By Deborah Goonan, Independent American Communities
Some opportunistic Nevada real estate investors and HOA foreclosure attorneys are likely displeased with a recent Opinion filed by Judge Kimberly J. Mueller in the Ninth Circuit Court of Appeals.
Mueller ruled that the Federal Foreclosure Bar overrides Nevada statute’s intent to extinguish a first mortgage as a result of an HOA foreclosure.
The Plaintiff in the case, Alex Berezovsky, had been seeking to “quiet title” to a property he purchased at an HOA foreclosure auction, hoping to eliminate his obligation to pay off a Freddie Mac mortgage on the property.
The Federal Foreclosure Bar prohibits nonconsensual foreclosure of FHFA assets – i.e. first mortgages held by Freddie Mac and, by extension, Fannie Mae.
The lender in this case, Bank of America, N.A., issued the mortgage, and later sold the loan used to purchase the HOA home to Freddie Mac. It was proven in court that attorneys for Garden Terrace HOA, Red Rock Financial Services, LLC, failed to provide notice of foreclosure to the lender. Therefore, Freddie Mac was unable to provide consent to the HOA foreclosure. Such consent, of course, would have been highly unlikely.
Mueller’s Opinion makes it clear that federal law overrides state law with regard to HOA super priority liens.
Additional Legal Reference:
9th Cir. Holds Federal Foreclosure Bar Preempts Nevada HOA Superpriority Statute (Maurice Wutscher LLP)
Good news for homeowners: Nevada investors, foreclosure attorneys have less perverse incentive to initiate swift HOA foreclosures over relatively small debts.
When property values rise, collection law firms working on behalf of HOAs hve figured out that they can beat the lender to the Courthouse, auctioning off homes and condos for paltry sums to recoup purportedly unpaid assessments.
The ability to extinguish liens of first mortgage holders creates windfall equity for real estate investors who purchase HOA properties at foreclosure auctions, often for pennies on the dollar.
Note: Homeowners that own property without a mortgage in Association-Governed communities remain vulnerable to HOA foreclosure abuse, due to their homes’ high equity value.
Public opinion of HOAs, HOA foreclosures, and the HOA super priority lien is overwhelmingly negative
In 2016 and 2017, a group of Nevada Realtors reviewed MLS data and public records, and also conducted public opinion research (with SGS) with HOA foreclosures in Nevada. The results of research are posted online at Nevada’s Homeowners’ Association Super Priority Lien.
According to March 2017 survey results, 45% of respondents had a negative opinion of HOAs, while only 19% had a positive opinion of HOAs. Additionally, 59% of respondents indicated that they think HOAs care more about collecting dues than serving members, and 81% oppose HOA power to foreclose over unpaid dues.
With regard to FHFA’s statement that it will not consent to extinguishing first mortgage interests following HOA foreclosure, 70% of respondents said they oppose the HOA super priority lien.
The report also notes, through research conducted by LIED Real Estate Institute, that HOA foreclosures in Clark and Washoe Counties have contributed collectively to at least $1 billion decrease in home values, due to HOA foreclosure sales at heavily discounted prices. Specifically, LIED research found that HOA foreclosure sales were discounted 42% in Clark County and 90% in Washoe County.
Furthermore, statistics reveal that HOA foreclosure activity has been heavily concentrated in certain Counties and zip codes. The report notes that Red Rock Financial (a division of First Service Residential), one of the defendants in the Berezovsky case, is among several HOA collection agencies with a propensity to add high collection fees to assessment liens, making it difficult for homeowners to catch up with past due payments, and to avoid foreclosure.