Several mortgage lenders have asked the Nevada Supreme Court to reverse a decision it made in September that a homeowners association's (HOA) super priority lien can extinguish a first deed of trust nonjudicially on a residential property.
Last month's ruling, which was issued by only a 4-3 majority, has only caused more debate in Nevada between mortgage lenders and housing investors over whether or not HOAs should have the right to extinguish a lender's mortgage on a foreclosed property without going through the courts.
The ruling allows HOAs to legally foreclose on a property that is delinquent on dues payments and auction off the title to the property without the involvement of the lender or courts. The sale of the title by the HOA extinguishes the first mortgage, an action that the lenders argue is not in the best interest of either homeowners and lenders. Lenders contend that HOAs should have to go through courts when initiating a foreclosure on a residential property and they should not have the power to extinguish mortgages nonjudicially.
Lenders view last month's court decision in Nevada as an industry-wide concern that could spell disaster for the mortgage industry as a whole, especially if it sets a precedent for other states.
"By requiring an HOA to bring a judicial foreclosure action in order to extinguish a preexisting deed of trust, the Legislature accorded important protections both to lenders—whose significant property interests an HOA foreclosure puts in jeopardy—and to homeowners—who face the prospect of losing their homes," the appeal filed earlier this week said. "By dispensing with the judicial foreclosure requirement, the majority opinion fatally undermines both protections."
One case central to the 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.
"The court’s interpretation that Nevada law does not require judicial foreclosure sacrifices lenders' and homeowners' interests, while giving third-party investors an unjustifiable windfall," a Bank of America spokesman said. "For example, the opinion endangers the right of redemption and other protections for homeowners, as well as allowing a lender’s security in substantial loans to be taken without due process."
Bank of America litigated the case as the servicer of the mortgage, filing suit on behalf of U.S. Bank, the trustee for the mortgage's securities. Bank of America won a lower court decision but the Nevada Supreme Court reversed that ruling on September 18, saying that the lender could have stepped in and paid the lien. Lenders told the court that sometimes HOAs will not reveal the amount owed in delinquent dues and sometimes will not accept payment from the lenders.