MBA, Trade Groups Submit Amicus Brief to Supreme Court on Nevada HOA ‘Super Lien’

The Mortgage Bankers Association, the American Bankers Association and the U.S. Chamber of Commerce submitted an amicus brief with the Supreme Court in support of a request by Wells Fargo Bank to review a Circuit Court of Appeals ruling on a Nevada statute that allows homeowners association “super liens” to have priority over a first mortgage.

The joint amicus brief (http://mba-pc.informz.net/mba-pc/data/images/AdvocacyDocuments/5 2017 16-1208 Mortgage Bankers Ass’n et al Amicus Brief.pdf) urges the Supreme Court to grant Wells Fargo’s petition for a writ of certiorari and then to affirm the Ninth Circuit’s decision over whether constitutional due process is violated by the Nevada statute.In April, a petition for writ of certiorari was filed with the Supreme Court for Bourne Valley Court Trust v. Wells Fargo Bank, seeking the Court’s review of whether the Ninth Circuit Court of Appeals erred in holding a Nevada statute authorizing non-judicial foreclosure of homeowners association super liens facially unconstitutional (http://www.scotusblog.com/wp-content/uploads/2017/04/16-1208-cert-petition.pdf).

Specifically, the Ninth Circuit determined the statute violated the Constitution’s due process clause, as it required an HOA to provide lienholders with notice of an HOA foreclosure sale only when affirmatively requested–despite the HOA foreclosure sale having the untraditional statutory capacity to extinguish a lienholder’s prior recorded interests.

MBA, ABA and the Chamber wrote the case presents “issues of critical importance to home lenders and the homebuyers and homeowners they serve.” The brief noted in nearly half of the states, when a homeowner living in a common-interest community falls behind on association dues, the HOA acquires a special statutory lien on her property. Such liens had long been understood to provide only a “payment preference,” allowing HOAs to recover a capped amount of unpaid fees through foreclosure before other lienholders are paid, but without otherwise impairing other lienholders’ rights. But a number of jurisdictions, such as Nevada, have recently interpreted their statutes to provide “super-priority” liens.

“Such liens not only allow HOAs to collect before other lienholders but also extinguish all other liens–including first mortgage liens,” the brief said. “And in Nevada, this deprivation of mortgagees’ property could take place without direct notice to the mortgage lienholders. In this case, the Ninth Circuit held that the state action requirement was satisfied and that Nevada statute violated mortgage lenders’ due process right to notice before deprivation of their property, while the Nevada Supreme Court later came to the opposite conclusion,” making this case idea for a Supreme Court review.

MBA and the trade groups agreed with Wells Fargo that the Ninth Circuit’s holding is correct and agree with both parties that certiorari is warranted to resolve the “intolerable conflict” between a federal court of appeals and state high court as to whether Nevada’s regime constitutes a form of state action subject to the notice requirements of the Due Process Clause.

“Put simply, super-priority statutes allow HOAs to eviscerate first-in-time mortgages often worth hundreds of thousands of dollars to satisfy later-incurred debts typically amounting to a few thousand dollars,” the brief said. “Such schemes contravene bedrock principles of property law and threaten to destabilize the real-estate finance system itself. The ultimate consequence of super-priority regimes is less credit for homebuyers because there is less security for lenders.”

This Court, the brief said, “should grant the petition and then affirm the court of appeals’ decision. Doing so would give lenders a measure of protection from the worst features of state super-priority regimes.”MBA, ABA and the Chamber based their assertions on the following points:

—Super-Priority Regimes Violate the Bedrock Rule of “First in Time, First in Right.” The brief said the first-in-time rule is “simple and longstanding. The first creditor to acquire a claim of interest in real property may recover its debts from the value of the estate before later creditors may do so.”

—The First-In-Time Rule Promotes Affordable Mortgage Credit for Homebuyers And Homeowners. The brief asserts the first-in-time rule is supported by economics as well as history; it is also the foundation of affordable mortgage credit.

“In the conventional mortgage transaction, the mortgagee makes a substantial loan to a would-be home buyer, without which her purchase would be impossible. To mitigate the risk inherent in such a sizeable loan, the mortgagee acquires the right to have its loan secured by a lien on the property,” the brief said. “Upon default, that security interest guarantees repayment up to the value of the property’s sale at foreclosure. Without that security interest in the property, such lending would rarely occur because the risk to the lender would be too great. It is the secured nature of a mortgage that makes homeownership possible for the vast majority of consumers.”

—HOA Super-Priority Regimes Subvert The First-In-Time Rule. The brief asserts the Nevada statute is an example of a law that stands the first-in-time rule on its head. “It allows HOA liens to jump to the front of the line even though they are later-arising. Nevada’s system thus runs contrary to the ‘universal’ principle ‘that a prior lien gives a prior claim, which is entitled to prior satisfaction.'”

— Super-Priority Regimes Undermine The Home Lending Market. The brief said super-priority regimes decrease choices and increase costs for homebuyers and effectively de-securitize a lender’s interest in its mortgage by subordinating its lien and by allowing HOAs to wipe out the lien entirely.”As a result of such regimes, mortgagees must mitigate risk through increasing downpayments or interest rates–or simply by exiting the market entirely,” the brief said. “The upshot is less competition, less lending, and fewer home purchases.

“The result, the brief said, can be “outrageously low” prices at HOA foreclosure sales. That means mortgagees have their liens wiped out with little or no compensation because all or nearly all the foreclosure proceeds go to satisfy the HOA’s lien. In the Bourne case, the original loan was $174,000, and, at the time of sale, the property had an assessed value of $90,543. Yet based on only $1,298.57 in delinquent association dues, the buyer was able to acquire the property at an HOA foreclosure sale for $4,145.

—Super-Priority Regimes Impair Federal Programs Designed To Bolster Homeownership. The brief asserts super-priority regimes adversely affect the federal government as well, because these regimes impair the administration of important programs such as the Federal Housing Administration’s mortgage insurance program.

“That program, and others like it, cannot promote sustainable homeownership opportunities for first-time and low- to moderate-income homebuyers where super-priority regimes chill mortgage lending and substantially reduce the availability of credit,’ the brief said.

The Supreme Court is expected to hear the case later this year.