Nevada Supreme Court to decide on foreclosure law
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There’s a big case currently before the Nevada Supreme Court and the outcome could have far-reaching consequences for investors, banks and Home Owners Associations (HOAs) in the state.
It may seem like a routine dispute between a bank and an investor. The bank says its owed money on a foreclosed home. The investor, who bought the underwater property, says he owns the condo free and clear of the bank’s debt.
What’s surprising is that, in this case, it’s a Home Owners Association that foreclosed on the property, not a bank. In Nevada, some are arguing this is legal in certain situations. It’s called a super-priority lien foreclosure. Just as it sounds, it gives the HOA top priority over the bank.
But, is this fair? "Yes," according to Attorney Michael Infuso, who’s representing the investor who bought the foreclosed condo.
“I think the perception is, and I think it's misplaced, is that the perception that this is just not fair," Infuso says. "How can an HOA lien, that is relatively small when compared to a first deed of trust, which is relatively big, how can that wipe it out? But, if you end up reading the statute and you read the language, that's what it says."
This is the crux of a very complex case in front of the Supreme Court. The bank made a home loan and now that the property is foreclosed it wants to recoup that investment. Meanwhile, the HOA foreclosed on the condo and found another investor who bought it for a fraction of the original cost.
Attorney Michael Infuso says HOAs should be allowed to do this because it protects the community, especially when they’re owed money.
“Somebody’s going to need to take care of these roads, take care of this landscaping, maintain the quality in the neighborhoods, and so if the banks don’t have an efficient and surefire way to collect the HOA dues, then the HOAs will go bankrupt.”
But, of course, the banks don’t see it that way. Michael Brooks is an attorney who works with banks. He doesn’t believe that HOAs necessarily have the right to foreclose and wipe out all the money owed to the bank, known as the first deed of trust.
“The challenge for the Supreme Court is to determine under what circumstances the HOA lien wipes out a first deed of trust," Brooks says. "If it decides that it always wipes out a first deed of trust, then lenders might not be as interested in lending in this state.”
And that’s why people are paying attention to this case. If it’s decided against the banks, it could affect how they choose to lend money to all homeowners in Nevada. Brooks says they might not be as open to investing here. On top of that, once the HOA forecloses, the homeowner still needs to pay back the original loan.
“It’s a double whammy for the banks and borrowers because if the banks look at a jurisdiction such as Nevada and feel like their collateral is at risk, then they’re far less likely to get involved in that jurisdiction.”
There are currently hundreds of similar cases in Nevada and the outcome of this one could help decide all of them. The state Supreme Court has not yet set a date for its decision.