In recent months, homeowners associations (HOAs) in Nevada have been foreclosing on their liens for delinquent assessments. HOAs are a part of everyday life for homeowners and lenders in Nevada, but the recent trend of HOA foreclosures has come with an alarming new hitch.
In a number of situations, “investors” and other third parties have bought residential properties out of these HOA foreclosure sales for a small fraction of the properties' worth. These third-party purchasers then purport to own the property outright—free and clear of the lender's first mortgage. Subsequently, they file suit to quiet title to the property in their name, in an attempt to wipe out the mortgage and certain other liens on the property.
The purchasers rely on an ambiguity in Nevada’s HOA lien statutes that contradicts the mortgagee protection clause generally included in an HOA’s controlling documents. Success by a purchaser in such a quiet title action will result in the extinguishment of a lender’s mortgage. Even if the purchaser is unsuccessful, the quiet title action may still prevent the lender from foreclosing during the course of the litigation.
Nevada law provides that a borrower's payment obligation to the HOA is intended to pay for things such as maintaining common areas, assuring that neighbors pull their weeds and contributing to the cost of a gate guard. If homeowners live in a development with an HOA, they must pay regular monthly assessments to the association so it can enforce regulations that are intended to foster a pleasant and uniform way of life. When a homeowner (the borrower with a mortgage or deed of trust in favor of the lender) does not pay the assessments, the HOA is entitled to declare the homeowner in default and, ultimately, to foreclose upon the corresponding HOA lien if the assessment remains unpaid.
Before this recent uptick in quiet title lawsuits, lenders often disregarded HOA foreclosure sales as not affecting their first lien mortgages, relying on a customary—as opposed to a literal—reading of statutes. Most lenders’ interpretation of Nevada HOA lien law differs strikingly from the arguments being advanced by the current purchasers. In addition, lenders relied on “mortgagee protection” clauses included in an HOA’s controlling documents, which generally protect the rights of first lien mortgage holders in the event of an HOA foreclosure.
The federal and state district courts in Nevada are now considering this issue, with new cases being filed regularly and judges ruling on both sides. Until the Nevada Supreme Court clarifies the status of the law, we anticipate that investors will continue their rampant purchase of properties at Nevada HOA sales and corresponding quiet title actions against mortgage lenders.