In the 2011 session, the Nevada Legislature made sweeping changes to state statutes dealing with deficiency judgments and the requirements and procedure for foreclosures. These changes took effect on July 10, 2011, for AB 284 (2011) and on October 1, 2011, for AB 273 (2011).
The intent behind AB 284 was to require the foreclosing party to verify possession of certain documents prior to foreclosure. AB 284 was, at least in part, the Nevada Legislature’s reaction to “robo-signing”: the nationwide practice of lenders executing mortgage-related affidavits, assignments and other foreclosure-related documents without actual knowledge of the factual averments stated in the documents.
AB 284 requires a foreclosing lender to submit an affidavit with the notice of default and election to sell. The affidavit must be signed based on personal knowledge under penalty of perjury and contain specific information and statements, including a statement that the beneficiary or the trustee is in actual or constructive possession of the note.
One of the many issues addressed by AB 273, on the other hand, was to limit the deficiency amount that a lender may obtain after foreclosure to the amount of money the lender paid for the right to obtain the judgment. This means that a company specializing in collections could not pay a foreclosing lender $1,000 for its right to pursue a deficiency, and then pursue the borrower for a full deficiency obligation of $80,000. In addition to limiting the lender’s recovery to the amount paid, AB 273 also prohibited creditors from obtaining a double recovery. Thus, a lender’s recovery is limited by any amounts received pursuant to an insurance policy, such as mortgage insurance.
For all the good that came from AB 273 and AB 284, both have had unintended consequences. For instance, AB 284 made it much more difficult for lenders to foreclose. As a result, in the 12 months prior to AB 284’s enactment on October 1, 2011, Washoe County averaged 546 recorded notices of default per month. In the 15 months following its enactment, Washoe County has averaged just 95 per month. According to Steve Schiller, president of Northern Nevada Regional Operations for Ticor Title of Nevada, in Washoe County, AB 284 contributed to the addition of 4,740 “shadow inventory” homes: houses in which the homeowner is in default and the lender has not initiated foreclosure proceedings.
The unintended consequences resulting from the passage of AB 273 are less apparent, but just as potentially problematic as those resulting from AB 284. For instance, when one bank acquires another — as occurred with great frequency from 2009 through 2012 — the banks do not assign a value to each individual note. Thus, determining the amount of consideration the acquiring bank paid for the right to enforce a particular note is problematic.
AB 273 also limits the lender’s recovery by the amount of proceeds it received from an insurance policy. The problem with this limitation is that it fails to account for the fact that once a mortgage insurer pays the lender, it receives subrogation rights permitting it to seek recovery against the borrower. AB 273 has, effectively, denied private mortgage insurers their right to pursue borrowers for the amounts the insurers pay to lenders. This could have a chilling effect on mortgage insurers’ desire to insure mortgages in Nevada, which could further affect the price Nevadans pay for such insurance.
The Nevada Legislature is currently considering several bills aimed at remedying some of these concerns. Amongst them is AB 300 (2013). If passed, AB 300 would amend many of the requirements for the affidavit of authority implemented by AB 284. For example, instead of requiring personal knowledge on the part of the lender’s representative signing the affidavit, AB 300 would permit the representative to attest to the statements made in the affidavit based upon the affiant’s review of business records or the records of the county recorder. Further, instead of stating that the lender or the trustee is in actual or constructive possession of the note, AB 300 would permit the affiant to simply state that the beneficiary or the trustee is entitled to enforce the note. The joint task force hopes the less-strict requirements for the affidavit of authority in AB 300 will reduce the chilling effect on foreclosures caused by AB 284.
The Legislature is also considering AB 431 (2013) which addresses many of the unintended consequences resulting from AB 273 (2011). If passed, AB 431 would clarify that, when one bank acquires another and thereby acquires its notes and deeds of trust, the amount of consideration paid for each note is the total amount it paid for all the notes divided by the number of notes. Thus, if Bank 1 acquires all of Bank 2’s 100 existing residential loan obligations for $1 million, the amount of consideration Bank 1 provided for the right to enforce each obligation is $10,000. Furthermore, AB 431 would only limit the amount of a deficiency judgment to the consideration paid if the right to obtain the judgment is transferred after a foreclosure; in other words, if the right is transferred specifically for the purpose of pursuing and collecting on a deficiency judgment. In addition, AB 431 provides that the amount of a deficiency judgment would only be reduced by the amount of any insurance proceeds received by the party pursuing a deficiency. Thus, the subrogation rights of the insurer would not be affected.
This article provides only a highlight of some of the foreclosure-related bills currently before the Legislature. Other bills concerning the same subject matter are: AB 273, 274 and 332, and SB 160, 278 424 and 491. Bills have a tendency to die or be amended quickly. Therefore, the information contained in this article is only reliable as of the date of publication.
Shay L. Wells is an associate with Woodburn and Wedge practicing in the areas of commercial litigation and creditor rights. Contact him at 775-688-3000 or swells@woodburnandwedge.com.
