HOA ruling puts foreclosing banks on notice

For many Southern Nevadans slammed by the recession, homeownership was transformed from a dream come true to a Sisyphean nightmare.

Paying the mortgage became a boulder homeowners could no longer roll up the hill. A loss of work meant getting behind on mortgage payments and maintenance fees owed to neighborhood homeowners associations. Legions of Las Vegans lost their life’s greatest investment to banks that held their mortgages.

What happened next frustrated just about everyone involved. In many cases, banks piled up mortgages and parked the properties. Months and even years passed.

Meanwhile, all too often residents of HOA communities found themselves living next to shuttered homes that were poorly maintained. Many banks simply refused to keep up with the monthly HOA fees.

A decision Sept. 18 by the state Supreme Court might keep that from happening again. In an important but little-noticed decision, the high court ruled that a super priority lien held by a homeowners association can set aside a first deed of trust on a property if the monthly dues aren’t kept up.

While the decision created a big score for a group of real estate speculators who bought the late-dues liens, bet the court would rule in their favor, and wound up acquiring homes for a fraction of their mortgage notes right out from under the banks, a bigger message was sent to HOA communities. They’re also a substantial player.

It wasn’t a one-sided legal victory. The court defined nine months of dues as the amount that could be moved against. It also made it clear that HOA penalties rising from disputes don’t qualify for super priority status.

But if you sign on to become part of an HOA, it would be wise to take the responsibility seriously. That goes for the banks that move to foreclose on properties, attorneys say.

In the court case, a group of real estate investors in 2012 purchased a super priority lien on a property in Southern Highlands with $6,000 in outstanding HOA assessments and a U.S. Bank mortgage of $885,000. The bank had declined to pay HOA assessments for four years.

The bank could have remedied the issue by paying the lien, the supreme court surmised, but instead argued that it held a priority position.

In its filings before the court, the bank’s attorneys argued that a ruling against it would unjustly reward speculators and cause financial institutions to rethink lending in Nevada and consider charging higher interest to offset its risk.

The court didn’t buy it, offering, “The inequity (the bank) decries is thus of its own making.”

An attorney for the real estate investors, Diana S. Cline of Howard Kim &Associates, says the decision hardly spells doom for the state’s mortgage lending industry. Instead, it cuts through the legal fog that has surrounded HOA assessments for years. Banks can always compel homebuyers to set aside an HOA escrow account.

An HOA can’t just snap up someone’s home when they get behind on assessment dues. But, Cline says, when the bank takes possession of the property through foreclosure, it also must accept responsibility for the ancillary costs and fees associated with the property.

Although the court’s ruling clarifies an aspect of legislation first adopted in 1991, it remained divided on whether the best legal path for such liens was in a judicial or nonjudicial setting.

Attorney Terry Coffing, whose partners at Marquis &Auerbach have many HOA clients but weren’t involved in the lawsuit before the Supreme Court, called the court’s view, “a bold decision” when nine months of HOA assessments can trump mortgages worth hundreds of thousands.

“A bunch of people just got rich, and a bunch of banks just took it in the shorts,” Coffing says. “But the banks created this problem. The banks made a business, monetary decision that they were going to let HOA fees rack up and accumulate.”

Coffing says he expects banks will continue to loan as usual, but some might compel homebuyers to set aside nine months of assessment fees in an account.

While those real estate speculators made a bundle, the rest of the players should benefit from the clarity the court just provided.

JJohn L. Smith’s column appears Sunday, Tuesday, Wednesday, Friday and Saturday. Email him at Smith@reviewjournal.com or call 702-383-0295.