Monthly Archives: December 2014

A Cautionary Tale – Beware the Nevada Homeowners Association

Lenders who fail to pay delinquent Homeowners Association (“HOA”) dues and fees risk losing their collateral. That was the lesson the Nevada Supreme Court taught a lender who relied on the presumption that the HOA’s lien established only a payment priority between the lender and the HOA in SFR Investments Pool 1, LLC, a Nevada limited liability company v. U.S. Bank, a National Association as Trustee for the Certificate Holders of the Banc of America Mortgage Pass-Through Certificates, Series 2008-A, 130 Nev. Advance Opinion 75 (September 18, 2014) (the “SFR Case”). Prior to the decision of the Nevada Supreme Court in the SFR Case, it was generally accepted that the HOA’s foreclosure extinguished the borrower’s title and interest in the property; however, the issue of whether the lien of the first priority deed of trust was also extinguished had not been determined.

The Decision In SFR


The fact pattern in the SFR Case presented a typical non-performing residential mortgage loan scenario. The homeowners defaulted under their loan and also failed to pay their HOA dues.

Both the HOA and the lender initiated separate trustee’s sale proceedings. The lender took no action to pay the delinquent amounts owed to the HOA. The HOA completed their sale first. SFR Investments Pool 1, LLC (“SFR”) was the successful bidder at the HOA’s trustee’s sale. Thereafter, it received and recorded a Trustee’s Deed Upon Sale reciting compliance with all applicable notice requirements.

Days before the lender’s trustee’s sale, SFR filed suit for quiet title and to enjoin the sale. SFR contended that the foreclosure of the HOA lien by power of sale extinguished the lien of the lender’s first priority deed of trust and vested clear title in SFR. Therefore, the lender had nothing to foreclose.

The Nevada Supreme Court agreed.

The Court held that Nevada’s version of the Uniform Common Interest Ownership Act of 1982 1 (the “Nevada HOA Act”) provides HOAs with a “superpriority” lien. The “superpriority” portion of the lien consists of maintenance and nuisance abatement charges and the last 9 months of unpaid assessments for common expenses (HOA dues) 2. This “superpriority” portion is senior to the lien of a first priority deed of trust. The remainder, the HOA’s “subpriority” lien, consisting of all other HOA fees or assessments, is subordinate to the lien of the first priority deed of trust.

The Court also found that the Nevada HOA Act permits an HOA to foreclose both its “superpriority” and “subpriority” liens by non-judicial foreclosure, subject to the special notice requirements and protections provided for in the Nevada HOA Act.

The argument by the lender that its due process rights were violated by the non-judicial foreclosure was rejected by the Court. The Court also quickly dispensed with the lender’s argument that the “mortgage savings clause” in the Covenants Conditions and Restrictions (CC&Rs) subordinated the HOA lien to the lien of the first priority deed of trust, holding that the “mortgage savings clause” was invalid because the Nevada HOA Act did not allow for waiver or modification of its provisions related to liens.

The overall tone of the Court in the opinion was that the lender, by “sitting on its hands,” created its own inequity. The lender could have taken steps to protect its own interests by requesting that it be provided with HOA notices of default and sale, escrowing the HOA dues and fees or paying off the HOA lien.

Certain arguments and issues were not presented or addressed in the SFR Case. The Court did not address the effect of an improperly noticed HOA non-judicial foreclosure sale and/or if improper notice renders such sale invalid. The result in the case might also have been different had the lender requested the amount to pay off the lien from the HOA with either no response from the HOA or a refusal by the HOA to provide the information or accept payment. HOAs have been known to assert that they are not required to provide a lien release amount and/or allow a lender to tender payment.

The commercial reasonableness of the HOA sale also did not present itself in the SFR Case. The typical fact pattern occurring in these HOA foreclosure sale scenarios is that an investor group will acquire the property for a very low price – between $5,000 and $10,000 – a fraction of the fair market value.

The Federal Court Weighs In


Shortly after the decision of the Nevada Supreme Court in the SFR Case, the United States District Court for the District of Nevada addressed the HOA lien priority issue in a case involving a residential mortgage loan insured by HUD through the Single Family Mortgage Insurance Program (the “FHA”) 3. The District Court held that the foreclosure of an HOA’s lien did not extinguish the lien of the first priority deed of trust securing an FHA insured loan. Federal, not state, law applied in cases involving FHA insured mortgages “to assure the protection of the federal program against loss, state law to the contrary notwithstanding 4.”

When a mortgage is insured by a federal agency under the FHA insurance program, state laws cannot operate to undermine the federal agency’s ability to obtain title after foreclosure and resell the property 5. An HOA would generally be able to conduct a foreclosure pursuant to the Nevada HOA Act that would extinguish the first priority deed of trust, however such a foreclosure in the case of an FHA insured loan would “operate[ ] to impede or condition the implementation of federal policies and programs” and “must yield under the supremacy clause of the Constitution to the interests of the federal government.” 6 Therefore, the HOA’s foreclosure was invalid under the United States Constitution and did not extinguish the lien of the first priority deed of trust securing the FHA insured mortgage loan.

This decision is at the trial court level and may not be cited as controlling, although it may be cited in future cases as persuasive. It should not be relied upon by lenders as a basis for not taking steps (see discussion below) to protect against an HOA foreclosure. It is unknown if the Nevada Federal Courts would extend the reasoning in this case to loans held by Freddie Mac or Fannie Mae.

Implications & Protective Measures


The decision in the SFR Case has implications for both borrowers and residential mortgage lenders in Nevada. Lenders left with large unsecured loans will look to borrowers to collect the large deficiency. Underwriting and structuring of residential mortgage loans in Nevada will also need to be carefully reviewed by lenders.

It is highly recommended that lenders participating in residential lending in Nevada take additional steps to protect their security for loans secured by property in common interest ownership developments.

Lenders should seriously consider escrowing HOA dues and/or assessments for all new loans of this type. At the time of origination the lender should record a Request for Common Interest Community Association & Homeowner’s Association: (1) Notices of Default and Notices of Sale; (2) Notices of Delinquent Assessments; (3) Notices of Delinquent Maintenance and Nuisance Abatement Charges; and (4) Request for Duplicate Statements. A Notice to Common Interest Community Association of Mortgage Lien with Notification of Contact Information Pursuant to NRS 116.310312, Request for Notices of Default and Notices of Sale Pursuant to NRS 116.31168 & Request for Copies of Billing Statements and Invoices should also be sent directly to the HOA. It is also recommended that lenders verify on a quarterly basis that all HOA dues, fees and assessments are paid current.

For existing residential mortgage loans of this type, it is strongly recommended that the two forms be completed, sent and recorded and that the lender verify on a quarterly basis that all HOA dues, fees and assessments are paid current. Depending on the borrower’s payment and performance history, escrowing common interest dues and assessments should also be considered.

In the case of a default under this type of residential mortgage loan, the lender should immediately take the forgoing steps to protect its interests if it has not already done so. Additionally, the lender should contact the HOA to verify if the borrower is current. A protective advance should be made to cure any delinquencies and the lender should take the steps necessary to ensure the dues are kept current until the borrower cures or the lender completes its foreclosure.

Future Developments?


The issues surrounding, and the implications of, the decision in the SFR Case are far from resolved. The next bi-annual session of the Nevada Legislature commences on February 2, 2015. Various groups are already lobbying for legislation to modify the provisions of the Nevada HOA Act to provide lenders with additional protections from the foreclosure of an HOA lien. As noted above, there are also unresolved issues not addressed in the SFR Case, a fact which is highlighted by the decision of the United States District Court for the District of Nevada discussed in this article. The decision in the SFR Case is the first step in addressing one of the many issues confronting residential mortgage lenders since the housing crisis.

Notes:

  1. Chapter 116 of Nevada Revised Statutes
  2. If federal regulations adopted by the Hederal Home Loan Mortgage Corporation or the Federal National Mortgage Association required a shorter period of priority for the lien, the period during which the HOA lein is prior to the first priority deed of trust muyst be determined in accordance with those federal regulations, the period of priority for the lien must not be less than the 6 months immediately preceding institution of an action to enforce the lien
  3. Washington & Sandhill Homeowner’s Association v. Bank of America and HUD, 2014 WL 4798565 (U.S. District Court D. Nevada 2014). This decision was issued on September 25, 2014.
  4. Citing United States v. Stadium Apartments, Inc., 425 F.2c 358, 362 (9th Cir. 1970); United States v. View Crest Garden Apartments, Inc., 268 F.2d 380, 383 (9th Cir. 1959); and United States v. Victory Highway Vill., Inc., 662 F.2d 488, 497 (8th Cir. 1981).
  5. Citing Rust v. Johnson, 597 F.2d 174, 179 (9th Cir. 1979)
  6. Citing Rust, F.2d. at 179.