Alfred M. Pollard, general counsel for the Federal Housing Finance Agency (FHFA), testified on Tuesday before the Nevada State Legislature Judiciary Committee on so-called "super-priority liens" and on recently introduced legislation to amend the way the foreclosure process is handled with regards to a homeowner association (HOA)'s lien.
The subject of super-priority liens has been a hot one in several states, but particularly in Nevada, where the state supreme court made a controversial ruling last September that gave HOAs the authority to foreclose on a home and extinguish a mortgage non-judicially, a ruling that was subsequently appealed by lenders.
Last month, a bill was introduced in the Nevada State Senate (SB 306) that proposed to revise the provisions that govern the foreclosure of an HOA's lien, "requiring the trustee under a deed of trust securing real property to provide a homeowners’ association certain notice concerning the Foreclosure Mediation Program under certain circumstances; and providing other matters properly relating thereto."
Pollard told the committee on Wednesday that while section 1 of SB 306 places "necessary limits" on what an HOA may seek to recover, "Section 2 makes the most important contribution to certainty for all parties." Section 2 of the bill creates safeguards, including notice to both the unit owner and the first lien holder of a delinquent assessment that an HOA intends to exercise the "super-priority lien" status and extinguish the first mortgage by foreclosing on the home. Section 2 of the bill requires an HOA to provide the mortgagee with a formal statement of the amount of the deficiency along with a breakdown of all charges that will allow the mortgagee to address the lien payment. Pollard - noting that he believed the extinguishing of a first mortgage is an inappropriate approach for an HOA assessment - said the notice may spur the unit owner to pay the HOA deficiency, but most importantly, it gives mortgagees a chance to protect their position by addressing the deficiency if the unit owner does not. Under the provisions of the proposed bill, the mortgagee (after receiving timely notice) would have until five days before the foreclosure sale to cure the HOA dues deficiency themselves to avoid possibly losing hundreds of thousands of dollars when the HOA extinguishes the first mortgage.
In his testimony, Pollard covered the remaining sections of SB 306, which call for the notice 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. Pollard called this a "prudent approach" in his testimony.
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 an auction in September 2012 to SFR Investments Pool 1 for $6,000 – the amount the homeowner owed in delinquent HOA dues. When Bank of America tried to schedule its own foreclosure auction on the house the following December, SFR Investments made a filing to stop Bank of America's foreclosure auction, claiming that the mortgage had been extinguished when SFR bought the house in September
In order to protect Fannie Mae's and Freddie Mac's property rights, FHFA intervened in two Nevada cases in which an HOA extinguished a mortgage last year.
In December, FHFA released a statement warning organizations that label mortgage loans with super-priority lien status that such loans will not push mortgages backed by Fannie Mae and Freddie Mac into the secondary position. The warning was aimed mainly at energy retrofit financing programs and HOAs that attach super-priority lien status to mortgages because of the risk they pose to taxpayers while Fannie Mae and Freddie Mac are under FHFA's conservatorship.
"Extinguishing property rights is no inconsequential matter," Pollard said in his testimony. "FHFA, which operates under federal law addressing such matters, must consider this as Fannie Mae and Freddie Mac review not only the legal issues involved, but as well the underwriting standards that apply in states that maintain such potential extraordinary remedies. FHFA has an obligation to protect Fannie Mae's and Freddie Mac's rights. By way of summary, FHFA does find that most of the provisions of SB 306 improve the situation for lenders and secondary market participants in Nevada and support common interest communities, while we continue to have concerns with other sections of the existing law and practices under that law."