FHFA, Fannie and Freddie File Defensive Class Action in Nevada

by Bradley Arant Boult Cummings LLP

In an effort to “avoid the cost and burden of piecemeal litigation” of hundreds of cases in the Nevada HOA foreclosure crisis, the Federal Housing Finance Agency (FHFA), Fannie Mae, and Freddie Mac (collectively, “Plaintiffs”) recently filed a putative class action and motion to certify a defensive class, pursuant to Rule 28 (b)(2) and (b)(1)(B), in the District of Nevada.

Plaintiffs seek to certify a defensive class consisting of “all current record owners—other than Fannie Mae, Freddie Mac, or the Conservator—of Units as to which: (1) HOA Foreclosure Sales have been or will be completed on or after September 18, 2009, (2) an Enterprise Lien had attached and had not been satisfied at the time of the applicable HOA Foreclosure Sale, and (3) the Court may assume and exercise in rem jurisdiction.” Plaintiffs assert that 12 US.C. § 4617(j)(3) preempts Nev. Rev. Stat. § 116.3116 and that HOA Foreclosure Sales do not extinguish Fannie Mae or Freddie Mac liens.

Section 4617(j)(3) was enacted by Congress in July 2008as part of the Housing and Economic Recovery Act of 2008 (HERA), HERA established FHFA to regulate Fannie Mae, Freddie Mac, and the twelve Federal Home Loan Banks. In the “Property protection” section of HERA, Congress authorized that when Fannie Fae and Freddie Mac are under the conservatorship of FHFA, none of their property “shall be subject to . . . foreclosure . . . without the consent of [FHFA].” Thus, absent FHFA’s consent, Section 4617(j)(3) protects from extinguishment any form of property interest to which FHFA has not consented. In its April 21, 2005 Statement of HOA Super-Priority Lien Foreclosures, FHFA confirmed that it “has not consented, and will not content in the future, to the foreclosure or other extinguishment of any Fannie Mae or Freed Mac lien or other property interesting connection with the HOA foreclosures of super-priority liens.”

Plaintiffs’ Corrected First Amended Complaint and Motion to Certify Class asserts that between September 18, 2009 and June 30, 2015, there were 3,055 HOA foreclosure sales in Nevada in which a third party purchased the property.  Of these 3,055 sales, Plaintiffs assert a “sizeable percentage” of the properties were encumbered by a Fannie Mae or Freddie Mac lien at the time of the HOA foreclosure sale.  In September 2014, the Nevada Supreme Court held that HOA foreclosure proceedings properly conducted pursuant to Nev. Rev. Stat. § 116.3116 could  extinguish a pre-existing deed of trust. In the putative class complaint, Plaintiffs assert 12 U.S.C. 4617(j)(3) preempts Nevada state law to the extent the property sold at an HOA foreclosure sale was encumbered by a Fannie Mae or Freddie Mac lien.

Plaintiffs’ complaint asks the court for:

  1. a declaratory judgment that federal law prevents foreclosure of an HOA lien “from extinguishing a Fannie Mae, Freddie Mac, or Conservator lien on a property while the Enterprise is in FHFA conservatorship, and that therefore the Enterprise Liens continued to encumber the properties notwithstanding the HOA Foreclosure Sale;”
  2. a quiet-title judgment recognizing the continued validity of the Enterprise lien; and
  3. a permanent injunction enjoining any claim by named Defendants or absent members of the Proposed Class that an HOA Foreclosure Sale extinguished an Enterprise Lien. Plaintiffs’ conclude that a ruling on the merits in their favor “that Section 4617(j)(3) preempts Nev. Rev. Stat. § 116.3116, and [that] HOA Foreclosure Sales do not extinguish [Fannie Mae or Freddie Mac] liens [will decide] the issue for all record owners who have taken title following an HOA Foreclosure Sale of a Unit that was at the time of the HOA Foreclosure Sale encumbered by an Enterprise Lien.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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