HOA Foreclosures Leave Banks Empty-Handed

October 16, 2014

A recent court decision in Nevada has put mortgage lenders and housing associations at odds over the sale of foreclosures in a case that could have implications nationwide, The Wall Street Journal reports.

The tension stems from homeowner associations who put liens on properties when home owners stop paying their HOA dues. Homeowner associations, similar to lenders, can foreclose on homes to recoup delinquent payments. Nevada, as well as 20 other states, has laws giving HOA liens priority over first mortgages. That allows HOAs to put a home up for auction and sell it without the mortgage lender's approval, eliminating the first mortgage and then allowing an investor to secure the title of the home. Because HOAs are mostly motivated to recoup the delinquent association fees, the homes they put up for auction — many of which are worth hundreds of thousands of dollars — are being sold for just a fraction of the cost.

The Mortgage Bankers Association has argued in court that "mortgage lenders stand to lose millions — perhaps even billions — of dollars in security interests." HOAs should have to foreclose through the court system and shouldn't be allowed to wipe away entire mortgages, MBA and other lenders argue.

But in September, the Nevada Supreme Court overturned a lower court's decision and said HOAs have the right to foreclose and eliminate the first mortgage.

The case stems from the sale of a Las Vegas home that had an $885,000 mortgage originated by Bank of America. The home owner defaulted, and the Southern Highlands Community Association foreclosed on the home. The home sold at auction in September 2012 to SFR Investments Pool 1 LLC, which paid $6,000 — the amount owed to the HOA. Bank of America tried to schedule its own foreclosure sale on the property in December 2012, but SFR stopped the sale, saying its purchase of the home erased the $885,000 outstanding mortgage balance.

If the decision stands, investors see this as a perfect opportunity to cash in on heavily discounted properties.

"This is one of the greatest returns in real estate that I've ever seen," says Jay Bloom, director of investment firm First 100 LLC, which has purchased more than 1,000 homes in states such as Nevada and Washington.

David Stevens, president of MBA, says if the decision stands, banks will have to take that risk into account and even possibly raise mortgage rates in Nevada.

The Federal Housing Finance Agency also says it's concerned about the court's decision, since it would prevent Fannie Mae and Freddie Mac from recovering money on their foreclosed properties in Nevada.

"FHFA is concerned with the decision and is reviewing its significant implications for housing finance," a spokesman for FHFA said in a statement.

Source: “Foreclosure Dispute Pits Mortgage Lenders vs. Investors,” The Wall Street Journal (Oct. 14, 2014)