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Foreclosures By HOAs Wipe Out Mortgage Liens

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Decisions made in separate lawsuits filed in Nevada and Washington, D.C., have mortgage lenders losing their liens when homeowners associations foreclose.

A Sept. 18 opinion issued by the Nevada Supreme Court found that if an HOA lien is foreclosed on, then the first deed of trust is extinguished.

The ruling is expected to affect how residential lenders underwrite structure and service their residential loans going forward.

That assessment came from Ballard Spahr LLP.

The court called the HOA lien a true super-priority lien and noted that the Nevada HOA lien statute is based on the Uniform Common Interest Ownership Act of 1982.

“The court could look to the drafters’ comments and the laws of other states to explain the act,” Ballard Spahr wrote. “The court ultimately reasoned that a portion of an HOA lien was superior to a first deed of trust, and it rejected the first deed holder’s arguments that the HOA statute only provided a payment priority.”

The law firm said that the decision, however, leaves several other issues unanswered.

An example cited was whether an HOA foreclosure is invalid if a first deed holder tries to pay off the underlying lien, but the HOA refuses to provide the amount of the lien or refuses to allow the lender to pay it.

“This is a common occurrence in Nevada, with some HOAs arguing that they are either prohibited or not obligated to provide the amount of the lien,” the report stated. “The opinion also declines to address whether an HOA foreclosure is invalid if the sale is not properly noticed by the HOA.”

The decision was made not long after the District of Columbia Court of Appeals came to a similar conclusion in August.

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