guest blog by Deborah Goonan
The latest controversy in HOA Land: in Nevada – and by extension 21 other states with similar legal status – the HOA super priority lien can now extinguish an outstanding mortgage backed by the Federal Housing Finance Agency (FHFA).
It’s ironic, because when CAI was founded back in 1973, it was with cooperation from FHA. Their agreement to back mortgages in common interest developments was the glue that held disparate CAI interests together.
But after years of mortgage deregulation, followed by out-of-control real estate price increases, and the ensuing mortgage default crisis, things have certainly changed.
Now it’s very difficult to obtain mortgage financing for condos, and not that easy for detached single family homes either. In the 22 states that have enacted priority lien status for HOA assessment liens, mortgage financing just became a great deal more difficult to obtain.
In early December, CAI boasted about its Nevada Supreme Court victory, where the court ruled that the FHFA backed-mortgage lien is extinguished following the HOA’s non-judicial foreclosure to collect unpaid assessments.
But a few weeks later, FHFA has fired back, vowing to fight in court to invalidate HOA foreclosures that wipe out taxpayer-financed guaranteed mortgages.
CAI claims that FHFA is “bailing out mortgage servicers” and vows to fight for the rights of HOAs to maintain super priority lien status. CAI’s statement presents the usual argument that the owners that can afford to pay assessments have to cover the costs for owners who cannot or will not pay.
But at issue for FHFA is the fact that HOA foreclosures can now wipe out entire mortgage interests, at dollar amounts that far exceed state super-priority lien allowances of 6, 9, or 12 months unpaid assessments.
The super-priority lien, CAI argues, is a means to motivate mortgage servicers to either speed up the foreclosure process or pay the HOA’s lien prior to or at its assessment foreclosure sale.
It is interesting to note that the Nevada Supreme Court was split 4-3 on whether a judicial foreclosure is necessary in an attempt to wipe out the mortgage lien, citing due process rights to redemption for owners and mortgage lien holders.
It seems clear that FHFA will not sit idly by, allowing HOAs to beat them to foreclosure and wipe out mortgage interests. FHFA has filed action in Nevada Federal court because, in its own words, it “has an obligation to protect Fannie Mae’s and Freddie Mac’s rights, and will aggressively do so by bringing actions to void foreclosures that purport to extinguish Enterprise property interests in a manner that contravenes federal law.”
Will FHFA challenges lead to statutory mandate of judicial (vs. non-judicial) foreclosure of HOA liens? Will increased legal costs and lending risks lead to higher costs for borrowers, including escrow of 6 – 12 months assessment fees? Or will FHFA push for elimination of HOA super priority lien status? These are interesting times.
Given the history of more than a few HOA attorneys to abuse the foreclosure process in order to evict owners and acquire homes with high equity (little to no mortgage balance owed) at the HOA’s auction sale, the recent NV Supreme Court decision is unsettling, to say the least. If first mortgages can be wiped out following HOA foreclosure, doesn’t that create additional moral hazards?
CAI-HOA corporate interests will duke it out in court with FHFA. And while HOA homeowners may “win” the relatively small battle for collecting a portion of unpaid assessments upon mortgage foreclosure, they will probably lose the war for preserving property values, if homes are allowed to sell at HOA auctions for pennies on the dollar, or if FHFA pulls the plug on favorable financing terms.