faced with a resulting lack of revenue, many HOAs began for the first time to pursue foreclosures for these unpaid liens. Hundreds, if not thousands, of Nevada properties were sold away from borrowers at HOA foreclosure sales between 2012 and 2015.[2]
Many of the properties sold were purchased by speculators for little more than the amount of the unpaid dues and the foreclosure agent's costs — in most cases less than $5,000 — regardless of the home's fair market value. By 2017, a Nevada Association of Realtors report concluded that more than $1 billion in property values were lost in Clark and Washoe counties as a result of HOA foreclosure sales during this time period.[3]
Lawsuits seek judicial determinations of the effect of these HOA lien foreclosures for years, eventually resulting in an established body of Nevada superpriority lien jurisprudence.
Purchasers at HOA foreclosure sales obtained record title to the properties. But what about the mortgages that remained? Purchasers began filing quiet title lawsuits, claiming that they owned the properties free and clear of the mortgages.
In 2014, the Nevada Supreme Court agreed, holding in SFR Investment Pool v. U.S. Bank that the superpriority amount of the total unpaid assessments took priority over the first deed of trust, extinguishing it.[4]
Extensive litigation followed in Nevada's state and federal courts concerning the validity of the HOA foreclosure statutes and other issues arising from the sales, as well as whether mortgages owned by government-sponsored entities such as Fannie Mae and Freddie Mac could be extinguished by sales under these state laws.
Eventually, courts concluded that mortgages owned by government-sponsored entities were not extinguished by properly conducted HOA foreclosure sales but often ruled non-government-sponsored entity loans were. In other words, as a general rule, a purchaser of a property with a government-sponsored entity-owned deed of trust took title subject to the deed of trust, while a purchaser of a property with a non-government-sponsored entity-owned deed of trust took title free and clear.[5]
Notwithstanding those generalities, lenders did prevail on a number of issues, including voiding sales where the superpriority lien had in fact been previously satisfied, and obtaining a ruling from the U.S. Court of Appeals for the Ninth Circuit that the statute effected an unconstitutional violation of due process, before it was subsequently reinterpreted by the Nevada Supreme Court.
The Nevada Legislature overhauls NRS 116 in 2015 to add lender protections.
Following the Nevada Supreme Court's 2014 SFR v. U.S. Bank decision, the Nevada Legislature substantially amended NRS 116.3116 to add protections for lenders.
Importantly, the amendments require the HOA's default notices to specifically provide the superpriority lien amount so lenders can satisfy that portion of the lien and prevent extinguishment of the deed of trust.[6] Relatedly, the amendments provide that if lenders satisfy the superiority amount at least five days before the sale, and record a satisfaction of that payment with the recorder's office, a subsequent HOA foreclosure sale will not extinguish the lender's first deed of trust.[7]
The amendments also require the association to record an affidavit indicating that they have reviewed a trustee's sale guarantee for the property and identify each holder of a security interest in the property, as well as each address to which the pre-foreclosure notices were mailed.[8]
The amendments include other important modifications as well. For example, a completed HOA foreclosure is now subject to a 60-day right of redemption by the property owner or a holder of a security interest, i.e., the lender, typically through a loan servicer.[9] Relatedly, the statute now allows a lender or loan servicer to record a request with the county recorder to ensure it receives all pre-foreclosure notices for a property.[10]
The economic effects of the COVID-19 pandemic in Nevada will almost certainly result in a new wave of HOA foreclosure activity.
In Clark County, which encompasses all of Las Vegas and the surrounding cities of Henderson and North Las Vegas, approximately 57% of homes are located within HOA or common interest communities.[11] Recent reports indicate that the number of homeowners who have fallen behind on their homeowner dues has grown as a result of the COVID-19 pandemic, and HOAs appear ready to move forward with foreclosures.
Indeed, between March 30 and May 26, approximately 230 notices of default were recorded with the Clark County Recorder, largely by HOAs.[12] While there have been fairly extensive moratoria on residential foreclosures both by state government and voluntarily by lenders, how state restrictions apply to HOAs remains to be seen. As such, HOAs continue to foreclose but the validity of those sales may well be the subject of future litigation.
What can lenders do now to attempt to avoid potential losses?
While it is difficult to predict the long-term effects on Nevada's economy, much of the tourist and entertainment economy seems unlikely to be back to normal anytime soon. Most conventions and gatherings of large groups through January 2021 have been postponed or canceled, and more cancellations beyond that time appear likely.[13]
To help protect against potential losses of secured interests due to potential HOA foreclosures, lenders and servicers may want to consider ensuring they protect their deeds of trust from the adverse effects of foreclosure sales. In addition, lenders should keep in mind that if a borrower defaults on their mortgage, it is likely that the HOA assessments are delinquent as well.
Lenders and servicers should consider setting up systems internally for the identification of and response to HOA notices of default and HOA notices of sale, which include procedures for the prompt escalation for payment of the superpriority lien amounts to protect the deed of trust.
Finally, while the amended statute provides for a right of redemption, it is often simpler and less expensive to satisfy the superpriority lien amount before a sale than to attempt to redeem after. Redemption of a property that has been sold at a completed foreclosure sale is complicated due to the short timelines and required documentation, as well as the fact of a new party or parties with an interest in the property, in addition to the lender(s) and borrower(s).
Lenders who learn that a property subject to their security interest has been sold at an HOA sale should work directly with the foreclosure agent and purchaser to abate the sale and facilitate the redemption process.
While the statute as amended in 2015 provides more opportunities for lenders to protect their security interests from HOA foreclosure sales, lenders and loan servicers should consider establishing or expanding procedures to ensure they have the ability to exercise their rights under the statute and comply with the statute's requirements — such as recording requests for notice on each property, timely paying the superpriority portion of the lien and recording the satisfaction. Traps for the unwary remain as a new wave of HOA foreclosure activity looms in Nevada.
Amy Sorenson and Kelly Dove are partners, and Tanya Lewis is an attorney, at Snell & Wilmer LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] See Nevada Revised Statutes, Chapter 116.3116.
[2] "HOA foreclosures tied to more than $1B in lost Reno, Vegas home values," Reno Gazette-Journal, July 17, 2017, (accessed on September 11, 2020).
[3] "Nevada Homeowners' Superpriority Lien" Report, prepared by the Nevada Association of Realtors, available at: http://hoasuperprioritylien.com/?_ga=2.145263092.1109936101.1599842310-1308596454.1597950422 (accessed on September 11, 2020).
[4] SFR Investments Pool 1 v. U.S. Bank, 130 Nev. 742, 334 P.3d 408 (2014).
[5] See Berezovsky v. Moniz
, 869 F.3d 923, 927 (9thth Cir. 2017); see also Daisy Trust v. Wells Fargo Bank, N.A., 135 Nev. 230 445 P.3d 846 (2019).[6] N.R.S. 116.31162(1)(b)(1)-(5).
[7] N.R.S. 116.31162(1)(b)(3)(I)-(II).
[8] N.R.S. 116.31162(1)(e).
[9] N.R.S. 116.31166(1)-(5).
[10] N.R.S. 116.33168(1).
[11] "Nevada Homeowners' Superpriority Lien" Report, prepared by the Nevada Association of Realtors, available at: http://hoasuperprioritylien.com/?_ga=2.145263092.1109936101.1599842310-1308596454.1597950422 (accessed September 11, 2020).
[12] "Despite Foreclosure Freeze, HOAs Sending Default Notices," Las Vegas Review-Journal, June 11, 2020 (accessed August 29, 2020).
[13] "Events in Las Vegas Pull Plug Amid Coronavirus Pandemic," KTNV-TV (ABC affiliate in Las Vegas), July 28, 2020 (accessed September 11, 2020).
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