Nevada Foreclosure and Recourse Rules

This week we look at Nevada foreclosure and deficiency judgment rules, and conclude next week with the Arizona rules. The Nevada foreclosure process is similar to California’s. Nevada uses a deed of trust to secure the real property loan, and the trustee of the deed of trust carries out the trustee sale.  The details of the process are a little different, however. Like in California, the process begins with the filing of a notice of default. The defaulting property owner then hast 35 days to correct the default by paying the past due amounts of the mortgage. After day 36, the entire mortgage balance must be paid to cancel the foreclosure. These time frames are much different from California’s, which allows 90 days to pay the past due amounts. 90 days after the notice of default is filed, the Trustee sale notice is filed. There is a 20 day waiting period, and then the sale can take place. The total run time is 111 days. If an owner occupied single family residence is involved, there are additional steps to the foreclosure process. The first is that the foreclosing entity must give the homeowner the opportunity to meet and mediate to see if a loan modification or short sale can be worked out.  This rule does not apply to rental or investment properties. If the homeowner elects to participate in mediation, there is a $200 fee. After foreclosure, Nevada does allow recourse against borrowers, but an additional wrinkle is involved. For mortgages issued before October 1, 2009 for any property, the foreclosing entity had six months from the foreclosure date to apply to the district court where the property was located to set a deficiency hearing. At the hearing, the court would hear evidence and determine the amount of the deficiency. If the foreclosing entity did not apply for the hearing within six months, their right to the deficiency terminated by operation of law and expired. (NRS 40.455) After October 1, 2009, owner occupied single family residences were exempted from the recourse requirement; no recourse for the loans is available. Again, this prohibition does not apply to rental or investment property. (NRS 40.458) As a practical matter, for a very long time, Nevada foreclosed properties did not have a deficiency judgment because it was not worth the time and effort to hire a lawyer and appraiser for the hearing. This is beginning to change, and in a big way. In the summer of 2011, to combat robosigning, the Nevada Legislature (which is part time, meets for only a few weeks every other year and is actually effective most of the time) passed a set of pre-foreclosure rules that essentially required the big banks to prove their chain of title before the foreclosure can take place; if they could not do so, the homeowner could sue to stop the foreclosure. The banks responded to this by hiring lawyers and filing for judicial foreclosures. Just like California, Nevada does allow judicial foreclosures also. So why the sudden change? The judicial foreclosure process allows the banks to (1) sidestep the new robosigning law and (2) seek a deficiency judgment at the same time. So the odds of a new foreclosure resulting in a deficiency judgment in Nevada are actually increasing. What about seconds and HELOCs that were foreclosed on? Nevada, like California has a one-action rule (NRS 40.430), so you either sue or foreclose, not both. So the seconds and HELOC holders do have the right to sue for essentially a breach of contract claim on the promissory note. As part of the anti-robosigning rules passed in July, 2011, new rules were enacted here as well. If a property was foreclosed on, or short sold, after July 1, 2011, the second trust deed holder has six months from the foreclosure or short sale date in which to sue for a balance due. The six month rule also applies to loans issued on or after October 1, 2009. What about the earlier stuff? Well, it appears, even after the law changes, that second trust deed and HELOC holders can sue for investor and rental properties up until the statute of limitations expires. The bad news? The Nevada statute of limitations is 6 years, not the 4 years Californians are used to. Upshot: Nevada rules are tricky, and if you are facing foreclosure or short sale, talk to a Nevada attorney familiar with the real property rules there before making a decision.