Buying a HOA foreclosure? Here are a few things to watch out for...

There are a number of bases on which lenders can defend a claim by the HOA or third party purchasers that the HOA lien extinguished a first priority deed of trust.
  • If the secured loan is an FHA loan, Federal Courts have held that Nevada law cannot be interpreted to extinguish the deed of trust. In Washington & Sandhill Homeowners Assoc. v. Bank of Am. N.A. et al., No. 13-cv-01845-GMN-GWF (D. Nev. Sept. 25, 2014), an HOA, relying on its super-priority lien, foreclosed on a property that was subject to a mortgage insured by the federal Department of Housing and Urban Development (HUD) pursuant to its Single Family Mortgage Insurance Program (SFMI Program). The federal district court found that federal law, not state law, governs federally insured mortgages and that state law cannot prevent HUD from acquiring title to an insured property pursuant to the terms of the SFMI Program. It thus held that the HOA’s foreclosure pursuant to NRS 116.3116 was preempted and invalid. The HOA appealed this ruling to the Ninth Circuit Court of Appeals.
  • HOAs often fail to follow Nevada’s procedural rules regarding serving the notice of default to the lender, allowing the lender opportunity to cure. If the lender does not receive proper notice, a claim for wrongful foreclosure could invalidate the HOA’s foreclosure sale.
  • HOAs often refuse to provide lenders with any payoff quote for super-priority amounts, even when the lender makes a specific request. As a result, lender’s due process rights are being denied when HOAs proceed with foreclosure.
  • Further, HOAs’ CC&Rs typically contain a mortgage savings clause that provides that no HOA assessment shall take priority over a first deed of trust. Lenders are filing breach of contract claims against the HOA for failing to honor this clause.
Even if an HOA foreclosure has not yet occurred, lenders should take immediate action to protect their interests in any first deed of trust.

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Nathan Robart

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