MBA Fights Emerging HOA Super Lien Issue
SAN DIEGO–One of the most contentious housing finance issues of the past year emerged from a small homeowners association in Nevada.
The Nevada Supreme Court in September 2014 ruled that the state’s HOAs could extinguish mortgagee first lien interests if their super priority liens were left unsatisfied.
The Court ruled (http://mba-pac.informz.net/mba-pac/data/images/PolicyDocuments/2014-63078NV.pdf) that not only do HOAs have a “super-priority” lien on a Nevada property interest for up to nine months of unpaid HOA dues, an HOA super lien in Nevada is a “true priority” lien, so that at foreclosure–which may be conducted non-judicially–the lien can extinguish a first deed of trust held by a mortgage provider.
A similar case in the District of Columbia brought a further sense of urgency among the real estate finance industry. “Under these rulings, a $500 lien can take priority over an $800,000 mortgage,” said Scott Nowak, assistant director of state government affairs with the Mortgage Bankers Association. Speaking here at the Mortgage Bankers Association’s 102nd Annual Convention & Expo, Nowak said the super lien provision, and the court ruling, “goes against the intent of the law.”
The super lien premise started out as a provision within model law developed by the Uniform Law Commission back in the late 1970s and early 1980s. The super-priority was included as a way to address HOA solvency concerns. When the model laws began to be implemented, state legislatures saw it as a ‘payment priority,’ to be collected in advance of the first lien mortgagee’s interests in a foreclosure initiated by a superior lienholder, not by the HOA itself. Since then, more than 20 states have adopted some version of HOA super lien statutes.
Emboldened by these rulings, states including Maine, New Hampshire, Ohio and Tennessee introduced legislation this year to give HOA super liens true priority in foreclosures. Nowak said MBA, working with state and local MBAs, have defeated or currently halted consideration on every proposal, “but we have had to expend a lot of energy.”
“These states use similar language to Nevada,” Nowak said. “If they decide that super liens have priority over first liens, the battles could be lengthy and costly and have substantial ramifications for lenders and borrowers. It’s going to be a battle that’s fought in the trenches, in the legislatures and the courts.”
In July, MBA and six other national financial trade services groups released an MBA-led joint Statement of Principles on “super priority” liens for common interest communities.
“We are opposed to policy initiatives that seek to give priority lien status to one private party ahead of another private lienholder that has followed proper procedures to record their lien,” the groups said. “These initiatives run contrary to the very heart and nature of secured lending, and can destabilize the entire real estate finance system by undermining the value of the collateral securing a loan–resulting in higher costs that will ultimately be borne by consumers.”
Nowak, who authored the Principles (http://mba-pac.informz.net/mba-pac/data/images/PolicyDocuments/StatementofPrinciples–HOASuperLiens.pdf), said the super lien issue endangers in-state first mortgage liens, and the law’s root in model legislation could lead to nationwide concerns–given that the model has been adopted by numerous states.
The Statement of Principles include the following:
–Support of the bedrock principle in real estate finance of “first in time, first in right,” that any private lien secured after origination of a property’s first lien mortgage or deed of trust should not take priority over that mortgage or deed of trust in foreclosure (i.e. “payment priority”) or have the ability to extinguish the mortgagee’s interests (i.e. “true priority”).
–Opposition to policy initiatives that seek to give priority lien status to one private party ahead of another private lienholder that has followed proper procedures to record their lien.
–If state policymakers decide to proceed contrary to [the “first in time, first in right”] principle and allow for an HOA super priority lien within their jurisdiction, this lien should exist as a payment priority that is satisfied from the proceeds of a foreclosure sale conducted by a superior lienholder or encumbrancer. At no time should this lien hold true priority status with the capacity to extinguish a mortgagee’s superior interests in a property.
–The Principles highlight specific parameters that should be adhered to by policymakers for composition of these liens.The Statement of Principles also included an Appendix that contains a history of the super lien issue as well as a summary of dangers that would exist should the Nevada super lien standard continue to gain credence around the country.
The issue remains contentious, with HUD (which oversees the Federal Housing Administration) and the Federal Housing Finance Agency (which oversees Fannie Mae and Freddie Mac) firmly opposed to super lien priority. Additionally, litigation challenging the Nevada super lien standard has been receiving favorable rulings in the U.S. District Court for Nevada, with regard to whether HOA super priority liens have the ability to supersede and extinguish the property interests of HUD and government-sponsored enterprise mortgages. But Nowak said more action could be required.
“Work with your state and local MBAs,” Nowak said. “We want to make sure that we are holding fast on this, so we can avoid this slippery slope.”
