Darius Bursh
COMMON MYTHS ABOUT ARIZONA FORECLOSURES AND SHORT SALES
Over the past 18 + months of advising owners of distressed property, several common myths have emerged regarding foreclosures and short sales in Arizona. Here is a list of common myths.
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33-814(G) intended to impose a requirement for the borrower to have lived in the property, this law was subsequently repealed such that it never took effect.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
(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.
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.
SHORT SALE TIPS FOR ARIZONA RESIDENTIAL PROPERTIES
1. Know what leverage you have, if any. If Arizona’s anti-deficiency statutes apply to your loan(s), use this fact to reject any lender demand for a seller/borrower contribution at close of escrow. Most junior lenders will ask for a contribution from the borrower, sometimes a significant one. If the loan is covered by Arizona’s anti-deficiency laws, the lender would be barred from seeking a deficiency if the home goes to foreclosure. A savvy borrower or his short sale negotiator will use this fact as leverage to get an approval without a borrower contribution, or at least not a significant one. Of course, each loan can be different, so know the law and how it affects each of your loans on a property before the short sale process begins.
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
(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
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
LOAN MODIFICATION DIFFERENT THAN LOAN RE-FINANCE
A recent article in the Phoenix Business Journal titled “Mortgage modifications elusive” wrote of the failure of the Government’s mortgage modification plan given the sharp decline in property values in certain cities such as Phoenix, Arizona. However, the article failed to distinguish between mortgage re-financings and mortgage modifications in the residential loan market, especially for homes that are upside down or underwater (meaning more is owed on the home than what the home is worth). The main point of the article was to say that if a borrower’s home loan is 105% or more of the home’s value, the borrower won’t qualify for a loan modification. Contrary to this recent article, a loan modification is possible where their home is underwater. The underwater rule applies only to loan re-financings under the U.S. Government’s Home Affordable Refinance program.
With respect to loan modifications, there is no rule that a homeowner cannot be underwater. In fact, a main goal of a modification and the Government’s Making Home Affordable loan modification program is to provide assistance to an underwater owner in an effort to avoid foreclosure. Today, loan modifications fall into 2 general categories – (1) a Federal loan modification under the U.S. Government’s Making Home Affordable program, and (2) a traditional loan modification (meaning one that is not subsidized by the U.S. Government). Although lenders historically have been hesitant to modify loans, as market conditions have worsened, many lenders have voluntarily modified loans to stave off foreclosure and the prospect of owning or selling another residence worth much less than the loan balance. This is especially true in states such as Arizona that have anti-deficiency statutes that in many instances prevent a lender from seeking a deficiency judgment against a borrower following a foreclosure (the only remedy of a lender in many cases is to foreclose on the residence).
While many homeowners and professionals have expressed frustration and confusion over the rules governing Federal backed loan modifications and traditional loan modifications, one thing is clear – the rules for residential loan modifications are changing often and rapidly. For instance, on April 28, 2009 the U.S. Treasury Department’s issued its latest rule changes regarding second mortgages under the Making Home Affordable loan modification program. Initially, second mortgages were not covered by the Government’s plan. Now, participating servicers are required to modify second loans or offer borrower’s discounts to pay the loan off. Moreover, the Federal loan modification program is in its infancy – both servicers and homeowners are still getting up to speed to understand the rules and process.
The point to be taken from all this is simple — homeowners should be hesitant to take “no” for an answer when seeking a loan modification – explore all options, don’t give up, continue to check your servicer’s guidelines and whether they are participating in the Federal loan modification program and, when all else fails, consult a professional with experience in the area. For additional information on the Government’s loan modification program, go to www.financialstability.gov/roadtostability/homeowner.html and to www.makinghomeaffordable.gov.
Marc McCain, Esq.
McCain&Bursh, PLC, Attorneys at Law
Direct: (602) 604-2166
Form an Arizona LLC or S Corp
Anyone thinking of starting a business or anyone currently running a business as a sole proprietor should consider forming a limited liability company (’LLC”) or subchapter S corporation (”S Corp”). The main advantage of an LLC or S Corp is the liability protection afforded to the owners of the business. When operating as a LLC or S Corp, an owner’s liability is limited to his or her investment in the company; that is, the company’s assets and any capital contributed by an owner are all that are availabe to a creditor of the company in connection with any company debt or any company liability. However, the individual assets of the company’s owners will not be at risk.
For example, assume you are the owner of a carpet cleaning business and do not operate as a LLC or S Corp. If you accidentally ruin the carpet of a homeowner in the cleaning process, you would be personally liable for the damage and all of your personal assets would be up for grabs to satisfy the damage. Assuming, however, you operate as a LLC or S Corp, the owner’s remedy would be to pursue a claim against the LLC or S Corp as an entity and only the entity’s assets would be available to satisfy any liability.
Of course, any business owner should carry insurance in an amount sufficient to cover foreseeable risk. But in those instances where insurance does not provide coverage, or if the coverage is insufficient (in a case involving serious injury or death for example), the additional liability protection afforded by a LLC or S Corp should allow a business owner to sleep easier at night.
There may be additional advantages to forming a LLC or S Corp such as tax advantages and the appearance of a professional business operation.
Anyone considering forming a LLC or S Corp in Arizona can contact the Law Office of McCain & Bursh, PLC. Our company website is www.mccain-bursh.com.