Current Politics
BORROWER’S 1, LENDER’S 0
In a recent case handled by local business and real estate attorney Lance Davidson, a borrower prevailed in a lawsuit brought by the borrower’s lender seeking a deficiency after the borrower sold the home at a short sale. In the lender’s approval letter, the lender included a clause that stated it reserved their rights to pursue a deficiency following the short sale. In a Motion to Dismiss, Mr. Davidson convinced the court that such an action was not appropriate under Arizona law and was awarded attorney’s fees. The lender did not appeal the decision, thereby ending the ordeal for the borrower, much to their delight.
This case highlights the hot topic in the Arizona real estate market regarding Arizona’s anti-deficiency laws and their application to short sales. While some counsel may argue otherwise, the apparent predominant view is that short sales will get anti-deficiency protection provided the anti-deficiency requirements are otherwise met and provided the facts do not present the lender with a solid argument otherwise (such as an express waiver of anti-deficiency protection). However, certain issues in this area remain unresolved under Arizona law and aggressive bank counsel argue that short sales get no protection absent an express release by the lender as part of the short sale approval. Given the number of short sales in Arizona, this issue is almost certain to be heard in Arizona courts over the coming years.
Marc McCain, Esq.
Disclaimer: nothing in this article or site is intended to be, nor should it be considered, legal advice. Every situation can present unique facts or circumstances that must be analyzed. An attorney-client relationship exists only after a client has a signed fee agreement with McCain&Bursh, PLC.
THE TRUTH ABOUT SHORT SALES AND DEFICENCIES IN ARIZONA
Rarely will a consumer find so much contradicting, confusing and downright incorrect information on a legal topic as they currently do when it comes to short sales and related issues. Rarely heard of just 2-3 years ago, short sales now make up a significant majority of current MLS listings in the metro Phoenix market and the trend doesn’t seem to be changing any time soon. Agents, consumers and other professionals are scrambling to get up to speed on the process, strategies and legal issues surrounding short sales. From a legal perspective, there are three (3) main issues I discuss with clients who may be considering a short sale (or other loan workout for that matter): (1) deficiency issues, (2) credit issues, and (3) cancellation of debt income issues.
With respect to issue #1 – deficiencies, short sales present interesting issues and possible outcomes. Arizona has two anti-deficiency statutes that act to prevent a lender from collecting on a deficiency following a judicial or non-judicial foreclosure on certain residential property situated on 2.5 acres or less. Because these statutes deal with foreclosures, many real estate professionals, including attorneys, take the position that Arizona’s anti-deficiencies have no application to short sales. This is not entirely true given several Court decisions that restrict a lender’s right to waive its security and sue on its note. While a short sale can result in a deficiency situation where a foreclosure on the same property would not (for instance, without a lender’s agreement to not seek a deficiency, a short sale involving a non-purchase money loan on qualifying property will not extinguish a borrower’s liability for a deficiency, while a foreclosure by the same lender at a non-judicial trustee’s sale will result in the lender being barred from seeking a deficiency), for many loans (specifically, purchase money loans on qualifying property), a short sale should not result in a deficiency for a borrower. However, without a lender’s express waiver of its right to seek a deficiency, a Borrower must consider why it is attempting to do a short sale and if it is worth the risk that a lender and its counsel will try to sue for a deficiency based on what they may feel are unresolved issues in Arizona law.
Notwithstanding Arizona’s relatively broad anti-deficiency protections afforded to purchase money loans on qualifying property, lenders continue to misrepresent their rights and borrowers’ liabilities in short sale transactions. Lenders continue to demand cash contributions from borrowers to approve short sales even though they would have no right to seek a deficiency if they foreclosed on the property. Borrowers and their real estate agents should never engage in short sale negotiations without knowing exactly what rights and obligations a lender and borrower have under the loan and any particular workout scenario.
For a more detailed analysis of Arizona’s anti-deficiency laws and their applicability to short sale transactions, see my letter to the Editor of Maricopa Lawyer attached.
letter-to-the-editor-of-maricopa-lawyer
Marc McCain, Attorney at Law
McCain & Bursh, PLC
(602) 604-2138
Nothing in this blog is intended as legal advice. Every borrower and owner should consult independent legal counsel to review their situation and evaluate their risks and issues. Any opinions expressed herein are based on the author’s interpretation of existing law, anti-deficiency policies and practical experiences working in the area. However, the facts of each case can be different and different facts can result in different outcomes. Moreover, the law can change and courts will continue to shape the interpretation of statutes addressing these and related issues.
UPDATE ON ARIZONA’S ANTI-DEFICIENCY STATUTE
The Arizona legislature passed, and Governor Brewer signed into law on November 23, 2009, Senate Bill 1004 which returns Arizona’s trustee’s sale statute anti-deficiency clause to its form prior to passage of Senate Bill 1271. The Bill includes a retroactivity clause, making the change retroactive to September 30, 2009, the day SB 1271 had gone into effect, and a statement of legislative intent confirming that the intent of the change is to return the law to its status before SB 1271. The Bill also includes an emergency clause, meaning it goes into effect immediately (as opposed to there being a 90 day waiting period as there was with House Bill 2008).
You can read the bill at the following link:
http://www.azleg.gov/legtext/49leg/4s/bills/sb1004s.pdf
The real estate industry and bankers are intending to continue work on an amendment to the law that would carve out certain speculative builders from anti-deficiency protections, but otherwise would leave existing protections in place.
Marc McCain, Esq.
McCain & Bursh, PLC, Attorneys at Law
LENDER’S IGNORING ARIZONA LAW IN SHORT SALES
More and more I am seeing lenders be aggressive and unreasonable in demanding money from borrowers during the short sale approval process. Lenders are doing this even where AZ law prohibits them from waiving their security and suing on the note (i.e. where the loan is a purchase money loan on qualifying residential property). As a result, I am stressing the need to be careful about agreeing to terms of a short sale that are not reasonable or contrary to Arizona law – read and understand your documents. Also understand that just because a lender may not have a right to sue on its note based on well settled AZ authority, they may try, whether out of ignorance, arrogance, aggressiveness, or who knows anymore.
What is needed in Arizona is a law that would prohibit lenders from receiving funds in a short sale (over the short sale net proceeds) that would not be permitted by our anti-deficiency statutes and our Courts’ interpretation of the law. Nothing short of a statutory restriction against the type of lender abuses we are seeing will work — we’ve already seen the debacle of the Federal Governments’ loan mod and refinance program. The support for such a bill would be tremendous, the question is whether any groups have the time and money to marshall the effort needed to raise the issue with our legislature and get it through the political process quickly enough to make a difference in this market . . .
BANKS NOT GIVING UP JUST YET ON AZ’S ANTI-DEFICIENCY LAWS
Investors and second home owners in Arizona should NOT rest easy on the heels of the legislature’s recent repeal of Senate Bill 1271. Recognizing bad law (SB 1271) and bad policy behind it, not to mention the certain backlash from consumers, one might have thought banks would take their defeat in stride and use their resources to work with borrowers to reduce Arizona’s unprecedented foreclosure rate. Unfortunately, the banking industry does not know how to take it lying down. Accordingly to Tom Farley, CEO of the AAR, local banking associations have rounded up a team of overpriced lawyers and have threatened to file a lawsuit challenging the repeal of Senate Bill 1271 unless they get their way with legislation that would change Arizona’s anti-deficiency statute(s) and the protections they bring to Arizona homeowners following a foreclosure or short sale.
My suggestion to Arizona’s homeowners, realtors and lawmakers: don’t let the banks push bad law and bad policy down your throat without taking them to task. Write your legislators – go to www.azleg.gov and make your voice known. Write your local bank president and tell them where your dollars will go if they move forward with their fight on this issue. Ask them if they received TARP or other subsidies on certain loans. Ask them if they are modifying bad loans or approving sensible short sale transactions. Ask them if they played any role in the current real estate mess in Arizona? Did they make money off risky loans based on shoddy underwriting standards? Ask them what they are doing to get this economy moving again – are they lending based on sound standards, will they lend more if they get their way with Senate Bill 1271?
Marc McCain, Esq.
McCain & Bursh, PLC
(602) 604-2138
IMPACT OF REPEAL of ARIZONA SENATE BILL 1271
As most interested parties now know, Governor Brewer signed House Bill 2008 and with it becoming law in late November, 2009, swept away the recent changes to Arizona’s anti-deficiency laws set to go into effect September 30, 2009. Residential property owners’ collective sigh of relief could be felt throughout the Valley. However, the victory parade could be short, as banking lobby will push hard to bring change to Arizona’s rather broad anti-deficiency statutes.
House Bill 2008, largely a budget bill, included the entire text of A.R.S. Section 33-814, Arizona’s statute addressing deficiency actions following a non-judicial foreclosure (called a trustee’s sale). The recent changes to subsection G, the anti-deficiency rule applicable to residential properties, were deleted entirely, leaving the language as it originally read before Senate Bill 1271 was signed by Gov. Brewer this summer. In addition, Sec. 47(B) of HB 2008 provides that the changes will apply retroactively to from and after September 29, 2009. Read the entire text of the statute on page 27-29 of HB 2008 — http://azgovernor.gov/DMS/upload/PR_090409_HB2008.pdf.
The Valley real estate market is abuzz with predictions about how the repeal of SB 1271 will impact its recovery. One thought is that foreclosures will soar as many lenders who suspended foreclosures in anticipation of SB 1271 taking effect (and being able to sue borrowers for a deficiency – largely non-owner occupied residential owners who would not have satisfied the new anti-deficiency requirements) now proceed with their pending trustee’s sales.
Another thought is that many lenders will be forced to consider alternatives to foreclosure including short sales and modifications. Given the severity of deficiencies on many under water residences in Arizona, lenders facing non-recourse loans may think twice about foreclosure. Short sales typically result in a sales price 20% or higher than what a lender would realize in a foreclosure or REO sale (PMI considerations aside). Without the prospect of recovering a deficiency following a short sale or foreclosure, it only makes sense that lenders entertain short sales.
Others think that deeds in lieu of foreclosure may increase as lenders try to reduce costs of retaking title to a severly underwater property.
Whatever the outcome, owners of residential real estate in Arizona can sleep easier knowing the deficiency rules in place for several decades will remain in place — at least for now.
Marc McCain, Esq.
McCain & Bursh, PLC, Attorneys at Law
(602) 604-2138
STATUS OF REPEAL OF ARIZONA SENATE BILL 127
Gov. Brewer signed and transmitted House Bill 2008 which includes a repeal of Senate Bill 1271, the recent change to Arizona’s anti-deficiency law contained in ARS Section 33-814(G) governing trustee’s sales. http://azgovernor.gov/DMS/upload/PR_090409_HB2008-09-12-13TransmittalLetter.pdf.
The repeal is set to take effect on approximately November 24, 2009 (90 days after the special legislative session ended), however the repeal was made retroactive to September 29, 2009 with the intent to do away with any attempt to enforce the changes implemented by SB 1271 during the window between September 30 and November 24, 2009. The repeal means that investors of qualifying properties (properties on 2 1/2 acres or less and utilized — by anyone - as single 1 or 2 family dwelling) will continue to be protected by Arizona’s anti-deficiency statutes upon a foreclosure by a first lien holder (barring any successful lender argument that SB 1271 should be applied to any foreclosures during the “window period” or any subsequent changes to the law).
However, remember that junior liens may or may not get anti-deficiency treatment following a foreclosure or short sale, but additional rules and analysis apply. This means that in some cases, junior lien holders whose lien is extinguished in a foreclosure or who release a lien in a short sale are not covered by AZ’s anti-deficiency laws and may sue a borrower on the note. In other cases, such lien holders will fall under the anti-deficiency statutes and will be barred from collecting on the note.
Always consult with a qualified professional on your particular situation and don’t forget that any foreclosure, short sale, deed in lieu or loan modification should be considered from a tax standpoint — consult with qualified tax professionals on your specific workout.
Marc McCain
McCain & Bursh, PLC, Attorneys at Law
(602) 604-2138
BANK LOBBYISTS CAN’T KEEP STORY STRAIGHT RE ARIZ. SENATE BILL 1271
Bank lobbyists told Arizona’s legislators that our anti-deficiency statutes needed to be revised because spec builders were “gaming the system” by claiming they lived in their spec homes to get anti-deficiency treatment. The Senate’s internal memo on the bill stated that investment properties were “NOT” protected by existing anti-deficiency laws. No one paid attention to the arguments or the law. The bill sailed through both chambers without a fight and was signed into law.
When real estate professionals and consumers realized what had happened, they were enraged, and a little embarrassed that such a spin job had just been orchestrated right under their collective noses. As the complaints rolled in and problem after problem (with the bill) was highlighted, the banking lobby changed its tune. Suddenly, the bill wasn’t just about spec builders, but more about investors and fraud on banks. But remember, the legislature believed that investors didn’t get protection under existing laws. So why in the world would the issue suddenly be about investors when the new law was passed with our lawmakers thinking they didn’t get protection anyway?
Why? Because bank lobbyists knew they had been outed and also knew that placing the blame on “investors” plays well in the media. At least until you stop and ask yourself “who is an investor”. Banks would like you to think we are talking about institutional investors with pockets spilling over with cash. This may be true for some homes purchased as investments, but it is far from the typical profile of an “investor”.
First, most big money home investors buy homes with cash – thus, there is no home loan and no issue of a deficiency. Second, and most importantly, the typical investor I meet is your next door neighbor, your friend, your retired teacher or grocery store manager. They are not ”rich”, are not trying to “game the system” and not void of moral guilt about being unable to pay their mortgage.
The “investors” I meet are hard working, honest, credit worthy individuals that wanted simply to get a piece of Arizona’s real estate profits. In many cases, they were counseled to buy a property by real estate agents, mortgage brokers, appraisers and lenders that all told the same story. You know the fairy tale — prices will continue to rise, you’ll be able to sell the property in a year or 2 for a good profit, or refinance the loan into a better loan and pull money out. Real estate prices never fall, so it can’t go wrong. Nice story huh? Too bad so many of us fell for it and are now holding the bag.
So, the closing occurred and lenders, mortgage brokers, appraisers, title companies and inspection companies all got paid. The investor started making payments on its new found goldmine. The loan was immediately sold, the bank replenshed its pockets and the process started anew with another credit worthy investor. Until the bubble burst and we all realized we had been sold fools gold. The “investor” now held an overvalued asset that couldn’t sell for the loan balance, and couldn’t be rented for anything close to satisfy the monthly payments. Investors started losing jobs, the loan market dried up and lenders wouldn’t (and won’t) work with their borrowers to modify loans to match market conditions (despite Government assistance and lots of pushing).
So it is only logical that after fueling the real estate bubble in Arizona, banks want to change the anti-deficiency law with a minute to go in the game — right before a foreclosure occurs. Selling or taking back the property they took as collateral is not enough they say — they need to take whatever hard earned money the investor may have left – wage garnishment, cash and securities, non-exempt assets. You name it — they want it.
Way to go Arizona’s legislature — keep giving banks another lifeline. They haven’t received enough as it is. Take away the one protection Arizona consumers have in the residential real estate market –they don’t need it. After all, our State and Federal Gov’t will surely be giving consumers their own bailout soon — right???
Marc McCain
McCain & Bursh, PLC, Attorneys at Law
(602) 604-2138