This post is offered as a courtesy to the Community Associations Institute (CAI), and its local Nevada chapters, who are fighting hard to protect the integrity of Nevada’s super-priority lien status. The 2015 Nevada Legislative Session ends in just a few days, and AB359 is being hotly contested right now. The following is quoted verbatim (with permission) from an email received today. I’m posting it here for you, as some of you may not be on CAI’s email list, but may still have interest in this topic:
Dear Grassroots Initiative Member:
Those of you who responded to yesterday’s call to action to e-mail Bruce Breslow, Director of the Department of Business and Industry (“B&I”), regarding a proposed amendment to AB 359 may have received an e-mail response describing the information in the form letters he received from Grassroots Members as “false information” and further stating that AB 359 protects the super priority lien. Specifically, Mr. Breslow responded that:
“AB359 doesn’t do anything to SB306 which was already passed. It still protects the “super priority lien.” HOA’s will still be first in line. The bill just says that an HOA lien doesn’t also wipe out the first deed of trust from a lender. Without that, FHA, VA, and FAFSA have indicated that they may choose to stop issuing mortgage insurance in Nevada. That would stop all home lending in our State. Again, AB 359 doesn’t affect the other legislation that was passed.”
Let’s break down that statement and compare it against the text of the new amendment, which is attached:
“AB359 doesn’t do anything to SB306 which was already passed. It still protects the “super priority lien.” HOA’s will still be first in line.” AB 359 does do something to SB 306: it undermines the priority of the HOA’s Super Priority Lien (“SPL”) which SB 306 affirmed. The SPL is more than 9 months of assessments payable when the lender eventually forecloses on a home in an HOA. It is the one tool that makes the lenders pay attention to HOA foreclosure notices. The SPL is a true priority lien– not just a payment priority – which means that a properly conducted HOA foreclosure sale extinguishes any junior liens, including the first security interest. In the SFR Investments case, the Nevada Supreme Court informed lenders that they ignored HOA foreclosure notices at their own peril. What happened after the SFR ruling? For the first time, lenders began paying HOA assessments to preserve their security interest.
Prior to the SFR ruling, the lender had no incentive to act despite the fact that Fannie Mae, Freddie Mac and HUD all require lenders to protect the priority of their liens by paying delinquent assessments and reimburse the lender for the cost of doing so. Lenders were content to allow delinquent assessments to accumulate, sometimes for years, knowing that when they did foreclose, the lender would only have to pay 9 months. By the time a lender forecloses, the 9 months of assessments recoverable through the SPL is usually just a fraction of the total amount owed to the HOA. What cannot be recovered through the SPL becomes the burden of those owners who do pay their assessments.
“The bill just says that an HOA lien doesn’t also wipe out the first deed of trust from a lender.” This is an inaccurate description of the amendment which B&I supports because the amendment protects both the first and the second deed of trust from extinguishment. The amendment may say that the HOA lien is a “priority in right” and not just a “priority in payment,” but the very next sentence of the amendment states that an HOA foreclosure does not extinguish either the first or the second security interest holder. See AB 359 Amendment, page 12, lines 46-53. Thus, this amendment extends protection to not just the first security interest lender, but the second lender as well, going far beyond the current law. A lien which is a priority in right extinguishes junior liens – that’s what it means to be a priority lien.
In short, if AB 359 passes, the HOA will be “first in line” for 9 months of assessments at some future date when the lender gets around to foreclosing. If the HOA forecloses in an attempt to replace a delinquent owner with an assessment paying owner, who will purchase at a HOA foreclosure sale? Under AB 359, with a unit that will be subject not only to the first deed of trust but also to a second, it is LAC’s opinion that there will be few, if any, purchasers. HOAs will have to credit bid and hold, waiting for the bank to finally act.
“Without that, FHA, VA, and FAFSA have indicated that they may choose to stop issuing mortgage insurance in Nevada.That would stop all home lending in our State” “FAFSA” is the acronym for the “Free Application for Federal Student Aid,” which is not relevant to the SPL. We will assume that Mr. Breslow intended to use the acronym for the Federal Housing Finance Agency (“FHFA”), the federal agency which is the conservator for Fannie Mae and Freddie Mac. The U.S. Department of Housing and Urban Development (“HUD”) oversees FHA (Federal Housing Administration).
First, as indicated above, Fannie Mae, Freddie Mac and HUD all require lenders to protect the priority of the mortgage lien in SPL states by paying delinquent assessments to clear HOA liens. See Fannie Mae Servicing Guide Announcement SVC-2012-05; Freddie Mac Bulletin 2014-02; and HUD Mortgagee Letter 2013-18. It is true that VA requires a lender to ensure that an HOA assessment lien will be subordinate to its mortgage lien and it will not reimburse a lender who has made payments to clear prior liens for delinquent HOA assessments. However, this is not a new position for the VA. See January 1, 2001 Lenders Handbook, VA Pamphlet 26-7; Chapter 16-B-19.
Second, Nevada is not the only state with a SPL. According to CAI, a total of 22 states plus the District of Columbia and Puerto Rico have assessment priority statutes, many of which are based on the same Uniform Common Interest Ownership Act (“UCIOA”) as Nevada’s statute. There is no indication that any entity has stopped issuing mortgage insurance in those states or stopped lending.
“Again, AB 359 doesn’t affect the other legislation that was passed.” LAC strongly disagrees that AB 359 does not affect other legislation that has passed. SB 306 preserves and protects priority in right for the SPL; AB 359 undermines it. We hope this clarifies why LAC opposes the new amendments to AB 359 and why your immediate action was so critical yesterday. Thank you for your support.
For more information on this topic, please contact Sara Berry. (Click the image below, and it will take you to the Leach Johnson Song & Gruchow website):