9th Circuit Finds HOA Foreclosure Cannot Extinguish FHFA Interest

The Ninth Circuit relied on the Housing and Economic Recovery Act of 2008 (HERA) in ruling that Fannie Mae’s financial interest in a loan purchased in 2003 could not be extinguished by a foreclosure sale initiated by the property’s neighborhood HOA.  This ruling is the most recent case in a number of cases over the last decade addressing issues surrounding HOA foreclosure actions in Nevada.

Although Fannie Mae was not the record beneficiary of the subject property, Plaintiff-HOA and the Court both found it compelling that the Federal Foreclosure Bar was applicable in this case. Under the Federal Foreclosure Bar, as established under HERA, foreclosure cannot occur on a property in which Fannie Mae or Freddie Mac have an interest without the FHFA’s permission.  Pursuant to Ninth Circuit authority, such a property interest can be established through admissible evidence.  The Court looked to Fannie Mae’s 2003 purchase of the subject loan to find federal interest preventing the foreclosure at issue, as the HOA did not receive permission to foreclose from FHFA.

Plaintiff also challenged the Court’s subject matter jurisdiction in order to allege that the case must be remanded to state court.  Originally Plaintiff filed a quiet title action in 2013, and Defendant-Servicer removed the case to federal court, citing the deceased borrower’s residence for diversity jurisdiction purposes. Plaintiff then challenged this removal on two fronts. Plaintiff attempted to avoid federal court by joining the foreclosed homeowner to the quiet title action, who was a resident of Nevada just as the HOA was—but the homeowner was deceased.  Defendants removed to federal court, arguing fraudulent joinder of the deceased homeowner.

The Court agreed with the holding of several surrounding courts that, “you cannot sue a dead person”, and since the original quiet title action was against the defendant-servicer and the deceased borrower, the trial court had diversity jurisdiction from the beginning of this action as the deceased borrower was not a proper defendant.