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Legislature makes changes in lending law

John Fowler

The Nevada Legislature while in session passed bills giving greater protections to borrowers whose homes are in foreclosure and force banks to respond to short sale offers. We address two Assembly Bill 273, which was signed by the governor on June 10, and Senate Bill 414, which is awaiting the governor’s approval or veto.

New protections from lenders

Junior deeds of trust are debt obligations owed by a property owner which have priority after the first deed of trust. Holders of these are always in danger of a foreclosure by the first deed of trust, leaving them out of luck. A completed foreclosure sale of the first deed of trust wipes out the security interest of the second holder in real property.

At present, a sold-out junior has six years after his debt went into default to sue the debtor on the obligation. Those sold-out juniors can sue for the full amount even though they may have received reimbursement from a mortgage insurance policy insuring repayment of the obligation secured by the deed of trust. These rules favor investors who buy packages of sold-out junior deeds of trust, because they can buy the obligations at a discount but sue for the full face value.

Assembly Bill 273 makes investments in sold-out juniors or junior deeds of trust somewhat less attractive. The bill shortens the time a sold-out junior can sue on its debt to the period of time between the date of the foreclosure sale and six months after the date of the foreclosure sale. Assembly Bill 273 also requires a court awarding a money judgment in favor of a sold-out junior to subtract from the amount of the judgment the amount received by the sold-out junior from the mortgage insurance policy.

Another restriction makes purchasing junior notes secured by deeds of trust on Nevada real property quite unattractive. The judgment a sold-out junior can obtain is capped by the amount the junior paid for the note, plus interest. This means that if an investor buys a package of junior deeds of trust on Nevada real property at a steep discount, that investor can obtain a judgment against an individual property owner only for the amount the investor paid for that note, plus interest. If the investor is a financial institution, the obligation was secured by a single family home, the proceeds were used to purchase the house, the owner lives there and the owner did not refinance the obligation, the investor cannot obtain a judgment against the debtor at all.

Purchasers of deeds of trust

New rules limit the rights of those who purchase a note secured by a deed of trust on Nevada real property, both a first deed and a junior deed of trust. The old rule governing these notes secured by deeds of trust limited the amount of a deficiency judgment that a lender, or the purchaser of the note and deed of trust from the lender, can recover in a judgment against the borrower. That rule was that a deficiency judgment (the judgment obtained after the foreclosure sale occurs) cannot exceed the lesser of the amount of the indebtedness minus the fair market value of the property (if the note holder takes ownership of the property at the foreclosure sale) or the indebtedness minus what the property sold for at the foreclosure sale (if a bidder purchased the property at the foreclosure sale).

Assembly Bill 273 extends the rule on deficiency judgments obtained by the purchaser of the note and deed of trust to sold-out juniors. This existing rule does not apply to sold-out juniors; under AB 273 it will apply to sold-out juniors. With home values where they are, as a practical matter, this means buyers of a note and deed of trust can never obtain a judgment for more than what they paid for the note. They can never obtain a judgment for the full principal balance of the note. And in all cases, the judge must subtract from the judgment all amounts received by the purchaser from any mortgage insurance policy that insured the deed of trust.

New protections for guarantor of note secured by Nevada real property

Assembly Bill 273 also gives new protections for those guaranteeing a note secured by a deed of trust on Nevada real property. The existing rule allows a guarantor, in most circumstances, to waive all the protections of statutes protecting borrowers from foreclosure sales, limiting deficiency judgments and preventing foreclosure sales. If the guarantee document waives those rules, a lender can sue a guarantor even while simultaneously foreclosing on the real property. These rules do not apply to the guarantors of debts $500,000 or less, the proceeds of which were used to buy a principal residence of a homeowner and the homeowner did not refinance the property.

Assembly Bill 273 continues these rules but limits the amount of a judgment that a lender can obtain. Under the new law, when the lender sues the guarantor, the judge must hold a hearing to determine the fair market value of the property that secured the debt. The judgment cannot be for more than the amount by which the indebtedness owed exceeds the fair market value of the property or, if the foreclosure sale happens before a judgment is handed down, the difference between what the property sold for at the foreclosure sale and the debt or the amount of the debt minus the fair market value of the property, whichever is less.

Banks must respond to short sale offers

Many Nevada borrowers have difficulty getting their banks to respond to a short sale offer on their home, an offer by a buyer to buy the home for less than the amount of the debt secured by the home. A new statute in Senate Bill 414 forbids a bank from unreasonably delaying a response to a short sale offer. It presumes that 90 days after the offer is made is an unreasonable delay.

John Fowler is a shareholder at Woodburn and Wedge and practices primarily in the area of corporate and business law and real estate law. Contact him at 688-3000 or jfowler@woodburnandwedge.com.