The anxiety filled wait is over as the Nevada Supreme Court has decided that when HOAs foreclose on their 9-month HOA superpriority lien, first deeds of trust are wiped out and the buyer at the HOA lien sale takes the property free and clear of all liens junior to the superpriority lien. This is the case even if the first deed of trust was recorded before the HOA dues became delinquent. Banks having first trust deeds on properties in Nevada where an HOA has foreclosed on its superpriority lien have just taken a hit which may amount to hundreds of millions of dollars of vanishing security for their Nevada loan portfolios.
HOA liens are split into two pieces. The last 9 months of dues which accrue is the superpriority piece while the remainder of the unpaid dues which are contained in the HOA lien are subordinate to a first deed of trust. HOAs record their notice of default and notice of sales under timing requirements which makes it a virtual certainty that at least 9 months of dues are contained within the HOA lien. While the banks have claimed that these 9 months of dues only should be treated as a payment priority upon foreclose by the first trust deed holder, the Supreme Court disagreed and held that the statute created a true priority. The Court relied on official comments to the Uniform Common Interest Ownership Act adopted in Nevada in 1991 and on an advisory opinion issued by the Nevada Real Estate Division to support its ruling. Much of the opinion was devoted to the claim by the bank that the HOA had to foreclose judicially on the superpriority portion of the lien since the banks were being deprived of their due process rights by not getting proper notice of the nature and amount of the superpriority lien. The Court refuted this position by stating that the bank should have been more diligent in discovering this information since it was readily available to it.
The banks are now forecasting doom and gloom to our recovering real estate market and are claiming that credit lending will be much tighter in Nevada on any properties on which there are CCRs administered by an HOA. However, the steps for the banks to protect themselves are simple. Impound 9 months’ worth of dues or simply pay the 9 months of dues to the HOA/foreclosure trustee if a Notice of Default is recorded. The other prediction coming from the banks is that they will now be suing homeowners on the unpaid mortgages after HOA sales and this will create further depression of the economy and increased bankruptcy filings. That certainly seems possible since the banks will not just write-off the unpaid debt.
Finally, this was a 4-3 decision by the court. The three dissenting Justices made a very cogent argument that a judicial foreclosure is required on the superpriority portion of the HOA lien. They agreed that the bank was not provided adequate notice as to the nature or amount of the superpriority piece. HOAs typically do not delineate the amounts of the two pieces in their lien, notice of default or notice of sale. The bank is taking another shot and filed a Motion for Rehearing on Oct. 6 solely on this issue. In fact, rumor has it that if the Nevada Supreme Court denies the Motion for Rehearing, the bank may petition the US Supreme Court to review the case. The bank’s position still has a pulse, but their condition is extremely critical.
For anyone interested in reading the Court’s decision or the Motion for Rehearing, you can find it on the Nevada Supreme Court’s website at: SFR Investments Pool 1, LLC vs. U.S. Bank, Case #63078
PRACTICE POINTER: HOA’s can be very tricky to navigate. Don’t take on this battle alone. Our Real Estate Attorneys are skilled at addressing the issues that revolve around the Home Owners Association and have extensive experience with legal proceedings that evolved from disputes within the HOA.