The general counsel at the Federal Housing Finance Agency is advising state lawmakers in Nevada about the hazards of super-priority liens.
An $885,000 first mortgage secured by a property located in the Silver State was wiped out when a $6,000 debt owed to a homeowner association was foreclosed.
Nevada law allows HOAs to foreclose on a unit with delinquent association fees using
a non-judicial foreclosure process that gives lenders little or no notice or ability to cure any unpaid HOA assessment amounts due under the priority lien.
Last summer, the
Nevada Supreme Court affirmed the extinguishment of the first lien when the super-priority HOA lien was foreclosed.
FHFA followed up by filing
a federal lawsuit tied to the Nevada foreclosure seeking a determination that the HOA’s foreclosure sale is invalid and contrary to federal law to the extent that it purports to extinguish its property rights.
The passage of Nevada Senate Bill 306 would impact HOA super priority liens.
FHFA General Counsel Alfred M. Pollard
traveled Tuesday to Carson City to pass on his thoughts about the bill to the Nevada State Legislature Judiciary Committee.
The legislation revises
the state’s Uniform Common Interest Ownership Act.
Pollard told the state legislators that although it benefits lien holders to cover some common area expenses on foreclosed properties, the burden becomes too great at some point.
A potential response could be for investors to alter their underwriting policies.
“If the risks to a first lien mortgage increase, then there may be required adjustments in mortgage pricing,” he said. “How to address all these competing issues, including the ability in certain states for associations to move to a foreclosure and extinguish a pre-existing first mortgage, is the subject of this hearing.”
The attorney noted that as amended, SB 306
would improve certain elements of the current statute for lenders.
“SB 306 makes important changes to the law regarding the appropriate exercise of certain lien rights of common interest communities and the relationship to the important property rights of homeowners and lenders,” Pollard stated in a transcript of his prepared statement. “This has been the subject of recent attention due to a decision of the Nevada State Supreme Court.”
Pollard explained that the legislation will help ensure that all interested parties are notified of an upcoming foreclosure in a timely manner while not harming associations’ ability to collect unpaid association fees.
But he warned that some of the bill’s provisions are of great concern to the regulator. He called extinguishment of property rights “no inconsequential matter.”
Pollard warned
that FHFA must consider Nevada super-priority liens both for the legal issues involved and the underwriting standards that need to apply in states like Nevada.
“While the bill improves parts of the current statute, provisions that purport to extinguish first security interests of lenders are of great concern to FHFA,” Pollard stated. “While I am keenly aware of the concerns of common interest associations, the remedy contained in the law remains very controversial and, in my mind, disproportionate to the goal and it will give pause to lenders doing business in such jurisdictions.”
