State high court ruling favors HOAs over banks on home seizures

Bloomberg News

A foreclosed home is shown in the Silverado neighborhood of Las Vegas.

Nevada’s highest court has upheld a law that lets homeowners associations foreclose on houses ahead of mortgage lenders, even if HOAs are owed a fraction of what’s owed to banks.

In a split decision today, the state Supreme Court, overruling a Clark County District Court judge, upheld a law that lets HOAs seize homes through foreclosure when property owners are behind on their HOA dues.

Under that law, HOAs can foreclose even if the property owner has missed mortgage payments.

Four Supreme Court justices agreed that HOAs are first in line to foreclose on delinquent homeowners, ahead of banks and all other creditors on the property, and that they don’t need court approval to seize the house. Three justices agreed in part and dissented in part.

Las Vegas real estate lawyer Jamie Cogburn said the ruling is the correct interpretation of the law but goes against public interest. Homeowners can lose their house if they owe just a few hundred dollars in HOA dues, he noted.

HOAs can sell the homes at auction but by law can only collect what they’re owed, plus collection fees, Cogburn said. The balance of the sales proceeds would go to other creditors or, if the house is paid off, to the homeowner.

That’s assuming it sells, though. Banks can try to collect from the borrower but have no collateral — the house — if they come up empty-handed.

“They’re just getting wiped out,” Cogburn said.

Phyllis Gurgevich, president and CEO of the Nevada Bankers Association, would not immediately comment on the ruling.

The case centered on a dispute between real estate investors and U.S. Bank. The owners of a house in Southern Highlands fell behind on their HOA dues and their mortgage, so both groups moved to seize the property. But the HOA — the Southern Highlands Community Association — held its foreclosure auction first and sold the house to the investors in September 2012.

The buyers, under the name SFR Investments Pool 1 LLC, then sued in a pre-emptive strike of sorts, alleging its purchase wiped out U.S. Bank’s claims to the property.

However, the judge overseeing the case sided with the bank, ruling the HOA had to sue to foreclose and that the bank’s claims outweighed the investors’ purchase.

In today’s opinion, Justice Kristina Pickering, writing for the majority, acknowledged there has been much publicity nationally about alleged foreclosure abuses by HOAs when homeowners fall behind on their dues.

There have been numerous complaints, for instance, that HOAs fail to give proper notice before seizing a house, according to Cogburn.

But, Pickering wrote, Nevada law lets HOAs foreclose without having to sue first. If changes to the law are needed, “they are for the Legislature to craft, not this court,” she wrote.

A spokesman for Minneapolis-based U.S. Bancorp, parent of U.S. Bank, did not immediately respond tonight to a request for comment.

Ariel Stern, an attorney in the case for U.S. Bank, declined comment.