attorney foreclosure assistance
PROBLEMS WITH AZ’S NEW ANTI-DEFICIENCY LAWS
The major premise for the Senate Bill 1271 was that the existing anti-deficiency statute was being manipulated by borrowers that were sleeping on floors or moving into a residence with little belongings so they could claim the property was used as a dwelling and then get anti-deficiency treatment.
The 2 main new requirements of the anti-deficiency statute are:
(1) the property must be used as a dwelling by the trustor for 6 or more consecutive months; and
(2) a certificate of occupancy must have been issued for the property.
The problem with the premise for SB 1271 is that it applies predominantly to those borrowers that are building a home with the loan for resale or don’t complete the property and then claim anti-deficiency protection. The current statute already provides that the home must be used as a dwelling – it just doesn’t say that the borrower has to use it as a dwelling. Arizona courts have interpreted the statute to mean that as long as the residence is on 2 ½ acres or less of land and is used by anyone as a dwelling (e.g. a renter, the home owner or family member, etc.) it will get anti-deficiency treatment. However, Arizona courts have also said that the statute does not apply to borrowers who are building the residence for resale. Thus, the premise presented was targeting those people who, the story went, had really got the loan to build and sell the home but couldn’t sell it or complete it and then manipulated the statute to say they used it as a dwelling because they camped out in the living room for a short period.
Presumably, the certificate of occupancy requirement was related to this alleged problem since it would prevent those borrowers who may have been close to having completed construction of a home but didn’t get all final work done and inspected from trying to manipulate the statute by camping out in a home and then claiming they should get anti-deficiency protection (for example, a home that didn’t have water or sewer facilities, but could be alleged to have been used as a dwelling).
While I am not saying that such manipulation has never occurred or is impossible, I would suggest that this scenario represents a miniscule percentage of the problem loans that have gone to foreclosure or are heading to foreclosure. Most borrowers are not building their own homes – they are either buying a home from another or refinancing an existing home loan. Yes, the manipulation cited could also occur where a borrower buys a new residence from a builder and then never uses it or rents it, but again, most investors are able to rent a home at some time for some price, or in fact use the residence as a dwelling for some time (e.g. a second home, vacation home, etc.). Moreover, since the statute already requires the home to be used as a dwelling, and the case law says that builder/sellers do not get anti-deficiency protection, all the lender had to do was prove its case in a deficiency action. Once it presented evidence to show the borrower hadn’t completed the home and/or that it was not really used as a dwelling, the burden of proof would shift to the borrower to rebut this. While I can appreciate the desire to shift the burden of proof to the borrower regarding use as a dwelling, I think the overall summary of the statute is that our legislature just took a chainsaw to a problem that required a scalpel.
Moreover, the certificate of occupancy requirement was completely ill-conceived since many homes were built before certificates of occupancy were issued and some cities and areas in Arizona don’t even issue a formal certificate of occupancy – e.g. Mesa according to its Permits Supervisor.
There are numerous other issues and questions presented by the new law including:
1. does use by the trustor as a dwelling mean the trustor had to live in the property, or merely put it to use by someone as a dwelling — e.g. a renter for instance (note the legislative summary clearly states the intent was that the trustor had to live in the property)?
2. can a borrower use (or live in) more than 1 property as a dwelling at the same time — for instance a vacation home and a main residence?
3. how will a court interpret the 6 consecutive month requirement? if a borrrower that has lived in a home for 3 months goes on an extended vacation, does that stop the clock on the 6 month requirement and require that the borrower use or live in the home for 6 months or more upon return? what about extended illnesses or out of state work assignments?
4. will the new law be applied retroactively to all loans made before the September 30, 2009 effective date but that result in a foreclosure after such date?
5. will courts strictly construe the certificate of occupancy issue?
6. can an entity such as a LLC or corporation that owns a home satisfy the “use as a dwelling” or “lived in” requirement?
I have met with dozens and dozens of clients that are having difficulty making payments on one or more home loans. They are by and large homeowners and relatively small scale investors that bought homes in the boom times believing they could get a share of Arizona’s rising real estate prices. These borrowers were not and are not seeking legal advice to game the system, but to confirm the laws that were in effect when they got the loan — the laws they expected would apply in the unlikely event they lost the home to foreclosure. These clients have presented a consistent story of having excellent credit, never skipping out on a loan and having moral guilt over the prospect of a foreclosure. Now, after making decisions based on what was thought to be a well settled set of rules for borrowers and lenders to play by, our legislature, at the pushing of the banking lobby, just changed the rules of the game with 2:00 minutes to go in the fourth quarter. In Football, it would be like giving the defense an extra 3 players for the offense’s 2 minute drill.
What’s even worse is that none of the foregoing discussion addresses the 1099 cancellation of debt issue that was created for many investors and homeowners that now won’t fall under an exception to cancellation of debt income following a foreclosure. I doubt our legislature or Governor considered or even understood these issues. The potential tax liability created for thousands of Arizona residents and investors could have significant negative consequences for Arizona’s economy and recovery. We already know loan dollars are scarce, now we’ll have fewer investment dollars in Arizona pockets to feed Arizona’s recovery. Given the manner this bill was pushed through (the strike everything amendment) and the trumped up problem presented by the banking lobby, I think Arizona residents should be alarmed and outraged. This is not the way good law is made.
Finally, if manipulation was a concern to the banking lobby, I can’t imagine a statute being more susceptible to manipulation than the one they just helped create. Now, investors who own more than 1 property need merely stagger their foreclosures and move from home to home for a 6 month period to satisfy the new requirement (as intended by the legislature). Most foreclosures take longer than 6 months anyway and during this time the borrower is not paying the lender. So, the new law might slow down foreclosures some, but for many Arizona residents that invested in property and have made the decision that letting it go the bank is the best option, all they did was create some extra steps to get to the same position (assuming the other requirements of the statute are satisfied).
McCain & Bursh, PLC, Attorneys at Law
www.mccain-bursh.com