effect of foreclosure in arizona
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
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.