Real Estate I AUGUST 6, 2019

Nevada HOA Foreclosure Ruling: “Superpriority” Liens Do Not Extinguish Federally Backed Mortgage Loans

In Daisy Trust v. Wells Fargo Bank, 135 Nev. Adv. Op. 30, 2019 WL 3366241 (2019) the Nevada Supreme Court ruled that an HOA “superpriority” foreclosure1 does not extinguish a first mortgage where the Federal Housing Finance Agency (“FHFA”) is the beneficiary of that loan, even if the federal interest is not apparent from the publicly recorded deed of trust. The Court’s HOA foreclosure ruling was based on the “Federal Foreclosure Bar,”2 and it carries major implications for lenders and HOA sale buyers alike.

Context: What is the Federal Foreclosure Bar?

The Federal Foreclosure Bar is a colloquial name for 12 U.S.C. § 4617(j)(3), which provides that “no property of the [FHFA] shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the Agency, nor shall any involuntary lien attach to the property of the Agency.” In practice, the FHFA generally obtains beneficial interests in mortgage loans through the Federal National Mortgage Association (“Fannie Mae”), or the Federal Home Mortgage Association (“Freddie Mac”), both of which are under FHFA conservatorship.

As a practical matter, this means that an interest in property held by Fannie Mae or Freddie Mac cannot be foreclosed upon without the FHFA’s consent. See Berezovsky v. Moniz, 869 F.3d 923, 933 (9th Cir. 2017). However, the Nevada Supreme Court had not had occasion to consider the Federal Foreclosure Bar’s applicability to superpriority lien foreclosures until its July 25, 2019 decision in Daisy Trust.

Facts/Procedural History of the Daisy Trust Case

The homeowners in Daisy Trust obtained a loan through Universal Mortgage Company (“Universal”) to purchase the subject property, which was governed by an HOA. The deed of trust identified Mortgage Electronic Registration Systems (“MERS”)3 as the beneficiary on behalf of Universal and its successors. Universal subsequently sold its interest to Freddie Mac; however, MERS remained the beneficiary of the publicly recorded deed of trust. The homeowners defaulted on their loan, and MERS assigned its interest in the loan to its servicer, Wells Fargo Bank (“Wells Fargo”), to facilitate a foreclosure.

The homeowners had also defaulted on their monthly HOA assessments, and the HOA began foreclosure proceedings of its own under NRS Chapter 116. Daisy Trust purchased the property at the resulting sale for $10,500. Daisy Trust subsequently brought a quiet title action against Wells Fargo and various other potential lienholders.

Daisy Trust first became aware of Freddie Mac’s interest during discovery in the lawsuit. Wells Fargo sought summary judgment, arguing that the federal foreclosure bar prevented the HOA sale from extinguishing the first deed of trust. It produced declarations from employees of Wells Fargo and Freddie Mac attesting to Freddie Mac’s acquisition of the loan, which were accompanied by database printouts from both entities purportedly showing the transfer. In opposition, Daisy Trust argued that: (1) Freddie Mac could not establish its ownership interest because Wells Fargo was the publicly recorded deed of trust beneficiary; and (2) the employee declarations were insufficient to show Freddie Mac’s ownership interest because they did not include the loan servicing agreement or promissory note.

The district court rejected Daisy Trust’s arguments and granted summary judgment in favor of Wells Fargo. Daisy Trust appealed.

The Court's Ruling

The Nevada Supreme Court rejected Daisy Trust’s arguments in a unanimous 7-0 en banc decision, reasoning as follows:

Fannie Mae/Freddie Mac Need Not Record Their Interest: The Court acknowledged that NRS 106.210 generally provides that “any assignment of the beneficial interest under a deed of trust must be recorded.” However, the Court’s prior ruling in Edelstein v. Bank of New York Mellon4 held that MERS may serve as the record deed of trust beneficiary on behalf of a lender and its successors, including federal entities such as Freddie Mac. The Court’s subsequent ruling in In re Montierth5 clarified that, even though a promissory note and accompanying deed of trust may be “split,” through a MERS transfer, the note nevertheless remains fully secured by the deed of trust so long as the beneficiary is in an agency relationship with the note holder. Because an agency relationship existed between MERS and Freddie Mac (and its predecessors), Freddie Mac’s interest was secured by the first deed of trust, even if it was unrecorded.6

Original Note/Servicing Agreement Not Necessary: The Court held that Wells Fargo’s declarations and records were sufficient to establish Freddie Mac’s interest, even in the absence of introducing the servicing agreement or original note. So long as the proffered declarations and documents are properly authenticated,7 and they confirm the identity of the servicer and the federal beneficiary, they are sufficient to make a rebuttable showing that the Federal Foreclosure Bar applies. To whatever extent Daisy Trust questioned the representations made in those materials, it carried the burden to show that they were untrustworthy.

Implications for Buyers

Daisy Trust presents obvious risks for buyers at HOA foreclosure sales. It is extremely difficult for a buyer conducting due diligence to determine whether Fannie Mae or Freddie Mac has an unrecorded interest in a foreclosure property. An HOA foreclosure purchase therefore becomes something of a gamble; a buyer’s first reasonable opportunity to learn of a federal interest in their property may come during litigation, as was the case in Daisy Trust.

On the bright side, there are potential arguments available to HOA foreclosure sale buyers that do not appear to have been raised in Daisy Trust. A “lurking” federal encumbrance that a buyer can only reasonably discover after purchasing an interest in property at least arguably violates the purchaser’s due process rights. Buyers could also argue that Fannie Mae and Freddie Mac impliedly consent to a superpriority foreclosure by not tendering a payoff after receiving notice of the lien. For example, Fannie Mae’s guidelines require servicers to “take all reasonable actions to prevent new liens that would be superior to Fannie Mae's mortgage lien from being attached against property.”8 Freddie Mac has similarly given guidance to its servicers instructing them to pay off potential superpriority liens.9

These issues will very likely be the subject of future litigation. In the meantime, however, potential buyers at Nevada HOA foreclosure sales are well-advised to consider the risk presented by an unrecorded federal interest, and to price that risk into their bids.

1 Generally speaking, a properly conducted HOA lien foreclosure sale extinguishes a first deed of trust. See NRS 116.3116; accord SFR Investments Pool 1, LLC v. Bank of New York Mellon, 134 Nev. Adv. Op. 58, 422 P.3d 1248, 1250 (2018).
2 See 12 U.S.C. § 4617(j)(3).
3 MERS is a database created by the banking industry which tracks mortgage ownership and servicing rights through a private database separate from the ordinary public recording system. MERS is generally named as the beneficiary of the publicly-recorded deed of trust, and it then tracks who the actual beneficiary of the loan is through its own internal database. This system simplifies the transfer of mortgage loans among lenders and servicers; however, it is sometimes criticized for obscuring the identity of the true beneficiary of a loan—a problem that Daisy Trust illustrates with particular clarity.
4 128 Nev. 505, 520–21, 286 P.3d 249, 259–60 (2012).
5 131 Nev. 543, 547–48, 354 P.3d 648, 650–51 (2015).
6 The Court held that, because Freddie Mac’s interest did not need to be recorded, it was not necessary to consider Daisy Trust’s argument that it was a bona fide purchaser for value.
7 The documents at issue in Daisy Trust were authenticated as business records, which requires showing that they were: (1) made at or near the time of the event being recorded; (2) by a person with knowledge of the event; and (3) in the course of the businesses’ regularly conducted activity. NRS 51.135.
8 See D1-6-02: Handling Notices of Liens, Legal Action, Other Actions Impacting Fannie Mae’s Interest (July 12, 2017)
9 See FREDDIE MAC, BULLETIN NO. 2014-20 at 3 (Nov. 17, 2014)