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.

Marc McCain, Esq.

McCain & Bursh, PLC

www.mccain-bursh.com

www.marcmccain.com

1.  Only purchase money loans on qualifying residential property get anti-deficiency protection in Arizona.  This is not necessarily true.  If the holder of a mortgage secured by a single 1 or 2 family dwelling on 2.5 acres or less forecloses via a trustee’s sale, that lender will be barred from seeking a deficiency pursuant to A.R.S. 33-814(G).  However, rights of junior lien holders and the right of a lender to waive its rights under a Deed of Trust and sue a borrower on its note must be analyzed under a different context.

2.  A borrower must have occupied its residential property as its primary residence to get anti-deficiency protection.  This is simply not true.  Although a recent amendment to A.R.S. 33-814(G) intended to impose a requirement for the borrower to have lived in the property, this law was subsequently repealed such that it never took effect.  In Arizona, the anti-deficiency statutes have always been interpreted to only require that a qualifying residential property have been put to use as a dwelling by someone, not necessarily the actual borrower.

3.  Arizona’s anti-deficiency statutes have no application to short sales because a short sale is not a foreclosure.  It is true that Arizona’s anti-deficiency statutes are contained within the judicial and non-judicial foreclosure statutes and that a short sale is not a foreclosure.  However,  in 1988 Arizona’s Supreme Court ruled that a lender can not waive its security and sue on the note in certain circumstances.  Moreover, Arizona cases interpreting Arizona’s anti-deficiency statutes provide strong authority that should restrict a lender’s right to sue a borrower where Arizona’s anti-deficiency laws would apply to a lender in a foreclosure context.  In short, if a lender makes (or holds) a purchase money loan on qualifying residential property, that lender’s rights to sue a borrower for lack of payment on the note are severely restricted, if not altogether prohibited.  However, lenders continue to press their rights following short sales where they have not expressly waived their right to a deficiency and argue that certian court decisions are very fact specific and thus, that a borrower may have liability following a short sale.  For this reason, having legal counsel and understanding your risks are prerequisites to a short sale.  A borrower should not assume that a lender won’t, and/or can’t, sue for a deficiency following a short sale.

4.  A short sale will always be better for a borrower’s credit.  Although I am not a credit counselor and do not profess to understand all the ins and outs of how a credit score is calculated (does anyone?), in most cases, a lender will require a borrower to be delinquent before contemplating a short sale.  As a result, a borrower’s credit is almost certainly to be hurt before the short sale is consummated, and once it is, the reporting of the sale as a short sale will generally damage one’s credit even further.  However, a potential benefit of a short sale is the ability (in concept) to qualify for certain loans sooner versus having a foreclosure on one’s record.

Marc McCain, Esq.

McCain & Bursh, PLC, Attorneys at Law

www.mccainbursh.com.

mmccain@mblawaz.com

(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.

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

www.mccainbursh.com

mmccain@mblawaz.com

(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.

2.  Always ask for the lender’s express release of liability as a condition to the short sale – even if your loan(s) would be covered by Arizona’s anti-deficiency laws.  The short sale proceeds should be taken by the lender as full satisfaction of all indebtedness under the loan(s).  Attempt to get this in writing from each lender.  If the lender is unwilling to provide such an express release, understand what liability you may have as a borrower following the short sale before you agree to the sale.  In some cases, Arizona law prohibits a lender from waiving its security and suing a borrower on its note.  As a result, if a lender in such a case releases its security in a short sale, a strong argument exists that Arizona law should prevent the lender from seeking any recourse against the borrower following the short sale.  However, lenders and their counsel may have a different view on the topic and could elect to sue (or threaten) if they want to press the issue, forcing a borrower to defend or consider options.

3.  Understand the process and information the lender will require for a short sale before starting the process.  Nearly all lenders require a borrower to submit current financial information – bank statements, tax returns, W-2’s, company profit and loss statements, etc.  In addition, lenders typically require a borrower to establish a hardship as a condition to approving a short sale.  What constitutes a hardship can vary from lender to lender, and how a borrower portrays the hardship can make a difference.  If a borrower may be liable for a deficiency following a short sale, that borrower may want to think twice about providing a lender with a snapshot of its current financial condition.  Since a borrower must accurately disclose its income and financial condition, doing so may provide a lender the information it needs to ask for a larger contribution, pursue any deficiency rights following a short sale, or in an action on the note (if available).

4.  Use a skilled, experienced negotiator to process your short sale.  The short sale process can be lengthy, time consuming and frustrating.  Without help from an experienced real estate agent and/or attorney, the process can be overwhelming for many borrowers.  Despite the difficulties, if a short sale is right for you, don’t give up if met with initial resistance or delay from your lender and don’t necessarily blame your negotiator.  Even the best real estate agents and attorneys run into unreasonable lenders and their legion of inexperienced and uncaring loss mitigation representatives. 

5.  Know what you are agreeing to in the short sale process and approval.  The standard ARR Short Sale Listing Agreement and Short Sale Addendum require a seller to provide all information requested by a lender in the short sale application process.  For reasons noted above, some borrowers may not want to agree up front to provide all information a lender requests.  Moreover, the Short Sale Addendum requires the seller to work in earnest to get the short sale approved.  As a result, a seller should not enter into a short sale contract unless it truly intends on seeking its lender’s approval and consummating the sale.

6.  Read and understand your lender’s approval terms.  Most lenders require a seller to sign and return the short sale approval or agreement.  The approval conditions and agreements used by lenders vary widely.  Some lenders are silent on deficiency issues, others attempt to get borrowers to agree that they will be liable for a deficiency following a short sale, even in instances where such an agreement may be contrary to Arizona law and its anti-deficiency provisions.  Some approvals require a borrower to sign an unsecured promissory note.  Whatever the conditions, a borrower must understand what potential obligations and liabilities it is taking on in the lender’s short sale agreement and related documents.

7.  Stay apprised of changes in the law and short sale programs.  Commencing on April, 5 2010, the Federal Government’s Home Affordable Foreclosure Alternatives program will implement changes to short sale and deed in lieu workouts for participating lenders and loans.  Among the many requirements of the program, a lender will not be able to seek a deficiency following a qualifying short sale or deed in lieu.  Moreover, many cases will be tried in Arizona’s courts over the coming months that may further shape Arizona’s anti-deficiency laws and whether certain loans should get anti-deficiency protection.

8.  Understand what tax liabilities may result from a short sale.  If a deficiency is not permitted or if a lender writes off any loss on a short sale, the lender should issue a 1099 C to the borrower to report the amount of the cancelled debt.  Unless the borrower falls under a recognized exception to cancellation of debt income, a borrower must recognize the income and pay and associated tax liability.  A prudent borrower will always understand the probable tax impact of a short sale (or other workout) before the transaction is consummated.

Marc McCain

McCain & Bursh, PLC, Attorneys at Law

www.mccainbursh.com

(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.

With the foregoing as a backdrop, set forth below are the general anti-deficiency rules applicable in Arizona now that Senate Bill 1004 has taken effect.  However, borrowers must understand these are only general rules — every situation must be analyzed carefully based on the relevant facts and applicable law.   And remember, the law can and may change and lenders will continue to assert rights in situations where the law is not 100% clear! 

1.  In Arizona, if a borrower fails to pay its loan, a lender can foreclose its Deed of Trust lien either judicially per A.R.S. § 33-721 et. seq., or non-judicially by conducting a trustee’s sale per A.R.S. § 33-801 et. seq. 

2.  If the foreclosure sale price does not pay a lender what it is owed, the lender may generally seek a deficiency against the borrower for the balance of the loan.  However, Arizona has what is called an anti-deficiency law that bars a lender from seeking a deficiency in certain situations.  The anti-deficiency laws with respect to real property loans in Arizona are found in 2 places – in A.R.S.  § 33-729(A) (regarding judicial foreclosures), and A.R.S. § 33-814(G) (regarding trustee’s sales).  

3.  In determining if Arizona’s anti-deficiency rules apply, the first step is to confirm what law applies to the loan, particularly the lender’s remedies under the Promissory Note.  The applicable law should NOT be assumed.  Read your Promissory Note and other loan documents carefully and understand their terms and what law will most likely apply to the lender’s rights under the Promissory Note.

4.  Assuming Arizona law applies to the lender’s rights under the note, in both judicial foreclosures and trustee’s sales in Arizona, anti-deficiency rules apply only if the property being foreclosed meets the following criteria:  (a) 2½ acres or less; and (b) limited to and utilized as a single one-family or single two-family dwelling. 

5.  For judicial foreclosures under A.R.S. § 33-729(A), there is the additional requirement that the loan be a purchase money (“PM”) loan for the borrower to get anti-deficiency treatment. 

6.  However, the trustee’s sale statute, A.R.S. § 33-814(G), does NOT require that the loan be a PM loan. 

7.  Refinanced loans present interesting issues.  Based on an Arizona Appellate Court case, a good argument exists that a PM loan should not lose its PM nature when it is refinanced.  However, cash out refi’s raise interesting issues and some lenders and their counsel argue that a refinance of a PM loan from a new lender should not be given purchase money protection, notwithstanding Arizona’s strong policies underlying its anti-deficiency laws.  Remember, a lender can always challenge existing case law and even the policy behind Arizona’s anti-deficiency statutes.  Future changes to Arizona’s anti-deficiency laws  and/or court decisions may provide additional guidance on refinanced purchase money loans and whether they retain their purchase money characteristic.

8.  In judicial foreclosures, if the loan on qualifying residential property is a non-purchase money (“NPM”) loan, then the lender is not prevented from seeking a deficiency as part of the foreclosure.  However, for several reasons, judicial foreclosures on residential property in Arizona are relatively rare — most lenders foreclose via a trustee’s sale.  Moreover, if the loan is a NPM loan, a lender could elect to sue a borrower on the note and skip the foreclosure process altogether, or sue on the note, get a judgment and then proceed to foreclosure.  Remember, only lenders that made PM loans on qualifying residential property are prevented from seeking a deficiency or suing the borrower on the note.

9.  In a trustee’s sale, both a PM and NPM lender that conducts the trustee’s sale on qualifying property will be prevented from seeking a deficiency after the foreclosure. 

 10.  Junior liens extinguished by a 1st position foreclosure may be able to sue on the note.  The issue is whether the junior loan was a PM or NPM loan – if it was a PM loan on qualifying property, Arizona’s Supreme Court has held that the lender can NOT sue the borrower on the note following the foreclosure; if the loan was a NPM loan, the junior lender CAN sue the borrower before or after the senior lender’s foreclosure.

11.  Arizona’s Supreme Court has ruled that a PM lender on qualifying property can NOT waive its security and sue directly on its note.  This rule should prevent a PM lender on qualifying property from suing a borrower on the note before or after a foreclosure or after a short sale, although there are lenders and lender counsel arguing that short sales should not get anti-deficiency protections despite Arizona’s strong policies underlying these consumer protection laws.  However, other Lender claims are not barred – e.g. voluntary waste of the property.  Moreover, many lenders are ignoring Arizona law in collection efforts and short sale approvals and negotiations. 

12.  Under the trustee’s sale statute, there is NO requirement that the trustor use the property as a dwelling – just that the property be used by someone as a dwelling.  Thus, in most cases, residential investment or rental properties qualify for anti-deficiency treatment, even if they are not owner occupied properties. 

13.  However, Arizona’s Supreme Court has held that commercial properties and loans secured by residential homes being developed for sale but never utilized as dwellings do NOT qualify for anti-deficiency treatment under the statutes. 

14.  In addition, Arizona’s courts have ruled that a deed of trust that is a lien against more than one property will not be subject to anti-deficiency rules — the deed of trust needs to be a lien against a single trust property. 

15.  Even if anti-deficiency rules apply, a borrower will be liable to a lender for any diminution in value of the trust property due to voluntary waste.  In other words, don’t damage the property, take fixtures, A/C units, etc., or let the property go to waste.  A borrower would be wise to continue to maintain its property up until the day it is sold.

16.  Real property taxes are NOT an owner’s personal obligation, but only a lien against the real property. 

17.  However, HOA assessments ARE an owner’s personal obligation and if not paid can result in credit damage, lawsuits and other collection efforts.

18.  Arizona’s rules governing foreclosures and deficiency issues may apply to short sales, but a borrower must understand the law and its loan and realize that the outcome can be different in a short sale vs. a foreclosure, e.g., a short sale on a NPM loan will generally permit a lender to collect the balance due on its note whereas a trustee’s sale on the same loan will prevent the lender from seeking a deficiency. Short sales also present the parties with the chance to negotiate terms of the short sale and deficiency issues.

19.  Consult with qualified tax professionals BEFORE deciding to do a short sale or foreclosure.  1099 income, gains, losses and other tax consequences may result from foreclosures, short sales and loan modifications.  Know what tax consequences you will face!

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.

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

www.mccainbursh.com

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 . . . 

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

www.mccainbursh.com

(602) 604-2138

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

www.mccain-bursh.com

(602) 604-2138

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

www.mccainbursh.com

www.marcmccain.com