Las Vegas Sun

February 25, 2018

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Lawmakers want to pare down HOAs’ power in foreclosure

Lawmakers who say a recent Nevada Supreme Court decision has given homeowners associations too much power to foreclose over unpaid dues are pushing for a last-minute legislative fix, saying the ruling could drag down the recovering market and threaten Nevadans' ability to get federally backed loans.

Changes could come through Republican Assemblyman David Gardner's bill, AB 359, which deals with so-called "super-priority liens" placed on homes by HOAs. The bill has not yet been scheduled for a hearing, but Gardner said lawmakers are actively working on the measure and he expects it will be up for discussion sometime in the final four days of the legislative session.

Real estate agents and mortgage lenders are sounding the alarm about the Supreme Court's September decision, which said that unpaid HOA dues should not only be the first thing paid when a foreclosed home is sold, but that that they can also extinguish a mortgage itself if a bank doesn't address the lien for HOA dues.

That goes further than the how many interpreted the law in the past — as requiring up to nine months of HOA dues and collection costs paid off first when a foreclosed home is sold.

HOA industry representatives support the stronger interpretation. They say the high stakes force banks to take HOAs seriously and pay dues, ensuring responsible HOA members aren't picking up the slack from their delinquent neighbors and the infrastructure, landscaping and public areas of an HOA are maintained.

"If the bankers and realtors succeed in eliminating the super priority lien, the entire burden of unpaid assessments will shift to those owners that do pay while banks continue to strategically delay foreclosure," wrote Norm Rosensteel and Donna Zanetti of the Community Association Institute Legislative Action Committee in an editorial published earlier this week in the Reno Gazette-Journal. "Once again, the homeowners that have worked hard to play by the rules will end up paying the price. It is time to protect homeowners, not predatory lenders."

But real estate agents and banks say the balance of power is too far in the favor of HOAs, and such a situation is a threat to the market. They back AB 359, which would prevent mortgages and other liens from being wiped out in an HOA foreclosure.

Realtors say the Supreme Court ruling has led to expensive homes being foreclosed upon and auctioned for a fraction of their worth because the owners haven't caught up on relatively small HOA dues of often less than $100 a month. When the HOA forecloses and an HOA's super-priority lien cancels a bank's legal claims to the mortgage, the ownership trail becomes murky, the cost of title insurance goes up and the home's resale value drops.

The Federal Housing Finance Agency, which regulates federal lending agencies, including Fannie Mae and Freddie Mac, has already raised concerns about the situation in Nevada. An official from the agency testified on the matter before the Legislature in April, and the agency later issued a statement saying it would aggressively challenge HOAs whose foreclosures wiped out federally backed mortgages.

"Their signal is strong. Their signal is pretty to-the-point," said Keith Lynam, president of the Greater Las Vegas Association of Realtors. "We're such a tumultuous market. It's irresponsible of us not to take it seriously."

Lawmakers have sought to ease the high stakes with SB 306, a bill that aims to give banks and borrowers more warning before their homes go to auction and a mortgage liens are extinguished. That bill is awaiting Gov. Brian Sandoval's signature.

Republican Sen. Becky Harris is backing a bill, AB 240, that creates an intermediate-level solution — one that would require "impound accounts" where lenders store up money that could be withdrawn to pay HOA dues in case of default.

Real estate industry representatives say something needs to be done to avoid a setback in the market.

"We don't need another shot to the stomach," Lynam said. "The Legislature has got to act."

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