Nevada HOA Super Liens Can't Extinguish a First Position Mortgage

The U.S. Court of Appeals for the Ninth Circuit has recently held that a super priority lien held by a homeowners association cannot constitutionally extinguish a mortgagee's first priority mortgage on a property in a non-judicial foreclosure action. The decision, which was made in a 2-1 vote, overturns the Nevada Supreme Court's 2014 decision to allow super liens to supersede a lender's first priority mortgage, as a matter of lien priority. The holding by the Ninth Circuit will impact numerous lawsuits in Nevada's courts between lenders and investors who have purchased HOA-foreclosed properties.

The initial 2014 ruling by the Nevada Supreme Court had received great criticism from lenders. The Supreme Court's ruling made it so that HOAs could supersede mortgage lenders' first position liens on both institutionally originated and seller-financed mortgage notes when borrowers went delinquent on their HOA fees.It gave HOAs the right to foreclose on such properties and auction off the title, without having to involve the court or lender in the process. In auctioning off the house, the loan owned on the mortgage note would be eliminated.

This ruling was a victory for the real estate investment group SFR Investments Pool 1, which had foreclosed on a super lien with a $6,000 balance. The group argued that the foreclosure extinguished a note debt of $885,000 on the property that was held as a first deed of trust by U.S. Bank. The Court siding with SFR spelled trouble for the real estate market, as lenders would lose millions in security interests. The law made it difficult for banks to protect their investments, and opponents of the law argued it would hurt homebuilding and resales.

A portion of the state's laws that the Nevada Supreme Court hadn't addressed was whether purported junior lienholders, including mortgagees, were required to be notified by the HOA in the event of a super lien foreclosure. Under an older Nevada law, HOAs were only required to notify junior lienholders if they requested to be notified. The law was revised in 2015 by the Nevada state legislature, which required all junior lienholders to be notified of foreclosure.

The case the Ninth Circuit was dealing with involved the older version of the law that did not make notice of foreclosure mandatory to junior lienholders. The Ninth Circuit ruled this as a violation of the Constitution.