Arizona Senate Bill 1271
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
Arizona’s Anti-deficiency laws — what are they and for how long?
In Arizona, certain loans on residential real property are subject to what are called anti-deficiency laws. These laws limit a borrower’s liability to its lender if certain requirements are met. However, there are many misconceptions about Arizona’s anti-deficiency laws, when they apply, and whey they don’t. Moreover, Arizona’s anti-deficiency laws have been in recent flux, increasing the confusion in the market and borrowers’ anxiety as they try to navigate a very difficult and stressful situation. The recent changes to Arizona’s anti-deficiency laws were the result of Arizona Senate Bill 1271 which took effect on September 30, 2009 (for an understanding of the additional requirements imposed under Senate Bill 1271, effective since September 30, 2009 and until HB 2008 takes effect, see prior blog posts at www.marcmccain.com or contact the author).
However, Arizona House Bill 2008 was recently passed and signed by Governor Brewer and is slated to become law in late November, 2009. HB 2008 contained a repeal of the changes to the anti-deficiency law made by Senate Bill 1271 and included a clause that made the repeal retroactive to September 29, 2009. Thus, local practitioners have been operating under the premise that HB 2008 will be applied retroactively as written and that the requirements implemented by SB 1271 will never by applied in practice. However, the banks have now sued Governor Brewer to stop the repeal of SB 1271 from taking effect, or at least to increase their leverage in introducing new legislation that would limit the broad application of Arizona’s anti-deficiency laws.
With the foregoing as a backdrop, set forth below are the general anti-deficiency rules applicable in Arizona once HB 2008 takes effect later this month (assuming that is the case). If banks are successful in keeping SB 1271 on the books, a borrower must understand how the changes made by SB 1271 affect their situation. Moreover, if your foreclosure or workout falls within the “window period” of September 30, 2009 until the date HB 2008 and its change to the anti-deficiency law takes effect, you should consider the additional risks related to your foreclosure or workout given the potential application of SB 1271. 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!
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 does not pay a lender what it is owed, the lender may generally seek a deficiency against the borrower for balance of the loan. However, certain states, including Arizona, have what are called anti-deficiency laws that bar a lender from seeking a deficiency in certain situations.
3. In determining if 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.
4. Assuming Arizona law applies to the lender’s rights under the Promissory Note, Arizona’s anti-deficiency laws 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).
5. In both judicial foreclosures and trustee’s sales, 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. NOTE: SB 1271 made changes to A.R.S. § 33-814(G) AND THESE CHANGES ARE NOT SET FORTH IN THIS SUMMARY IN DETAIL. HOWEVER, SB 1271 IS TECHNICALLY THE LAW UNTIL HB 2008 TAKES EFFECT. Any borrower should understand the changes to A.R.S. § 33-814(G) made by SB 1271 and the status of HB 2008 before agreeing to any workout or foreclosure.
6. 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. However, the trustee’s sale statute, A.R.S. § 33-
continued…
814(G), does NOT require that the loan be a PM loan. A PM loan does NOT lose its PM nature when it is refinanced. However, cash out refi’s raise interesting issues.
7. In judicial foreclosures, only a PM lender on qualifying residential property is prevented from seeking a deficiency; a non-purchase money (“NPM”) lender is not – it can obtain a deficiency following a foreclosure or sue the borrower on the note. For several reasons, judicial foreclosures on residential property in Arizona are relatively rare — most lenders foreclosure via a trustee’s sale.
8. 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 and from suing the borrower directly on the note.
9. 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, the lender can NOT sue the borrower on the note following the foreclosure; if it was a NPM loan, the lender CAN sue the borrower.
10. If a lender can not seek a deficiency, then the lender can NOT waive its security and sue directly on its note. This means that a lender under a PM loan on qualifying property will NOT be able to sue the borrower on the note – before or after the foreclosure. This rule also applies to short sales. However, other Lender claims are not barred – e.g. mortgage fraud.
11. Under the trustee’s sale statute (WITHOUT TAKING INTO ACCOUNT THE CHANGES MADE BY SB 1271), 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. HOWEVER, IF SB 1271 IS APPLIED, THE BORROWER MUST ESTABLISH THAT IT, THE BORROWER, UTILIZED THE PROPERTY AS ITS DWELLING FOR AT LEAST 6 CONSECUTIVE MONTHS. THIS COULD MEAN THAT CERTAIN INVESTMENT OR RENTAL PROPERTIES MAY NOT QUALIFY FOR ANTI-DEFICIENCY TREATMENT).
12. 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.
13. 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.
14. 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.
15. Real property taxes are NOT an owner’s personal obligation, but only a lien against the real property.
16. However, HOA assessments ARE an owner’s personal obligation and if not paid can result in credit damage, lawsuits and other collection efforts.
17. Arizona’s anti-deficiency statutes and the cases interpreting them generally apply to short sales, but with some nuances. Borrowers must be careful when analyzing short sales and their potential liability after the sale. In some cases, a short sale will permit a lender to collect the balance due on its note whereas a foreclosure on the same property may bar a lender from seeking a deficiency.
18. 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!
McCain & Bursh, PLC, Attorneys at Law
(602) 604-2138
Arizona Senate Bill 1271 is Still the Law — But For How Long?
In light of the Banks’ recent lawsuit against the Governor attempting to prevent the repeal of Senate Bill 1271 from taking effect on or about November 24, 2009, it is important to understand the status of current Arizona law. To be technically correct, existing law INCLUDES the provisions of Senate Bill 1271, the bill that modified Arizona’s anti-deficiency provisions in the trustee’s sale statute – A.R.S. Section 33-814(G). The changes to A.R.S. Section 33-814(G) require that the trustor utilized the property as a single-one or single-two family dwelling for at least 6 consecutive months and also that a certificate of occupancy has been issued for the property.
However, House Bill 2008, recently passed by our legislature and signed by Gov. Brewer, repeals Senate Bill 1271 and the repeal is retroactive to September 29, 2009, the day before Senate Bill 1271 became law. Thus, the legal community has been operating under the premise that, although Senate Bill 1271 is technically the law from September 30, 2009 until the date HB 2008 takes effect, it will never be applied since HB 2008 makes the repeal retroactive to September 29, 2009 as though A.R.S. Section 33-814(G) were never changed. Now that the banks have sued the Governor, this premise, and the outcome of this power struggle, is in doubt.
The expectation from many in the legal community is that HB 2008 will take effect as scheduled on or about November 24, 2009 (90 days after teh end of the last special legislative session), and thus, Senate Bill 1271 will be repealed and A.R.S. Section 33-814(G) will be applied by courts as though it never changed. However, the repeal could be only temporary. Banking lobbyists are hard at work at the State Capitol trying to push a version of Senate Bill 1271 down the proverbial throats of our Governor and Legislators, with the pending lawsuit serving as leverage for their demands.
Given the uncertainty surrounding this very important issue of State law, I urge all of my clients and industry professionals to stay apprised of current developments and understand that the law in this area is in flux. What was “existing” or “current” law yesterday or today may not be the same tomorrow or next week, and how a court may interpret the mess created by this tug of war is anyone’s guess. As a result, a careful review of the law and application to a specific situation is critical before finalizing any short sale or permitting a home to go to foreclosure.
Marc McCain, Esq.
McCain & Bursh, PLC, Attorneys At Law
(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
STATUS OF SENATE BILL 1271 — CHANGES TO ARIZONA’S ANTI-DEFICIENCY LAW
As of Tuesday morning, August, 18, 2009, the repeal of Senate Bill 1271 is still in limbo (see prior posts regarding the effects of SB 1271 on Arizona’s anti-deficiency laws). However, House Bill 2008 contains a repeal of SB 1271 and has been sent to the Governor. This bill is waiting to be either signed into law or vetoed by the Governor. In addition, both the House and Senate budget bills contain a repeal of SB 1271, although these bills are being held up in the legislature as part of the budget fiasco being played out in the current legislative special session.
The good news is that there is no reason for Governor Brewer to veto House Bill 2008, save of course for political reasons having nothing to do with the content of House Bill 2008. According to Tom Farley, CEO of the Arizona Association of Realtors, House Bill 2008 is largely a spending bill that keeps certain Government programs functioning while the broader budget bills are negotiated. It does not affect the more controversial budget issues that no one in our Government seems to agree upon. However, there have been whispers that Gov. Brewer will veto all bills sent to her unless the broader budget bills include the sales tax increase she has been pushing.
Since Senate Bill 1271 was passed, I have heard from lenders and borrowers that existing trustee sale dates are being pushed out beyond September 30, 2009 (presumably so the lender can take advantage of the changes to the anti-deficiency statute and seek a deficiency where they presently cannot). As most would agree, this change in the rules so late in the foreclosure process for thousands of borrowers is grossly and inherently unfair. Borrowers who received loans that were non-recourse when made, now face the prospect of a deficiency action or cancellation of debt income where only weeks ago, such outcomes would not have occurred. Many borrowers have been attempting work outs with lenders for months while at the same time planning for the worst (foreclosure). While foreclosure is never a good outcome for a borrower, those borrowers falling within Arizona’s existing anti-deficiency laws could at least formulate an exit strategy that would limit their liability and protect what remaining assets and financial resources that remain after months or years of paying for a distressed property. Now, those plans, and the rules of the game, have been turned upside down by SB 1271.
Concerned borrowers should contact the Governor’s office and urge her to sign HB 2008 into law. Now is not the time to provide lenders with another bailout, nor the time to financially ruin tens of thousands of Arizona homeowners. In times like these, political bickering must take a back seat to prudent governance. For goodness sakes Governor Brewer, the sponsor of the bill, Senator Steve Pierce, has called for the repeal of his own bill. He now realizes the obvious – the banking lobby pushed SB 1271 through the legislative process based on incorrect information and exaggerated manipulation of current law. Please don’t hold Arizona homeowners in financial limbo Governor Brewer – the people of this state deserve better!
To urge the Governor to sign HB 2008 into law, email her office at: ktyne@az.gov; rbark@az.gov; and ssmith@az.gov.
Marc McCain. Esq.
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
NO DECISION ON ARIZONA SENATE BILL 1271 — YET
1 Senate vote. Just 1. That’s all that was needed to pass Arizona’s 2010 budget and along with it, repeal Senate Bill 1271. For those that have not been following this issue, Senate Bill 1271 amends Arizona’s anti-deficiency laws and allows a lender to sue many borrowers for the deficiency balance owed on a home loan after a foreclosure. The bill was passed to assist Arizona community banks, although it helps ALL banks including those receiving Federal aid. In addition, the abysmal wording of the new law takes many home loans out of anti-deficiency protection even if the borrower has lived in the home for years (see issues regarding certificate of occupancy requirements in prior blog entries).
What is worse is that the legislation was passed based on an incorrect understanding of existing anti-deficiency laws (legislators were informed that current law does not give anti-deficiency treatment to investors of residential property — simply not true) and a complete bait-and-switch tactic employed by bank lobbyists to trump up support for their bill. There is a fine line between truth and lies in politics and in my opinion bank lobbyists should be ashamed of themselves for their misleading tactics and utter spin job.
Fortunately, there is still hope that a budget will be approved that includes a repeal of Senate Bill 1271. Urge your legislators to stand up for consumer rights and mandate that a repeal of SB 1271 be included in the budget proposal. You can find email addresses of all legislators on www.azleg.gov.
As a side note, Senator Pierce, the sponsor of Senate Bill 1271, should be applauded for recognizing the problems with SB 1271 and publicly calling for its repeal. Such an occurrence is rare in politics — kind of like a baseball umpire reversing his call. Hopefully, the rest of our legislature can take Senator Pierce’s lead on this and do the right thing, at least for once.
Marc McCain
McCain & Bursh, PLC, Attorneys at Law
(602) 604-2138
LETTER TO ARIZONA LEGISLATORS re ARIZONA SENATE BILL 1271
Here is a copy of the email correspondence I sent to Senator Sylvia Allen today. If anyone has a stake in the change in Arizona’s anti-deficiency law, I ask that you email me your concerns and opinions at mmccain@mblawaz.com. Although I have my own thoughts on this issue, I would like as much input as possible to take to Arizona’s legislators in the coming days.
Senator Allen:
Thank you for taking the time to meet with me yesterday and hearing my concerns over the passage of SB 1271. I want to stress that, although I support the AAR’s call for a repeal of the statute, I am not currently working on behalf of any one group or association. My concerns are based solely on what I am certain was an incorrect understanding of Arizona law and what I believe is an exaggerated problem of spec builder abuse of existing law (in the overall picture).
In addition, there appears to have been little to no discussion of the many serious consequences this legislation will have on thousands of Arizona property owners. These include garnishment of assets and wages, forced bankruptcies and cancelled debt taxes that could be substantial. All of these issues do not bode well for the average Arizonan at a time when they are struggling to stay afloat. For many people, this bill will either take whatever funds they have left, or push them into bankruptcy and neither result is good for Arizona’s economy.
Moreover, the wording of the statute and each change to the statute will create tremendous ambiguity in the courts and force potentially thousands of helpless property owners to litigate deficiency lawsuits against lenders and their counsel. In such litigation, the owner will now have the burden to establish the requirement that the property was lived in for 6 or more months. Since many lenders have no idea of how the property has been used, homeowners will face “fishing” lawsuits where lenders force them to satisfy their burden of proof in court or face a judgment – even if they in fact lived in the property for countless years. This is a David vs. Goliath scenario waiting to happen.
The certificate of occupancy (C of O) requirement is simply bad law and does not further the intent behind the change to the law. As I have indicated in my prior correspondence, not all cities issue C of O’s, some cities (like Phoenix) only started issuing them in more modern times, and even if a C of O can be obtained where one was not issued, this will tax local governments and their building departments at a time when resources are scarce, and can result in inspections of property and required upgrades to bring a property current (in order to get a C of O).
If this law is not repealed, it will most certainly result in a constitutional challenge by one or more consumer groups. The law was written to have retroactive effect – meaning it will be used against borrowers that entered into contracts long before the law was changed, and before foreclosure proceedings even commenced. In short, it will be used in an effort to change the rules governing the loan agreement and the borrower’s obligations thereunder after the contractual obligations were entered into. Given the vagueness in the law, the impact it will have on existing contractual rights and obligations, the problems with the C of O requirement, and the fact that the premise of the law was flawed, I expect a court to determine the law to be unconstitutional as written.
I am receiving numerous calls from owners and lenders asking about the new law. So far, the lenders I have spoken with are not calling about spec builders in default, but investors of qualifying residential property that will no longer get anti-deficiency treatment if the change in the law stands (despite the fact that the property has been used as a dwelling, albeit perhaps not by the borrower). Since the premise for the need to change the law was incorrect (which it most certainly was), the resulting legislation was inherently flawed. If lenders wanted to change the law to their benefit, they should have done so by presenting an accurate account of the law and with ALL impacts properly discussed and analyzed. I urge you to do what is necessary to repeal this law and bring the lenders and their lobby back to the table during the next normal legislative session to have a well rounded and accurate discussion of the issues at play.
Sincerely,
Marc McCain
Attorney at Law
ARIZONA’S NEW ANTI-DEFICIENCY RULES
On Friday, July 10, 2009, Governor Brewer signed into law a change to Arizona’s anti-deficiency law contained in the trustee’s sale statute – A.R.S. Section 33-814(G).
The following additional requirements must now be satisfied by the borrower in order to qualify for anti-deficiency treatment:
1. THE TRUSTOR (BORROWER) UNDER THE DEED OF TRUST MUST HAVE USED THE PROPERTY AS A DWELLING FOR AT LEAST SIX (6) CONSECUTIVE MONTHS; AND
2. A CERTIFICATE OF OCCUPANCY (“C of O”) MUST HAVE BEEN ISSUED FOR THE PROPERTY.
In addition, the statute provides that the Trustor (Borrower) is responsible for proving that the property was used as a dwelling for the required six (6) consecutive months.
The second new requirement (a C of O must be issued) would not seem to change the application of the anti-deficiency statute to most borrowers. However, in some cities C of O’s are not issued for homes that do in fact comply with building codes. For instance, historic residences in the City of Phoenix were built before C of O’s were issued. Moreover, some cities don’t even issue C of O’s for residences. According to Trevor Howell, Permits Supervisor at the City of Mesa, Mesa does NOT issue C of O’s for residences as a standard practice. Did the legislature mean to exclude all historic homes and virtually all homes located in the City of Mesa from anti-deficiency treatment? I would think not, yet based on a strict reading of the new statute, that is exactly what our legislature did! As a result, the C of O requirement may result in thousands of homeowners being subject to a deficiency judgment notwithstanding that they occupy their home. Thus, it would be wise to check with the applicable governmental entity with jurisdiction over your property to confirm a C of O was in fact issued (such as your City building, zoning or development services department).
If a C of O was not issued on a home, the borrower could face a deficiency action by its lender following a foreclosure. If a lender attempted to seek a deficiency because a C of O was not issued, but if the home was in fact completed, I recommend gathering as much evidence as possible to establish that plans for the home were permitted, the constructed improvements were inspected and approved, and that the home and all systems were completed and in use (e.g. water, electric, etc.). Assuming the borrower can demonstrate the foregoing, I would argue that the intent of the new requirement is satisfied. Of course, the court hearing the deficiency action would have to agree with this line of reasoning.
The first new requirement in the statute (that the borrower used the trust property for at least six (6) consecutive months) may change the applicability of Arizona’s deed of trust anti-deficiency statute for many borrowers facing foreclosure. Although the statute reads only that the property must have been used as a dwelling, the legislative summary of the bill explains that the bill was intended to require a borrower to have lived in the dwelling for at least six (6) consecutive months. This means that for many investment properties, the anti-deficiency rule that formerly prevented a lender from seeking a deficiency or suing its borrower directly on the note will no longer apply (assuming a court interprets the new language consistent with the stated legislative intent) – the lender will be able to sue the borrower for the balance owed on its loan following a foreclosure if the borrower did not live in the property for at least six (6) consecutive months.
One issue that needs clarification is whether the six (6) month requirement means that the dwelling must have been a primary residence, or whether a second home used as a dwelling by the borrower for six (6) or more months would qualify under the new statute. For instance, what if a Phoenix resident has a second home in Flagstaff that it does not rent out, but uses as a vacation home or weekend getaway? Assume the home has been owned and used in this fashion by the borrower for more than six (6) consecutive months. Will this property get anti-deficiency treatment following a trustee’s sale assuming the other requiremens of the statute are satisfied?
In addition, some practitioners I am consulting with on the new law are taking the position that the law is not clear and that use as a dwelling could include a rental property that was not actually lived in by the trustor. While I agree that the legislature did not fully understand the current state of AZ anti-deficiency law, I find this argument a stretch given a plain reading of the statute and coupled with the legislature’s stated intent. I certainly expect lenders to take the position that the trustor/borrower had to live in the property.
Other questions include whether the law will be applied to all loans that were originated before the September 30, 2009 effective date, or just to foreclosures on loans that originated after the effective date of the new law.
Of course, whether a lender decides to seek a deficiency will depend on many factors. In many cases, a lender may forego its right to seek a deficiency and simply cancel the balance of its debt following a foreclosure. However, the cancelled debt may no longer qualify for an exception under the tax code to the recognition of cancelled debt income. Any potential foreclosure or short sale should also be analyzed from a tax perspective so the borrower understands the tax consequences before proceeding with the foreclosure or short sale.
If you need to consult with me based on the change in the law, please call or email me as soon as possible to schedule an appointment so you understand your rights and obligations in connection with any pending foreclosure or short sale. Note that the particular facts of your situation will determine whether a lender can seek a deficiency.
Marc McCain
McCain & Bursh, PLC, Attorneys at Law
mmccain@mblawaz.com
(602) 604-2138