Nevada Court Says HOAs Trump Lenders in Foreclosure Disputes
Mortgage lenders, housing investors and homeowners associations in Nevada are in dispute over a court decision that allows HOAs to foreclose on homes to recoup delinquent association dues without having to go through the courts, The Wall Street Journal reported Oct. 14.
In Nevada and about 20 other states, homeowners associations, like lenders, can foreclose on homes to collect past due payments. The court ruling that HOA liens are allowed to get priority over first mortgages means HOAs can auction off a home without the consent of the lender — often for pennies on the dollar—and the first mortgage is extinguished.
The case in question involved a Las Vegas home purchased in 2007 with an $885,000 mortgage originated by Bank of America. The borrower defaulted on the mortgage the following year, and then the Southern Highlands Community Association foreclosed on the home and sold it via auction in September 2012 to investment firm SFR Investments Pool 1 LLC for only $6,000 — the amount the homeowner owed to the HOA.
Bank of America scheduled its own foreclosure sale for December 2012 but SFR filed to stop the sale, arguing that the HOA auction extinguished the $885,000 mortgage.
Bank of America won a lower-court decision, but the state Supreme Court reversed it and sent the case back to the lower court. The justices who supported SFR said that the bank could have stopped the problem by paying the lien itself. Bank of America spokesman Richard Simon said the court’s interpretation that Nevada law doesn’t require HOAs to go through the courts “sacrifices lenders’ and homeowners’ interests, while giving third-party investors an unjustifiable windfall,” the Journal reported.
Lenders noted that HOAs sometimes won’t tell them the amount due or won’t accept payment from the banks.
Critics say the ruling could cause mortgage lenders to lose millions — perhaps even billions — of dollars and potentially force lenders in Nevada to raise interest rates. They want HOAs to foreclose through the court system so they don’t have the ability to wipe out entire mortgages.
If the decision holds, buyers could receive huge windfalls. “This is one of the greatest returns in real estate that I’ve ever seen,” Jay Bloom, a director of investment firm First 100 LLC, which has bought more than 1,000 homes nationwide, told the Journal. Many homes worth hundreds of thousands of dollars have sold for only a few thousand.
TwinRock Partners, an investment-management firm, purchased about 100 homes at Nevada HOA sales in the past two years that it hopes to sell at a huge profit. One example: a home originally purchased for about $300,000 was purchased from the homeowners association for $11,000.
The Journal noted that it is unclear who ultimately will take the losses from homes auctioned off by HOAs since most mortgages are pooled into securities and owned by multiple parties. Investors, as well as Fannie Mae and Freddie Mac, could place blame on servicers for not protecting their interest in these properties. If government-sponsored enterprises can’t recover their money, taxpayers could be the ones on the hook.