The circumstances under which a condominium or homeowners association (HOA) lien for unpaid assessments may wipe out a lender’s mortgage lien continues to evolve across the country. As noted in our previous alerts regarding assessment lien priority cases in Nevada and Washington, D.C., the relative priority of these assessment liens, vis-à-vis mortgage liens, continues to have significant impact on lenders, associations, and consumers and potentially impacting the cost and availability of mortgage loans for homes within HOAs.

Ruling on FHFA Priority

New questions regarding the statutory lien priority provided to HOA assessment liens arose out of several 2014 court rulings holding that an HOA could foreclose an otherwise first priority mortgage lien, in some cases even if the mortgage lender received no notice of the foreclosure action. While litigation surrounding the bounds of this principle continues in several states, several federal agencies have asserted that interests in a mortgage held by a government agency are not susceptible to being wiped out without the federal government’s consent pursuant to the Property Clause of the U.S. Constitution. This position was successfully argued on behalf of HUD’s interest in insured mortgages, in Washington & Sandhill Homeowners Ass’n v. Bank of America, Case No. 2:13-CV-01845- GMN-GWF. 

Taking the federal interest preemption argument one step further, the Federal Housing Finance Authority (FHFA), as conservator for Fannie Mae and Freddie Mac, has argued in several cases that mortgages held by Fannie Mae or Freddie Mac are entitled to similar protection under the Property Clause. In short, FHFA argues that (a) the FHFA is an agency of the federal government whose property interests are subject to protection under the Constitution; (b) FHFA’s role as conservator for Fannie Mae and Freddie Mac creates a federal property interest in the assets of Fannie Mae and Freddie Mac; and (c) therefore, mortgages held by Freddie Mac and Fannie Mae may not be foreclosed as part of an HOA’s assessment lien foreclosure without the consent of the FHFA.

FHFA, directly or through lender defendants, has advanced this argument in multiple cases including cases in which Ballard Spahr presently represents the defendant lenders. A federal judge in Nevada issued the first decision on this line of argument in Skylights LLC v. Byron on June 24, 2015. In that decision, the court held in favor of FHFA’s argument, finding that “a homeowner association’s foreclosure of its super-priority lien cannot extinguish a property interest of Fannie Mae or Freddie Mac while those entities are under FHFA’s conservatorship.” Skylights LLC, 2015 WL 3887061. If adopted by other courts, this interpretation of the Constitution would have a dramatic effect on the scope and applicability of both prior state judicial holdings and state assessment lien laws that otherwise permit HOAs to foreclose mortgage liens as part of their assessment collection efforts against delinquent homeowners.

Legislative Responses

In the wake of this nationwide litigation regarding assessment lien priority, state legislatures may also be asked to resolve the competing interests of community associations and mortgage lenders when it comes to their respective liens. As noted in our June 16, 2015, alert, Nevada’s legislature acted during the 2015 session to amend its law to clarify and ensure that while an association assessment lien may in fact have priority over a mortgage lender’s lien, that mortgage lender must have received notice of the pending assessment lien foreclosure and an opportunity to pay the amount of the association’s lien that is senior to the mortgage lien so as to preserve the lien of its mortgage. Additionally, with the Uniform Law Commission’s revisions to the assessment lien provisions of the Uniform Common Interest Ownership Act (discussed in a previous alert), states that have adopted the uniform act (or are considering doing so) may be called upon to respond legislatively to lien priority, notice to lenders, as well as quiet title issues raised by these various assessment lien cases.