A client note from Morningstar Credit Ratings says that the Nevada Supreme Court gave homeowners associations in the state a new weapon in their battle to maintain properties within their jurisdictions.

“The ruling in the case of SFR Investments Pool 1 v. U.S. Bank is forcing participants in the single-family residential market to examine their exposure to delinquent homeowners association, or HOA, fees and try to ensure that fees, fines, and assessments are paid on time,”Morningstar analyst say. “This case is interesting, not because the HOA foreclosed on the property, or because the HOA was granted super-lien status and paid before any other lien-holder. The ruling in this case allowed the holder of the HOA lien to extinguish all other liens on the property.”

According to Morningstar, the HOA in this lawsuit was owed $6,000, and U.S. Bank, as trustee for the securitization collateralized by the property, had an $885,000 first-lien mortgage securing its loan.

Morningstar says that the HOA foreclosed on the property, sold the house to an investor, SFR Investments Pool 1, in a trustee sale for the amount of the overdue HOA fees ($6,000), and SFR Investments received the house free and clear.

The foreclosure on the HOA lien took priority over the first-lien mortgage and extinguished the senior lien, leaving the securitization investors homeless with no recourse.

“While 22 jurisdictions allow super-lien status for HOAs, investors should note that only Nevada and Washington, D.C., have allowed HOAs to extinguish the first-lien mortgage loan on the property,” Morningstar analysts warn.

One in four homes in the United States are part of HOAs and most HOAs – more than a quarter –are in California and Florida, according to Community Associations Institute.