BY SVIATLANA LIASHCHYNA
as seen in Issue 1-32 of the a360inc Compliance Update
Recently, the mortgage industry has seen an uptick in litigation and discussions regarding HOA super-priority lien foreclosures and their hidden threats. Currently, most cases related to this topic are filed in the 9th Circuit District due to the court’s decision in Bourne Valley Court Tr. v. Wells Fargo Bank, NA, 832 F.3d 1154, where the constitutionality of the state HOA lien foreclosure notice requirements included in NRS 116.3116 was raised. The decision was questioned, and the Nevada Supreme Court accepted a certified question about the interpretation of NRS 116.3116. On August 2, 2018, the Nevada Supreme Court, to answer the question, ruled that an HOA is required to give notice to all subordinate interest holders even when such persons or entities did not request a notice. (SFR Invs. Pool 1, LLC v. Bank of N.Y. Mellon, No. 72931, 2018 Nev. LEXIS 63 (Aug. 2, 2018))
The Nevada court decisions raised concerns amongst mortgage lenders that they may lose their interest in the secured property in the face of the HOA lien foreclosure.
In 2008 the Uniform Common Interest Ownership Act was introduced; this provided for formation, management, and termination of any common interest community, including condominiums, planned communities, and real estate cooperatives. The act was amended in 2014 to clarify the lien priority rules after a series of conflicting court decisions. More than 20 states implemented the priority HOA lien statutes. Nevada and several other states specifically adopted the model statutes in their entirety, including requirements related to the HOA lien priority.
Until recently, these types of state statutes were interpreted to provide only “payment priority” for HOA liens. This means that the HOA is paid first after a foreclosure sale, but other liens are not extinguished. Recently, however, some courts (including the Nevada Supreme Court) have interpreted their HOA lien statutes differently. These courts have construed their jurisdictions' statutes as giving HOA liens a super priority status. This means that “[a]ny liens that are unsatisfied by the foreclosure-sale proceeds are extinguished, and the foreclosure-sale purchaser acquires free and clear title.” See Chase Plaza Condo. Ass'n, Inc. v. JPMorgan Chase Bank, N.A., 98 A.3d 166, 172 (D.C. 2014); Twenty Eleven, LLC v. Botelho, 127 A.3d 897 (R.I. 2015); Summerhill Vill. Homeowners Ass'n v. Roughley, 289 P.3d 645 (Wash. Ct. App. 2012); BAC Home Loans Servicing, LP v. Fulbright, 328 P.3d 895, 896 (Wash. 2014); G&P Inv. Enters., LLC v. Wells Fargo Bank, N.A., 199 F. Supp. 3d 1266, 1267 (D. Nev. 2016).
It should be noted that FHFA and HUD successfully argued that 12 USCS 4617(j)(3) preempted the HOA state law requirements and that the HOA’s superior lien position that extinguishes other interests could harm taxpayers. See Saticoy Bay LLC Series 9641 v. Fannie Mae, 417 P.3d 363 (Nev. 2018). This means that the government-backed and insured loans are somewhat protected.
One of the major challenges that the servicers face with HOA liens is that the HOA dues are difficult to identify and monitor. The servicers often do not have sufficient and reliable information about the status of HOA dues; therefore, the services often rely on their attorneys to advise them of any potential issues that might cause significant losses or process delays.
Firms should consider implementing the following controls to ensure that they adequately assist their clients with HOA-related matters:
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