The recent Nevada Supreme Court decision that allows homeowners associations to trump mortgage lenders in foreclosing on homes sent a shot from Carson City across the state and through the Nevada real estate community. The ruling has the potential to affect the delicate relationships among homeowners, HOAs and lenders covering more than 500,000 properties in nearly 3,000 HOAs in Nevada.

Kolleen Kelley, president of the Nevada Association of Realtors, referred to it as “Armageddon” on the day the decision was announced. She said banks would further restrict mortgage lending if their loans couldnt be protected. Other industry observers agreed.

The case centered on an $885,000 home in Southern Highlands sold at auction for $6,000 by an HOA.

The court ruled that super priority liens held by HOAs for unpaid assessments take precedence over first trust deeds held by banks or other mortgage lenders. Further, it said HOAs don't need to go to court for permission to seize a property, which it can then sell at auction for owed assessments and fees.

Critics of the decision have it wrong, many say. Jay Bloom of Las Vegas is one such voice. He's an entrepreneur and a director of 1st One Hundred, a Nevada real estate investment firm. Bloom told VEGAS INC recently there were numerous benefits from the decision.

For more All VEGAS INC business coverage

Are you familiar with the Nevada Supreme Court decision? What's your assessment of it?

It's probably the most positive thing that could have happened for Nevada real estate in the past five years.

Why?

It accomplishes a number of things. Homeowners associations have delinquent assessments that they need to collect the way a municipality has to collect property tax. If a municipality can't collect property taxes on a certain percentage of its population, then it needs to raise taxes on all its property owners or cut services. A homeowners association is the same thing. A homeowners association that has 15 to 20 percent of its population not paying means higher assessments for the ones who are or reduced services for the community.

This decision compels payment of the homeowners association fees by all property owners of the community — including lenders — which means lower assessments for homeowners and improved services, which increase property values.

The law that formed the basis of the decision was written decades ago by an independent group as a model for state governments across the country. Nineteen states have similar legislation. What is the public policy issue being addressed?

The people who wrote this law in the '80s thought that this approach of (making) the HOA senior to the banks would compel the banks to pay the HOA assessments for the houses that they lend against and help the communities. The Supreme Court justices very astutely recognized the public interests at stake. This law is good for the homeowners, it's good for the communities and it's good for property values. The most ironic part of this — it's really good for the banks.

Good for the banks?

Prior to this decision, the ambiguity of the status of the first mortgage meant that these HOA foreclosure sales were going for a few thousand dollars. Now, if you have a $300,000 house that sells for $5,000 and the bank gets extinguished, the bank is screaming how inequitable it is. However, with this decision … that $300,000 house will sell at HOA foreclosure sale for near $300,000. The HOA will get its $5,000 and the $295,000 that's left will go to the bank. It gets the banks paid.

You're saying the decision creates a road map enabling the free market to work?

It has the property selling at market instead of at low valuation. This is a win for Nevada. Homeowners' assessments will go down with this decision. Community services will improve. Property values will go up. And, it will free up that shadow inventory of property that the banks have been unwilling or unable to foreclose on and bring those properties back to life. A lot of those properties tend to be vacant properties that attract (marijuana) grow houses, meth labs and prostitution. It's these blights on the community that we're talking about putting back into play. Our experience is that owner-occupied residences pay the HOAs and are not the foreclosures that we're talking about here. These are abandoned houses, or these are properties of rent-stripping out-of-state owners who collect what they can until somebody takes the house. Now, we have anti-foreclosure legislation here … and that creates a situation where it takes the banks three to four years to go through the foreclosure process.

Doesn't this then create an end-run around those protective laws?

We're not talking about $300,000 mortgages here. You're talking about assessments that are $50 to $100 a month. The owner-occupied properties pay. Since the amounts are so (minimal), someone who's really invested in their home has the means to pay HOA fees. And, at the end of the day, this compels the banks to protect their interest by at least contributing to the neighborhoods where their interests and security are.