Super liens

But what about property rights?

The Nevada Supreme Court made a major mistake in 2014 when it ruled that home-owners associations could wipe out a lender’s financial investment on certain homes. On Thursday, the justices revisited the matter in similar case and should seize the chance to reverse course and right an obvious absurdity.

The controversy stems from a poorly written state statute dating to 1991 that is intended to protect HOAs from financial distress in the event of delinquent dues payments. The law allows these associations to initiate foreclosure proceedings in an effort to recover unpaid fees.

Flaws in the law became apparent during the recent housing crisis as thousands of Las Vegans living in HOA communities stopped paying their mortgages and dues when the value of their homes plummeted. When HOAs moved forward with these extra-judicial foreclosures, some construed the statute’s ambiguous wording as enabling them to extinguish all prior claims on the properties, including mortgage obligations.

That meant that an investor could theoretically purchase a $500,000 home at an HOA auction for a few thousand dollars to satisfy the association lien and take title to the residence without assuming the existing mortgage. The lender, meanwhile, eats hundreds of thousands of dollars.

Banks and other financial institutions argued against such an interpretation, of course. But a handful of Nevada courts split on the matter until the state high court ruled two years ago that an HOA foreclosure on a “super lien” could indeed erase any existing encumbrances on the property. If this strikes some as ludicrous, that’s because it is. Proponents of the decision argue that banks are free to pay off the delinquent dues themselves to maintain title. In fact, though, state law until 2015 did not mandate that HOAs notify lenders when they move to foreclose, a factor that led the 9th U.S. Circuit Court of Appeals in August to declare the Nevada law unconstitutional.

But the larger, more important question remains. On what constitutional grounds do lawmakers grant a third party the right to obliterate a valid legal contract between a bank and mortgagor? Until a buyer pays off a home loan, the lender retains a financial interest — a reality that shouldn’t depend on legislative whim. To argue otherwise cavalierly ignores all sorts of bedrock constitutional issues involving due process, private property and government takings.

And as a practical matter, why would a lender operate in a legal environment that sanctions such chicanery?

The case before the state Supreme Court involves the 2013 HOA sale of a Las Vegas condominium for $6,900 in back dues and other fees. The lender, Wells Fargo, had underwritten an $82,000 loan on the unit, which it lost thanks to the action. But the bank sued, arguing convincingly that the HOA has no right to confiscate its asset.

The justices shouldn’t continue to endorse this assault on property rights. At the same time, the Legislature must rethink the wisdom of elevating HOA liens above all others, particularly since there are plenty of alternative ways to help associations recover delinquent fees that don’t involve trampling on the rights of lenders.