The Government-Sponsored Enterprises (GSEs) and their servicers scored a significant victory last week in the Nevada Supreme Court. In Nationstar Mortgage, LLC v. SFR Investments Pool 1, LLC (Case No. 69400), the court held that mortgage servicers have standing to assert, on behalf of the GSE investor, that the Housing and Economic Recovery Act (HERA) preempts state law and prevents extinguishment of the GSE loan at an HOA foreclosure sale.
Since the Nevada Supreme Court’s decision in September 2014 that foreclosure of an HOA lien could extinguish a deed of trust, investors and servicers, on the one hand, and HOA foreclosure sale purchasers, on the other hand, have been litigating whether deeds of trust survive an HOA foreclosure sale under NRS 116.3116. One major defense for investors and servicers has been that HERA prevents extinguishment of a deed of trust at an HOA foreclosure sale when a GSE, such as Fannie Mae or Freddie Mac, owned the loan at the time of the HOA foreclosure sale.
By way of background, Congress passed HERA in July 2008, which established the Federal Housing Finance Agency (FHFA). FHFA is an independent federal agency with regulatory and oversight authority over Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In September 2008, FHFA placed Fannie Mae and Freddie Mac into conservatorships “for the purpose of reorganizing, rehabilitating, or winding up [their] affairs.” While FHFA acts as conservator, “[no] property of the Agency shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the Agency.” In 2015, FHFA released a written statement providing that it “supports the reliance on [HERA] in litigation by authorized servicers of [the GSEs] to preclude the purported involuntary extinguishment of [the GSE’s] interest by an HOA foreclosure sale.”
One issue that has arisen frequently in the HOA litigation involving a GSE-owned loan is whether a servicer may assert the defense on behalf of the GSE or whether the GSE and/or FHFA must be joined as a party to the litigation. Investors and servicers have argued that the servicers have standing to assert HERA on behalf of the GSE. HOA sale purchasers have argued that HERA specifically requires FHFA be a party to the litigation to assert HERA and that, under Armstrong v. Exceptional Child Center, Inc., private litigants such as the mortgage servicer may not assert the Supremacy Clause as a basis for preempting state law.
In Nationstar Mortgage, LLC v. SFR Investments Pool 1, LLC, the Nevada Supreme Court held, as a matter of first impression, that servicers have standing to assert HERA on behalf of GSEs and FHFA. The court held that the plain language of HERA “explicitly allows the FHFA to authorize a loan servicer to administer FHFA loans on FHFA’s behalf.” Furthermore, the court rejected SFR’s reliance on Armstrong as “misplaced,” finding that Nationstar was asserting HERA preemption as a defense rather than a cause of action.
The court’s decision does not address, however, the dispositive question in these cases—whether HERA actually preempts state law and prevents extinguishment when a loan is owned by Fannie Mae or Freddie Mac at the time of the HOA sale—because the district court failed to reach this issue. In the meantime, this decision represents a major victory for GSEs and FHFA, which are currently flooded with hundreds of quiet title cases throughout Nevada.