Federal district court bars foreclosure sale of first lien HUD-insured mortgages

by MPA02 Dec 2014

Recently, the U.S. District Court for the District of Nevada held that a homeowners association (HOA) foreclosure sale is not valid against HUD-insured loans, but will the ruling be extended to GSE-insured mortgages?


The decision comes shortly after the Nevada Supreme Court upheld a state law that gives HOAs a super-priority lien on a Nevada property for up to nine months of unpaid HOA dues.


In its ruling, the District Court noted that federal rather than state law applies in cases involving FHA-insured mortgages to assure the protection of the federal program against loss, state law notwithstanding.


The District Court reasoned that in situations where a mortgage is insured by a federal agency under the Federal Housing Administration (FHA) insurance program, state laws cannot operate to undermine the federal agency’s ability to obtain title after foreclosure and resell the property.


The Mortgage Bankers Association (MBA) said Monday it plans to reach out to the Federal Housing Finance Agency (FHFA) to determine whether its counsel believes the U.S. District Court’s HUD/FHA ruling may be extended to Nevada loans insured by the GSEs, due to their FHFA conservatorship.


In September, the Nevada Supreme Court ruled that a homeowners association can foreclose on homes to recoup delinquent payments, a decision that could potentially cause mortgage rates to rise. Nevada, along with 20 other states, has laws that allow HOA liens to get priority over first mortgages.


Bank of America, which was involved in the Nevada Supreme Court case, requested the Supreme Court reconsiders. The lender argued that, because the “superlien” law gives an HOA lien priority over a first mortgage to the extent of nine months of unpaid dues, only nine months of unpaid dues should have priority over a first mortgage, not the entire assessment lien.


According to court documents, the MBA wrote that the decision could cause mortgage lenders “to lose millions—perhaps even billions—of dollars in security interests.” The mortgage industry argues that HOAs shouldn’t have this power and they should have to foreclose through the court system.