Bryan Ellis Investing Letter – Mortgage lenders in Nevada are fighting homeowners’ associations (HOAs) in the state for their lives – or at least their livelihoods – thanks to a ruling from the Nevada Supreme Court declaring that HOA liens have superiority over home loans and can legally “extinguish a first deed of trust non-judicially on a residential property.” In short, an HOA can legally foreclose on a property with delinquent HOA dues or fines without going through the courts and, once the property is sold, the borrower no longer has a legal obligation to repay the mortgage loan, although funds from the sale may be used to satisfy part or all of the debt. Not surprisingly, mortgage lenders are quite alarmed by this ruling, which they say could “spell disaster for the mortgage industry as a whole”.

The ramifications of the ruling are clearly evident in one of the cases that the Nevada Supreme Court deemed “central” to the issue. A Nevada HOA sold a Las Vegas home with an $885,000 note on it for $6,000 in order to recoup delinquent HOA fees. The investment firm that purchased the property was able to successfully block Bank of America from foreclosing and auctioning off the property again after the investors made the purchase from the HOA, arguing that the mortgage had been extinguished by the HOA auction. The Supreme Court agreed, saying that Bank of America should have paid off the HOA lien if it did not want the loan extinguished. The Mortgage Bankers Association (MBA) has since stepped in to note that in many cases, HOAs will not disclose the amount of delinquent fees owed and also do not have to accept payment from lenders.

While mortgage lenders are not fans of the Nevada policy, real estate investors definitely are. “This is one of the greatest returns in real estate that I’ve ever seen,” crowed the director of one investment firm that promptly purchased multiple Nevada properties at HOA foreclosure auctions. However, warned David Stevens, president of the MBA, “If the decision stands, banks will have to account for it by raising mortgage rates in Nevada.” Another investor fired back at Stevens, saying simply, “Lenders should have been aware of this risk”.

WHAT WE THINK: It’s hard to come in on the side of HOAs for much of any reason, but if you think the state Supreme Court decision will stand, it’s definitely time to start buying in Nevada. With investors reporting paying about $11,000 for homes work nearly $200,000 thanks to this new rule, the returns would truly be hard to beat. We also think that just as in the case of property tax liens, lenders should be prepared to pay delinquent HOA dues in order to keep up their interest in a property. However, HOAs are notorious for bending and breaking existing rules or just making up their own, so we do not doubt that this ruling is ripe for abuse by HOAs wanting to make some quick money.

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