Nevada Case Positions Mortgage Lenders Against Investors

In a court decision that has rattled the mortgage industry, the Nevada Supreme Court contends that homeowners associations (HOAs) have the power to foreclose on homes to recoup delinquent payments — while effectively wiping away entire mortgages, The Wall Street Journal reports

Many of these foreclosed homes are sold to investors for only a few thousand dollars, with values in the hundreds of thousands of dollars. 

While investors are reaping the benefits, mortgage lenders nationwide argue that HOAs should have to foreclose through the court system and shouldn’t have the power to clear entire mortgages. But in a closely watched case in September involving Bank of America Corp., the Nevada Supreme Court said they can do so, and sent the case back to a lower court.  

The case involved a Las Vegas home purchased in 2007 with an $885,000 mortgage originated by Bank of America. The homeowner defaulted on the mortgage the next year. The Southern Highlands Community Association foreclosed on the home and sold it at auction in September 2012 to SFR Investments Pool 1 LLC, which paid $6,000 — the amount owed to the HOA by the delinquent homeowner.

Many are challenging such sales.

In a court filing Tuesday, the Mortgage Bankers Association (MBA) wrote that because of the court decision, “mortgage lenders stand to lose millions — perhaps even billions — of dollars in security interests.”

David Stevens, president of the MBA, said that if the decision stands, banks will have to account for it by raising mortgage rates in Nevada.

In addition, last week Bank of America requested that the state Supreme Court reconsider its decision.

On the other side of the dispute are the housing investors. If the Nevada court’s decision stands, some investors expect to receive a windfall.

“This is one of the greatest returns in real estate that I’ve ever seen,” said Jay Bloom, a director of First 100 LLC, an investment firm that bought more than 1,000 homes in states including Nevada and Washington. Nevada and about 20 other states have laws that allow HOA liens to get priority over first mortgages.

It isn’t yet clear who would get hit with the bulk of the losses, but the decision could have widespread implications for the housing market as a whole. 

To the extent that Fannie Mae and Freddie Mac aren’t able to recover the money, taxpayers could potentially take the loss. A spokesman for the Federal Housing Finance Agency, which regulates Fannie and Freddie, said in a statement, “FHFA is concerned with the decision and is reviewing its significant implications for housing finance.”

Debra Still, chief executive of Pulte Mortgage LLC, said her company and others are still wrapping their heads around the decision and researching its implications. But one thing seems certain, she said: “This is unexpected and a dramatic change from what was common and customary. … It’s not going to help loosen credit.” 

To read the full Wall Street Journal article, click here

Written by Emily Study

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