deficiency actions
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
ARIZONA’S ANTI-DEFICIENCY LAWS ARE CHANGING!
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. Under existing statutes, 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.
However, on July 10, 2009 Gov. Brewer signed into law a change to A.R.S. § 33-814(G). The change takes effect September 30, 2009. In addition to the above requirements, the trustee’s sale statute will require that: (a) the trustor has utilized the property as a dwelling for at least 6 consecutive months; and (b) a certificate of occupancy has been issued for the property. Under the existing 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 properties currently qualify for anti-deficiency treatment if on 2 1/2 acres or less. Under the new law, a property that has not been used by the trustor as a dwelling for at least 6 consecutive months will no longer qualify for anti-deficiency treatment. This change raises many interesting issues and will add to the confusion surrounding deficiency issues (see back page).
Note: Arizona courts have held that commercial properties and loans secured by residential homes being developed for sale but never used as dwellings do NOT qualify for anti-deficiency treatment under the statutes. In addition, 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.
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. § 33-814(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. This rule also applies to short sales. Note there are gray areas regarding cash out refi’s. Other Lender claims are also not barred – e.g. mortgage fraud.
11. 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.
12. Real property taxes are NOT an owner’s personal obligation, but only a lien against the real property. However, HOA assessments ARE an owner’s personal obligation and if not paid can result in credit damage, lawsuits and other collection efforts.
13. Last, but not least, 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 and plan accordingly!
Note:
This article does not constitute legal advice and no attorney-client relationship exists without a formal, written fee agreement with the author. Check with an experienced attorney to review your situation and to confirm the current state of the law – the law can change.
Marc McCain
McCain & Bursh, PLC, Attorneys at Law
mmccain@mblawaz.com
(602) 604-2138