For those of you who were busy enjoying the holidays around the end of December, you may have missed a little bit of news that came out of CAI on December 23rd regarding a public statement made by the Federal Housing Finance Agency (FHFA), which stated that super-priority liens from Homeowners Associations violated the right of Fannie Mae and Freddie Mac to have first position, and increased the risk of loss to taxpayers:
One of the bedrock principles in this process is that the mortgages supported by Fannie Mae and Freddie Mac must remain in first-lien position, meaning that they have first priority in receiving the proceeds from selling a house in foreclosure. As a result, any lien from a loan added after origination should not be able to jump in line ahead of a Fannie Mae or Freddie Mac mortgage to collect the proceeds of the sale of a foreclosed property."
- Federal Housing Finance Agency on Certain Super Priority Liens
While the "increased risk of loss to taxpayers" is an easy button for the FHFA to push, it ignores the reality that the lenders whose loans they guaranteed are the ones responsible, not the HOAs.
Essentially, the FHFA is suing to strike down the first priority status of HOAs in priority lein states to ensure that Fannie Mae and Freddie Mac get paid by the lending institutions that failed to complete foreclosures in a timely manner, or pay HOA dues while foreclosure procedures were underway (both circumstances that would have avoided any lawsuits in the first place).
Make no mistake, FHFA is bailing out mortgage servicers that lacked the competency to meet basic contractual requirements and follow established rules of civil procedure," said Thomas M. Skiba, CAE, chief executive officer of Community Associations Institute (CAI). "By suing community associations, FHFA is trying to protect Fannie and Freddie at the expense of association homeowners. That's unfair, unconscionable and unacceptable."
- CAI: FHFA Move Threatens Associations & Owners
Priority lien laws for community associations are currently active in 22 states and the District of Columbia. Many of these state laws share common language, having been adapted from the Uniform Common Interest Ownership Act of 1982, 1994 or 2008. According to their website, the purpose of the Uniform Law Commission, who drafted this law, is to provide states with "non-partisan, well conceived, and well drafted legislation that brings clarity and stability to critical areas of state statuatory law." In spite of these laws having been in place for more than 10 years in some cases, they are frequently challenged in court, especially after the recent mortgage crisis.
HOAs simply cannot afford to wait until lenders get their act together.
Following the mortgage crisis, many lenders have been particularly slow to foreclose on homes, in part because banks are incentivized not to foreclose (warning, that link may not be safe for work), and in part because the loan packages were broken up and sold in fractions, a practice that many believe contributed to the bursting of the housing bubble, and most certainly prevented lenders from being able to wholly collect on debts, and in some cases to even identify which debts were owed to them. This delay caused a number of delinquent homeowners to simply walk away from their homes, rather than waiting for the bank to do something.
Unfortunately for homes in community associations, delays in the foreclosure process do not prevent the home from accumulating costs. The primary function of the Homeowners Association is to preserve the value of the homes in the community. Allowing the home to fall into disrepair breaks the contract for the entire neighborhood. Many HOAs have gone so far as performing regular preventive maintenance on the abandoned homes (such as mowing lawns, cleaning gutters and power washing). Compound that by the lost income of the regular assessments used to maintain common areas in the association, a cost which must be made up by the other members of the association.
In other words, one abandoned home in a community represents a serious financial commitment by the other homeowners in the HOA. HOAs simply cannot afford to wait until lenders get their act together.
Enter the super-priority lien, an option that allows community associations in these states an opportunity to recover these vital costs, even over the primary lender. But the FHFA disagrees, and this is why the president of CAI is steaming mad:
In one case, Fannie Mae’s servicers failed to respond to legal service of process and, despite mandatory notification pursuant to Nevada law, failed to appear at a foreclosure auction to protect Fannie Mae's financial interests," Skiba continued. "It says a lot about FHFA priorities that the agency now is suing to recoup Fannie Mae's losses from the pockets of community association homeowners, rather than suing servicers for breach of contract. Someone must stand up for homeowners and that’s what CAI will continue to do."
- CAI: FHFA Move Threatens Associations & Owners
While we can expect to see lawsuits on this issue for several years to come, one state to watch is Nevada, where a recent decision by the Nevada Supreme Court seems to be in agreement that it is the lenders who are at fault here, not the HOAs. In a opinion filed September 18, 2014, the court had this to say:
U.S. Bank's final objection is that it makes little sense and is unfair to allow a relatively nominal lien—nine months of HOA dues—to extinguish a first deed of trust securing hundreds of thousands of dollars of debt. But as a junior lienholder, U.S. Bank could have paid off the SHHOA lien to avert loss of its security; it also could have established an escrow for SHHOA assessments to avoid having to use its own funds to pay delinquent dues. 1982 UCIOA § 3-116 cmt. 1; 1994 & 2008 UCIOA § 3-116 cmt. 2. The inequity U.S. Bank decries is thus of its own making and not a reason to give NRS 116.3116(2) a singular reading at odds with its text and the interpretation given it by the authors and editors of the UCIOA."
- Nevada Supreme Court, SFR Invs. Pool 1, LLC v. U.S. Bank, N.A.
It's easy to see why the bank in this case felt that the issue 'made little sense'. After all, their loan amount was for $880,000 whereas the HOA's lost fees amounted to less than $10,000. However, as the justices stated, all legal process was followed by the HOA and the bank had been notified on several occasions. Plenty of opportunity was given to the bank to protect their investment and they did not avail themselves of it. Therefore, according to the Nevada supreme court, the problem was of the bank's own making, and no fault of the HOA.
Now that they are losing money, lenders are taking action, the FHFA is right with them. The battle lines are drawn and the vultures are circling. Hopefully, this battle will have a peaceful resolution, where everyone gets what they are due. Until then, we will continue to have hope that lenders will simply do what they should have done from the beginning, and faith that the courts have everyone's best interests at heart.