Did Condo Financing Just Become Impossible?

Casey Fleming

This one’s a little arcane, but important.  Yesterday the Nevada Supreme Court issued a ruling that just might make lenders pull completely out of the condo market in many states.  Hopefully this will be pushed to the U.S. Supreme Court, but in the meantime lending becomes VERY murky.

From Rob Chrisman, one of the best mortgage-industry bloggers:

Here’s trouble. The Nevada Supreme Court upheld a law that allows homeowners associations (HOAs) to foreclose on homes ahead of first mortgage providers, solidifying “super lien” priority for HOA claims in Nevada. The decision is expected to reinforce similar laws in other states that have super lien laws designed to protect HOAs at the expense of first lien holders. So are first liens still secure when an HOA is involved?

Can HOAs foreclose and wipe out the lender?
Can HOAs foreclose and wipe out the lender?

The court ruled that an HOA super-priority lien is a “true super-priority lien,” and that a properly conducted foreclosure on the HOA lien extinguishes first deeds of trust. The case in question involved a $6,000 lien that was foreclosed upon by SFR Investments, wiping out an $880,000 first lien held by U.S. Bank. Analysts quickly pointed out that super lien states (about 20) pose a great risk to lenders, servicers and investors in many parts of the country, with some estimates running as high as 350,000 HOAs covering over 25 million households.

Much of this is new construction, and it has been a growing issue in many retirement states like Florida. If, in theory only, one had a greedy condo association, we could anticipate varying levels of mismanagement, fraud or vindictiveness. The CFPB and FHFA have gone to great lengths to inform the consumers about the mortgage indebtedness, but critics believe this allows for an unregulated group to seize a property with little effort.

Condo financing may soon become impossible
Condo financing may soon become impossible

The public sees what is spelled out in newspapers such as the Reno Gazette Journal, business section. The case involved a condo HOA in Las Vegas filing liens on property for non-payment of HOA dues. Some entity bought those lien rights, and foreclosed. In the past the HOA could not actually foreclose, as they were behind the deed of trust: they could file notice but not actually foreclose.  Only government agencies that are in front of deed of trust could actually foreclose. The NSC ruled in favor of the HOA, meaning the HOA can foreclose and is in front of the 1st deed of trust – in this case held by US Bank.

In general lenders believe that the court is “misguided.” The HOA is not a government agency, and historically, that is the only entity than can be in front of a 1st deed of trust. So will lenders stop lending whenever an HOA is involved since the possibility has increased that their loan will be wiped out?  Possibly – evidently the ruling does not specify the type of HOA or any limitation, so some subdivision that has an HOA to maintain a front entrance brick wall and some flowers and collects $20.00 a month dues has lien rights over a 1st deed of trust. Why would any lender make a loan knowing this? This could be catastrophic for housing with HOAs in Nevada and several other states.

I don’t think I can add anything to this – other than as a mortgage advisor who writes loans on condos, I can tell you this could be very, very bad.  If you were the decision-maker at U.S. Bank, would you ever write another loan on a condo?  I would stop them immediately, until the legal issues are clarified by a higher court.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
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