deficiency following foreclosure
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
Foreclosure of Residential Mortgages/Arizona Anti-Deficiency Laws
Before losing a home to foreclosure, it is critical to understand when a lender’s rights are limited to selling the home at foreclosure, and when a lender is entitled to a deficiency judgment. In addition to damaging one’s credit, a foreclosure may also result in a deficiency judgment if the foreclosure price doesn’t pay the lender in full. However, in specific instances in Arizona, a deficiency judgment is not permitted. The following terms and rules provide a summary of when a borrower may be subject to a deficiency judgment following a foreclosure.
1. A real property loan is typically secured by a Mortgage or Deed of Trust. A Mortgage is foreclosed judicially by filing a court action per A.R.S. § 33-721 et. seq. A Deed of Trust is foreclosed non-judicially via a trustee’s sale per A.R.S. § 33-801 et. seq. However, a Deed of Trust may also be foreclosed judicially as a Mortgage.
2. In judicial foreclosures and trustee’s sales, the type of property is key, not the type of borrower. Anti-deficiency rules apply only if the property foreclosed is 2½ acres or less and used for a single 1-family or single 2-family dwelling. Commercial properties don’t qualify nor do loans secured by residential homes being developed for sale but never used as dwellings.
3. If the property passes the test in #2, next determine if the loan is a purchase money (”PM”) or non-purchase money (”NPM“) loan. A PM loan is (a) any carry-back loan given upon buying a property, or (b) any loan used for all or part of the purchase price of a home. A home equity line of credit may be a PM loan if given to pay the price of the home. A PM loan doesn’t lose its PM nature when it is refinanced.
4. In a judicial foreclosure, only a PM lender on qualifying property is prevented from seeking a deficiency; NPM lenders are not — they can obtain a deficiency.
5. In a trustee’s sale, both PM and NPM lenders on qualifying property are prevented from seeking a deficiency. The borrower will not be subject to further liability for the loan.
6. If a 1st position PM lender forecloses via trustee’s sale, a 2nd position NPM lender does not lose its right to sue a borrower on the loan. Unless the 2nd position NPM lender is paid or settles the debt, a bankruptcy filing would be required to discharge the 2nd position NPM lender’s loan.
If you need to speak to an Arizona attorney, contact the attorneys at McCain & Bursh, PLC. www.mccain-bursh.com.