NEVADA’S ANTI-DEFICIENCY STATUTE
If you’re like many of the homeowners in the state of Nevada, you may be facing or have already gone through a home foreclosure. When this occurs in a depressed market, it can often result in a “deficiency” when the bank does not recover the total amount owed at the time of the foreclosure sale. While banks can pursue the homeowner for the deficiency once the foreclosure sale is completed, Nevada law places specific limits on when and how much the bank can recover from the foreclosed homeowner. Below is a summary of the deficiency laws in Nevada and the ways in which your are protected after a foreclosure sale.
1. The Six Month Rule:
Nevada law provides a six month time limit during which lenders can pursue homeowners for deficiency judgments following a trustee sale. Here’s an example of how this rule operates in practice.
Homeowner defaults on his first mortgage and the Lender files a notice of default and election to sell. A trustee’s sale is properly noticed and conducted on January 1, 2011. The property is sold for less than the homeowner currently owes resulting in a “deficiency” owed to the Lender. The Lender has until July 1, 2011 to file a complaint requesting a hearing to establish the amount of the “deficiency judgment” the Lender will receive against the homeowner. The Lender then becomes an unsecured judgment creditor and can attempt to collect the judgment from the homeowner personally through any legal means available.
What happens if the Lender fails to file its deficiency complaint within six months from the date of the sale? The Nevada Supreme Court has held that the Lender is forever barred from seeking a deficiency judgment. This is an inflexible rule that is enforced strictly upon the Lender and failure to comply with the rule relieves the homeowner from ever facing any personal liability for the deficiency resulting from the foreclosure sale.
This protection extends not only to the homeowner, but to any individual or business that personally guaranteed repayment of the note. For example, a parent co-signs for his son to purchase his first home. The parent is NOT a record owner of the home which is held in the solely in the son’s name. The son defaults and a foreclosure sale ensues as described above. If the Lender fails to file for a deficiency judgment within the six month time period, it is barred from pursuing the son, his father, and any other individual or business that may have guaranteed repayment on the loan. This is true regardless of whether the guarantors of the loan were also owners of record on the real property.
Nor does it matter whether the property sold was utilized for commercial or residential purposes. While some states may limit the deficiency protections to residential homeowners, the Nevada Supreme Court has allowed blanket protection to all principals and guarantors of a debt secured by real property regardless of whether the property was a single family residence, condominium, or a commercial building.
2. The Fair Market Value Rule:
Even when the lender has complied with the six month rule discussed above, the amount of the judgment the lender can obtain is limited. Specifically, Nevada law restricts the judgment amount following a foreclosure sale to the difference between the fair market value of the property and the total debt owed on the date of the foreclosure sale. Below is an example:
The lender is owed $300,000. At the time of the foreclosure, the lender has the property appraised, resulting in an appraised value of $250,000. At the foreclosure sale, the property only brings in $200,000, leaving the lender short $100,000. Although the lender is owed $100,000, Nevada law limits the amount of the deficiency judgment to the difference between the appraised value and total debt owed ($50,000) rather than the difference between the sale price and the total debt owed ($100,000). This results in the lender receiving a $50,000 judgment and being forced to forego collection on the remaining $50,000 debt. However, the Court may also include in the judgment interest accrued at the statutory rate from the date of the sale forward.
Additionally, Nevada law places a burden on the Lender to establish the fair market value at the time of the sale by virtue of an appraisal. Although there is no Nevada case law on point, it is possible that the Lender’s failure to appraise the property in a timely fashion may preclude it from proving fair market value and, as such, prevent it from obtaining a deficiency judgment in any amount.
3. The Effect on Junior Lienholders:
When foreclosure occurs and the foreclosure proceeds are insufficient to cover the first mortgage on the property, all junior lienholders (2nd mortgages, home equity loans, lines of credit, etc.) are “wiped out.” This does not mean that the junior lenders are no longer owed money, but that they no longer have any security interest in the foreclosed property. The debt owed to the junior lenders is essentially a “deficiency” because the foreclosure proceeds were insufficient to repay them. This raises the question of whether the six month time limit that applies to the foreclosing lender also applies to the junior lenders.
On this point, Nevada law is unclear. The deficiency statutes can be read and interpreted both to preclude application to junior lenders or to require them to file within the six month time period. This firm has successfully argued that the six month time limit did apply to preclude a lender from pursuing a judgment on a second mortgage. In that case, a single lender held both the first and second security positions on the property. The foreclosure proceeds were insufficient repay the first and second notes, and the Lender filed a complaint to collect on both. However, the Lender failed to file its complaint within the six month time period. We filed a motion to dismiss that was granted by the district court, which declined to distinguish between the first and second mortgage in terms of the applicability of the six month time limitation.
One would assume that Lenders would be aware of this rule and have no problems complying with the six month time limitation. However, due to the wave of foreclosures in Nevada and the time consuming process of the Nevada Mediation Rules, it is not surprising that Lenders have failed to comply with the procedural rules in order to receive deficiency judgments. These failures can result in substantial financial losses. In the case described above, the Lender was precluded from receiving a judgment in excess of $300,000.
If you are facing or have recently been involved in foreclosure proceedings, it is important that you speak with an attorney regarding the issues discussed above. Doing so will allow you to take advantage of the protections that Nevada law offers to homeowners that have suffered due to the failing housing market and the depressed economic climate.
Mills & Anderson Law Group focuses its practice in the area of family law including: divorce, custody, child support, spousal support, alimony, guardianship, adoption, termination of parental rights, and abuse and neglect proceedings. We also practice in the areas of corporate consulting, contracts, business organizations and criminal law. If there is a specific topic you would like information on, feel free to comment on the blog or contact us directly via our “contact us” page.