The following is a case update written by Hon. Meredith A. Jury (United States Bankruptcy Judge, C.D. Cal., Ret.), analyzing a recent decision of interest:
Even though the ownership of a first trust deed by Federal Home Loan Mortgage Corporation (Freddie Mac) was undisclosed, the loan’s servicer Bayview Loan Servicing holding the beneficial interest of record, Freddie Mac was still entitled to the non-extinguishment protection of the Federal Foreclosure Bar of the Housing and Economic Recovery Act (HERA) against a nonjudicial foreclosure by a superpriority homeowners association (HOA) in Nevada, which was designed by statute to extinguish liens junior to the HOA’s position. Bayview Loan Servicing, LLC v. Shadow Spring Community Association, 2019 WL 6219525 (D. Nev. Nov. 21, 2019).
Freddie Mac, which has been under the conservatorship of the Federal Housing Finance Agency (FHFA) since 2008, purchased the mortgage on the home located at 6364 Glenolden Street in North Las Vegas, Nevada, in 2005, along with the trust deed that secures it. The trust deed has been assigned several times to various nominees acting as Freddie Mac’s loan-servicing agents, including Bank of America and currently Bayview Loan Servicing, LLC. As is its custom, Freddie Mac does not appear of record to hold the beneficial interest in the deed of trust, that interest being recorded in the name of the servicing agent.
The Glenolden Street home is in the Shadow Springs common-interest community and subject to its homeowners’ association’s covenants, conditions, and restrictions (CC&Rs). The Nevada Legislature gave HOA’s a superpriority lien against residential property for certain delinquent assessments, enforceable by a nonjudicial foreclosure procedure. Due to the homeowner’s delinquency in paying assessments, the HOA conducted such a nonjudicial foreclosure, concluding with an auction of the property to a Trust in November 2013. In such circumstance, Nevada Revised Statutes 116.3116(2) provides that foreclosure by an HOA of its superpriority lien will extinguish a first deed of trust.
In a suit to quiet title filed in the Nevada District Court by Bayview and Freddie Mac, they asserted that their deed of trust was not extinguished due to the Federal Foreclosure Bar in 12 U.S.C. § 4617(j)(3), which creates an exception to that result. The Housing and Economic Recovery Act (HERA), which went into effect in 2008, established the FHFA and placed Freddie Mac under that agency’s conservatorship.
In cross summary judgment motions, the District Court analyzed the effect of HERA on the foreclosure of the HOA’s superpriority lien and concluded that Freddie Mac was correct: The Federal Foreclosure Bar enacted as part of HERA prevents the extinguishment of a Freddie Mac deed of trust when an HOA forecloses a superpriority lien notwithstanding the NRS and the intent of the Nevada Legislature. The court granted judgment for Freddie Mac, quieting title with its deed of trust remaining of record in the first priority position.
The district court was not writing on a fresh slate when it considered the impact of the FHFA conservatorship on Freddie Mac’s deed of trust. In Berezovsky v Moniz, 869 F.3d 923, 931 (9th Cir. 2017), the Ninth Circuit held that the Federal Foreclosure Bar supersedes the Nevada superpriority lien provision, preventing a nonjudicial foreclosure sale from extinguishing a Freddie Mac deed of trust when it was under the FHFA conservatorship. The question to be resolved in Bayview was whether Freddie Mac held a protectable interest in the trust deed when at the time of the sale Bank of America appeared as record owner of the beneficial interest.
In the summary judgment motion, Freddie Mac offered the declaration of its Director of Loss Mitigation and corroborating documents which established that Freddie Mac had purchased the loan in 2005 and had owned it ever since. The various servicing-agents, including Bank of America at the time of the foreclosure sale, were servicing the loan under the terms of Freddie Mac’s Single-Family Seller/Servicer Guide which is publicly available. The declaration, documents and the Guide all showed, without contradiction, that Bank of America and Bayview were merely agents for servicing purposes only, with the beneficial interest remaining with Freddie Mac.
The Trust asserted that to enjoy the protection of the Federal Foreclosure Bar, a Nevada statute enacted in 2011 required all assignments of a beneficial interest in a trust deed to be recorded. The district court rejected this argument for two reasons. First, Freddie Mac had acquired its beneficial interest in 2005 and the 2011 legislation only applied to a deed of trust made after July 1, 2011. Second, the Nevada Supreme Court in Daisy Trust v. Wells Fargo Bank, N.A., 445 P. 3d 846 (2019), stated “a deed of trust [need not] be ‘assigned’ or ‘conveyed’ to Freddie Mac in order for Freddie Mac to own the secured loan,” and “the record deed of trust beneficiary is in an agency relationship with” Freddie Mac. So, “Nevada’s recording statutes did not require Freddie Mac to publicly record its ownership interest as a prerequisite for establishing [that] interest.”
In addition to holding that Freddie Mac held the beneficial interest, the court also found no evidence that FHFA had consented to the extinguishment of the deed of trust. Therefore, the Federal Foreclosure Bar prevented the extinguishment of the deed of trust.
The Nevada Supreme Court shook up the residential mortgage lending community when in SFR investments Pool 1 v. U.S. Bank, 130 Nev. 742, 334 P. 3d 408 (2014)it held that the nonjudicial foreclosure of an HOA’s superpriority lien would extinguish a first deed of trust on a single family residence. Such was the public outcry of the lenders that the Nevada legislature amended its statute by creating a statutory right for homeowners, holders of a recorded security interest and successors in interest to redeem property within a 60-day timeframe after such sale. This amendment allowed first trust deed holders to save their security by tendering the delinquent assessments to the HOA, deemed a just outcome, and the fervor died down.
This case is addressing a sale which occurred long before the statutory amendment. It and other cases, most unpublished, tussled mainly with what level of proof was necessary to show that Freddie Mac (or Fannie Mae) owned the beneficial interest in the deed of trust such that the Federal Foreclosure Bar would protect it from extinguishment. Any practitioner faced with a case where the foreclosure sale occurred before the amendments should inspect the record here to determine how to present the necessary evidence of ownership if the loan is owned by Freddie Mac or Fannie Mae.
These materials were written by the Hon. Meredith A. Jury (United States Bankruptcy Judge, C.D. Cal., Ret.) a member of the ad hoc group with editorial contributions by Monique D. Jewett-Brewster, an attorney with Hopkins & Carley, ALC, a member of the ad hoc group and 2018-19 Chair of the CLA Business Law Section. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.