NEWPORT BEACH, CA—Homeowners associationscelebrated a legal victory in the Nevada SupremeCourt last month when it was decided that that HOAs wereallowed to foreclose on homes and then sell them for pennies on thedollar to recoup delinquent payments rather than waiting years forlenders to foreclose on the homes themselves. According to anarticle in the Wall Street Journal,the Mortgage Bankers Association has claimed thatmortgage lenders could lose as much as billions ofdollars in security interests by this practice, but MichaelMeyer, managing principal of locally basedinvestment-management firm TwinRock Partners, saysthese fears are unfounded and that the ruling is a good thing forall involved.

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According to the article, TwinRock purchased roughly 100 homesat Nevada HOA sales in the past two years that it hopes to sell ata huge profit. GlobeSt.com spoke with Meyer to discuss theimplications of the ruling and what it means for lenders and thehousing market.

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GlobeSt.com: Should HOAs have the right to auctiondelinquent homeowners' homes without the blessing of the mortgagelender?

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Meyer: Yes. The problem is the law waswritten 20-something years ago with the involvement of lenders andI believe Fannie Mae, and it was well thought outas a way to protect all of the homeowners in an HOA. If it turnedout that there were a large number of homeowners who weren't payingtheir dues because they were underwater on their mortgages, thenthis provided the HOAs with some muscle to get their dues paid sothat all of the other owners in the association wouldn't have topay more or lose services. If they had to pay more, a lot ofassociations in entry-level communities where people can't reallyafford to start paying more would be hurt, or the value of theircondo or home would go down and more would default.

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In essence HOAs are like many municipalities that provide allthe services for cities, and they have taxing authority, so theyget a priority lien when someone defaults on their payments. Thisgives HOAs the same rights as the City; it protects the value ofneighborhoods and homes. It was supposed to be that banks wouldmonitor and pay past-due dues—that's what they do with taxes—andthen the HOA would be fine and the bank would decide what to do byeither working it out with the borrower by doing a loanmodification and adding what they paid to it, or deciding toforeclose. Either the bank would buy it back or someone else wouldbuy it. If the bank buys it, they would end up selling it. If otherpeople buy it, like we did, we would always either try to let theperson who lost the home stay there as a renter if they couldafford it or renovate the home and find tenants to live in it.

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GlobeSt.com: So why didn't it work out thisway?

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Meyer: Just like with the sub-primecrisis, where the banks were packaging loans and putting them intocertificates, the banks got caught with their pants down. Theyweren't tracking all the details of their loans, and then we hadthis whole big crisis. In this case, the banks didn't take care ofthese HOA liens and got caught with someforeclosures, so they started going through thecourt system to say that's not what this law really said. They lostin that regard. Now, nobody will be hurt because the banks will beon top of what they should do. It's a uniform law that was writtenfor all the states, and about 20 states adopted it, includingNevada. There, the issue got taken to the Supreme Court, more orless on appeal. About two weeks ago, the Nevada Supreme Courtconfirmed that this is what the law says: if there's a foreclosure,the HOA gets a super-priority lien of nine months of past-due dues.They have the ability to foreclose because of that lien, and ifthey do, all junior liens are wiped out.

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GlobeSt.com: Why do you feel this ruling won't havenegative implications for mortgage lenders?

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Meyer: There's a lot of discussionamong mortgage lenders, the MBA and title companies, and there'llbe some peripheral issues that get taken up in the courts. Banksare not going to want to accept this lying down. But it's reallygoing to be very positive for the lending industry, too, once itgets settled down. What's supposed to happen is when the HOAsforeclose, after they try to work it out with the borrowers, thenpeople come to those foreclosure auctions. It's all published andpublicized, and they bid on the homes up to market value. The banksrecover just as much as they would have recovered if they hadforeclosed themselves.

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In Nevada, this will create a lot of new jobs once it'sstabilized. When values recover a little more, there will be a lotof home-building there. The technology revolution has been greatfor companies' efficiency, but people lose jobs; home constructionis one area where whenever the economy improves, it creates a hugenumber of jobs for builders and servicers.

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Stay tuned for an update to this story in which GlobeSt.comspeaks with a mortgage lender to get their perspective on thisruling.

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Carrie Rossenfeld

Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.