Nevada's robust commercial loan and promissory note trading market together with lenders' interest in taking second liens on Nevada real property will be materially impacted by new laws recently passed by the 2011 Nevada legislature. These laws, which affect both commercial and residential real property in Nevada, are created by Assembly Bill (AB) 273, signed into law by Governor Brian Sandoval on June 10, 2011. These laws will limit lenders' deficiency judgment awards to only the amount of consideration that the lender had paid to acquire the note, meaning that if a lender has acquired a particular note for less than the note's face value---which is frequently the case where a number of notes are bundled together for sale---the lender may recover a deficiency judgment award that is considerably less than the unpaid balance of the note. These changes in Nevada's laws will have the effect of chilling note purchases as well as lenders' willingness to loan on Nevada property, where Nevada property has already seen stagnation in sales and significant declines in property value.
While the Nevada legislature's stated intent with passage of AB 273 was to shield homeowners from predatory lenders, the bill may instead make it more difficult for homeowners to sell their residences, where banks are reluctant to grant loans to new purchasers, and more difficult for homeowners to obtain second mortgages on residences, where banks are unwilling to risk loss of principal which may result from application of these new laws. These new laws may also make lenders on defaulted loans choose foreclosure and litigation over sale of the notes in the secondary market.
Limitation on Deficiency Judgment Awards
Note assignees are affected by the new cap on deficiency judgment awards. Specifically, for an assignee of a note, any deficiency judgment awarded to the note assignee on or after June 10, 2011, against a borrower, loan guarantor, or other surety may not exceed, among other variables, the greater of either (i) the amount by which the note purchase price (not the full amount due on the note) exceeds the property's fair market value at the time of the trustee's sale or (ii) the trustee's sale price, plus, in either case, interest from the date of sale and reasonable costs. In addition, the amount of the deficiency judgment is further reduced by subtracting from it any insurance proceeds that have been received by or, even if not received, may be payable to the lender in connection with the loan default. Such insurance may, for example, come into play by private mortgage insurance or FDIC or SBA guarantees. These new limitations on note assignee deficiency judgment awards are in effect now, applying to all note assignee deficiency judgments awarded on or after June 10, 2011. It is unclear, at this point, whether this new provision is waivable by a guarantor, either before or after default. Further, the new laws do not address the issue of determination, for deficiency purposes, of the purchase price of a note purchased as part of a bundle or group of notes.
New Laws Specifically Affecting Junior Lienholders
Under Section 2 of AB 273, for any deficiency judgment awarded to any junior lienholder after a foreclosure, deed in lieu and, perhaps, short sale, pursuant to a deed of trust dated on or after June 10, 2011, where the junior lienholder files the deficiency action post-foreclosure or post-sale , the deficiency judgment award : (i) is limited to the amount paid for the debt; and (ii) must be reduced by subtracting from it any insurance proceeds that have been received by or, even if not received, may be payable to the junior lienholder in connection with the loan default, just as is the case for note assignee deficiency judgment awards, as discussed above.
Also, under Section 3 of AB 273, for any deed of trust dated on or after June 10, 2011, any junior lienholder who is a financial institution may not bring a post-foreclosure deficiency action against a borrower who is a homeowner, provided that the homeowner borrower is the owner-occupier of a single-family, primary residence purchased with the loan proceeds and the loan was not refinanced. This new law, then, extends to junior lienholders the prohibition barring first lienholders from pursuing deficiency actions against homeowner borrowers. With this elimination of personal liability of single-family homeowners to their lenders for post-foreclosure deficiency, homeowners will find it more difficult to obtain second mortgages.
Other significant changes under AB 273 affecting junior lienholders prohibit junior lienholders from commencing any action for money damages against the borrower at any time that is more than 6 months after a foreclosure sale or a sale in lieu of foreclosure for all sales held on or after July 1, 2011. Prior law permitted the junior lienholder to bring an action against the borrower at any time within six years (Nevada's contract statute of limitations) ---as opposed to six months---following the foreclosure sale or a sale in lieu of foreclosure. The six month period may commence on the senior lender's foreclosure, and so in order to not lose their opportunity to pursue a deficiency action, junior lienholders will need to be particularly vigilant to receive notice of sale dates.
New Laws Specifically Affecting Guarantor Actions
Lender actions against loan guarantors will now be more costly and prone to delay. For all actions against loan guarantors commenced on or after June 10, 2011, and commenced before the foreclosure sale is held, the court will first hold a hearing---which was not required at this point under prior law---to take evidence from all sides regarding the property's fair market value as of the date the action was commenced. Any monetary judgment that the court may subsequently award the lender will be limited by the lesser of (i) the amount by which the debt exceeds the property's fair market value at the date the action was commenced or (ii), if the foreclosure sale has been held, the difference between the amount of the foreclosure sale price and the amount of the debt. If the note has been assigned, or if there is insurance, the previously discussed provisions will reduce the monetary judgment even further.
These new laws will make it more difficult for note assignees and junior lienholders to realize the full amount paid for notes or the full amount of principal loaned, thus reducing loan trading and lending in Nevada. A lender's right, under Nevada law, to pursue a separate action against loan guarantors is now more costly. It may also be more difficult to sell homes or to obtain second mortgages, at a time when property transferability and loans on property equity are particularly important as the economy struggles. Borrowers on under water loans, particularly where the loan is being enforced by an assignee, have important new defenses.