The Las Vegas housing market is being hobbled by legal wrangling and disagreements over homeowners association foreclosure proceedings that have resulted in thousands of homes sitting empty and untouchable in legal limbo.
"It’s a huge issue in Nevada right now,” said attorney Jacob Hafter, the principal of Hafterlaw in Las Vegas. “There are thousands of cases in the courts about this right now.”
Over the past several years, scores of valley homeowners who abandoned their homes and stopped paying their mortgages also stopped paying their HOA assessments. Association officials started foreclosure proceedings on many of the homes.
“There is a statute that says an HOA lien is a priority lien,” Hafter said. That means that in most cases, when an HOA forecloses, it wipes out all other liens.
In a pivotal case, the Nevada Supreme Court ruled in September 2014 that properly executed foreclosure sales extinguish bank notes.
“What the Supreme Court said last September was that if it was done properly, according to statute, it wipes out the mortgage,” Hafter said. “(So) you have to demonstrate in court that all the notices were properly served, that everything was done properly, and it’s all a question of fact, which can only ultimately be settled at trial. So now it’s a case-by-case basis; we can’t fast-track any of them.”
“The problem is that because it is unsettled, no title insurance company will give you insurance on a house that’s foreclosed upon by an HOA,” Hafter continued. “So you have to go to the court and clean title, which is taking forever — years. It’s basically locking up all this real estate, and so you had all these cases in the courts about foreclosure processes.”
The result is a multitude of valley homes that have bad title and are locked up in limbo.
“You can’t do anything with them except rent them or live in them,” Hafter said.
A stagnant pool is shown in Ventana Canyon in Henderson, whose homeowners association was sued by investors.
The issue
“The problem to be addressed is whether the homeowners association properly notified all interested parties when they went to foreclose on that home,” said Keith Lynam, a Realtor at Platinum Real Estate Professionals and 2015 president of the Greater Las Vegas Association of Realtors. “It is certainly a concern.”
The biggest worry going forward, Lynam said, “is if (the issue) doesn’t get addressed and lenders pull back as they said they would.”
“This is a classic case of two competing legitimate interests,” said Henderson attorney Avi Cutler of Ballon Stoll Bader & Nadler. “Banks have a legitimate case to be put first on houses they lent money toward the purchase of. Homeowners have a legitimate argument to not be stuck with HOA fees of neighbors who’ve abandoned their houses or ceased making their payments.”
Additional problems can ripple through the home market as a result.
“We don’t feel it’s good for the real estate market,” said Joseph Decker, administrator of the real estate division of the state Department of Business and Industry. “If you live in a community and one of your neighbors goes into default with the HOA — let’s say your house is worth $300,000 market value, and your neighbor goes into default for $5,000 in assessments — and that association forecloses, they extinguish the first lien your neighbor owed to his bank. Then they turn around and sell the house at auction for $20,000 in order to collect what they are owed.”
An investor might buy the house for $20,000, making the HOA happy but negatively affecting the market value of surrounding houses.
A condo at Lake Las Vegas on Saturday, Jan. 17, 2009 slated to be auctioned off in a large auction of foreclosed homes.
The future
What needs to happen to make the situation better?
“That’s a good question,” Decker admitted. “The HOA super-priority exists, but really what we are trying to work on is a situation in which the lender’s first mortgage is not necessarily extinguished, where the lender gets notice that the HOA is going to foreclose and is provided an opportunity to protect its investment or security.”
Notification is the key, lawyers say — and it is what the Legislature has been working on.
State lawmakers are considering a measure that would provide a 60-day “right of redemption” after a foreclosure sale to allow the lender or homeowner to satisfy the HOA lien and recover the property.
But not everyone is in favor of such a law.
“I think the Supreme Court got the law right in its decision,” said Noah Allison, an attorney and principal in Three Lock Box, a Las Vegas construction control company. “I have listened to some of the exotic constitutional and equitable arguments against the super-priority lien by some extremely capable lawyers, but I don’t see those arguments getting very far. If the banks have provable advance notice of the HOA lien foreclosure yet do nothing to stop it, then tough luck. You snooze, you lose.”
The intent of the HOA super-priority law was “to coerce banks sitting on houses in foreclosure and going derelict in neighborhoods to do something about it,” Allison said. “Nobody wants to live near a house with dead shrubs, cracked paint and a swamp where the pool should be.”
HOAs have stepped in to fix such problems, Allison said, “and they deserve to be paid for their efforts. Until (the ruling), banks ignored HOAs. Now, maybe they won’t.”
But the court’s decision doesn’t solve the problem, at least with certain federally underwritten home loans, said Wilbur M. Roadhouse, a director with Fennemore Craig.
“The Federal Housing Finance Agency, as conservator, has taken the position that federal law precludes involuntary extinguishment of Fannie Mae or Freddie Mac liens,” Roadhouse said. “Briefs have been filed in certain actions in federal court in Nevada, with oral arguments set to be heard as early as June 2.”
Banks understandably are unhappy with how things have played out.
“If you had a $300,000 first trust deed wiped out by a $20,000 HOA lien foreclosure, would you be happy?” Roadhouse asked.
Decisions are expected that could help clear the murky waters.
“There are other court cases coming down that will settle that part of the equation,” Lynam said. “The banks have stated that these were not properly recorded, that they weren’t properly notified of the foreclosure proceedings. There is some legislation that’s being brought forth that I think will help, that will determine what ‘properly notified’ means.”
Hafter said HOA foreclosures should work the same way as any other foreclosure.
“It should give the third-party buyer at the auction the legal right to it and let them start insuring those properties,” he said.
That’s starting to occur, albeit slowly.
“Some of the courts,” Hafter said, “are starting to rule for these buyers.”