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From Banking and Finance Law Daily, August 29, 2017

Nevada homeowner association’s superpriority lien doesn’t trump FHFA’s interest

By Richard A. Roth, J.D.

An individual who bought a Nevada home at a homeowners association foreclosure sale did not take ownership free and clear of Freddie Mac’s mortgage lien because the Housing and Economic Recovery Act prevented Freddie Mac’s lien from being foreclosed, the U.S. Court of Appeals for the Ninth Circuit has decided. The federal law applied to the sale, the court said, and the Nevada state law that gave HOAs superpriority liens for unpaid assessments is preempted by the federal law (Berezovsky v. Moniz , Aug. 25, 2017, Mueller, K.).

Under Nevada law, unpaid assessments for six months or longer give an HOA the authority to foreclose on a home and to sell the home free and clear of any liens that arose after the covenants, conditions, and restrictions attached to the title of the property, the court explained. This is referred to as the HOA’s superpriority lien. The buyer claimed that the superpriority lien allowed the HOA to sell him the property free and clear of the lien created by the mortgage loan that Freddie Mac purchased from the original lender.

However, the superpriority lien conflicts with a provision of federal law commonly referred to as the Federal Foreclosure Bar, the court noted. HERA gave the FHFA the authority to become Freddie Mac’s conservator. The FHFA exercised that authority, and in so doing it acquired all of Freddie Mac’s assets for as long as the conservatorship lasted. The statute also includes a provision that no property the FHFA holds as conservator can be foreclosed upon without the FHFA’s consent (12 U.S.C. §4617(j)(3)). This is the Federal Foreclosure Bar.

Federal bar applicability. The homebuyer first argued that the Federal Foreclosure Bar applies only to state and local tax liens, not to private foreclosure sales. Noting that whether the bar applies to private foreclosures was a matter of first impression, the court rejected the homebuyer’s argument as contrary to HERA’s structure.

The Federal Foreclosure Bar is one of three separate property right protections created by HERA, the court said. The first of these protects FHFA property from state and local taxation; the second—the Federal Foreclosure Bar—protects the agency’s property from foreclosures and other involuntary sales; and the third protects the FHFA itself from fines and penalties. The tax-related provisions are separate from the foreclosure-related provisions, the court pointed out. Moreover, the foreclosure-related provisions include no restriction to taxes.

The court easily rejected the homebuyer’s assertion that Freddie Mac and the FHFA implicitly consented to the foreclosure sale because they took no action to prevent it. There was no support for the theory that inaction implied consent; rather, HERA requires affirmative consent to a foreclosure.

Preemption. Not only did the Federal Foreclosure Bar apply to the sale, it preempted the Nevada superpriority law, the court then said. Although there was a presumption against preemption because real estate foreclosure is an area of law that traditionally has been regulated by the states, that presumption was rebutted by HERA.

The statute did not include an explicit preemption of state foreclosure laws, but it did implicitly demonstrate a clear intent to preempt state laws. HERA said clearly that no FHFA property was subject to foreclosure without the agency’s consent, while the Nevada law would automatically extinguish Freddie Mac’s lien without the FHFA’s consent. As a result, the state law was an obstacle to Congress’s intention to protect the conservatorship property and thus was preempted.

Property interest. The homebuyer’s final argument, that the FHFA and Freddie Mac did not prove Freddie Mac had an enforceable lien, also failed. Freddie Mac had an enforceable interest even though its name did not appear on any recorded instrument, the court determined.

The original lender, Countrywide Home Loans, used Mortgage Electronic Registration Systems as trustee under the deed of trust. Freddie Mac bought the note from Countrywide, but MERS remained the trustee for several more years. Eventually, MERS assigned its interest to Bank of North America, which recorded the assignment by an instrument that did not mention Freddie Mac.

This process did split the note from the trust deed, the court agreed, but did not violate Nevada law. Under Nevada law, the trustee was Freddie Mac’s agent, and Freddie Mac had the authority to enforce its property interest by instructing the trustee either to foreclose or to assign the deed of trust to Freddie Mac.

In other words, Freddie Mac had an enforceable security interest even if the recorded deed of trust identified only the trustee. And, as Freddie Mac’s conservator, the FHFA had the right to enforce that interest.

The case is No. 16-15066.

Attorneys: Luis A. Ayon (Maier Gutierrez Ayon) for Alex Berezovsky. Michael A.F. Johnson (Arnold & Porter LLP) for Federal Home Loan Mortgage Corporation and Federal Housing Finance Agency.

Companies: Federal Home Loan Mortgage Corporation; Freddie Mac; Garden Terrace Homeowners Association; Red Rock Financial Services, LLC; Wells Fargo Bank, N.A.

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