foreclosure assistance
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33-814(G) intended to impose a requirement for the borrower to have lived in the property, this law was subsequently repealed such that it never took effect.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.
IMPACT OF REPEAL of ARIZONA SENATE BILL 1271
As most interested parties now know, Governor Brewer signed House Bill 2008 and with it becoming law in late November, 2009, swept away the recent changes to Arizona’s anti-deficiency laws set to go into effect September 30, 2009. Residential property owners’ collective sigh of relief could be felt throughout the Valley. However, the victory parade could be short, as banking lobby will push hard to bring change to Arizona’s rather broad anti-deficiency statutes.
House Bill 2008, largely a budget bill, included the entire text of A.R.S. Section 33-814, Arizona’s statute addressing deficiency actions following a non-judicial foreclosure (called a trustee’s sale). The recent changes to subsection G, the anti-deficiency rule applicable to residential properties, were deleted entirely, leaving the language as it originally read before Senate Bill 1271 was signed by Gov. Brewer this summer. In addition, Sec. 47(B) of HB 2008 provides that the changes will apply retroactively to from and after September 29, 2009. Read the entire text of the statute on page 27-29 of HB 2008 — http://azgovernor.gov/DMS/upload/PR_090409_HB2008.pdf.
The Valley real estate market is abuzz with predictions about how the repeal of SB 1271 will impact its recovery. One thought is that foreclosures will soar as many lenders who suspended foreclosures in anticipation of SB 1271 taking effect (and being able to sue borrowers for a deficiency – largely non-owner occupied residential owners who would not have satisfied the new anti-deficiency requirements) now proceed with their pending trustee’s sales.
Another thought is that many lenders will be forced to consider alternatives to foreclosure including short sales and modifications. Given the severity of deficiencies on many under water residences in Arizona, lenders facing non-recourse loans may think twice about foreclosure. Short sales typically result in a sales price 20% or higher than what a lender would realize in a foreclosure or REO sale (PMI considerations aside). Without the prospect of recovering a deficiency following a short sale or foreclosure, it only makes sense that lenders entertain short sales.
Others think that deeds in lieu of foreclosure may increase as lenders try to reduce costs of retaking title to a severly underwater property.
Whatever the outcome, owners of residential real estate in Arizona can sleep easier knowing the deficiency rules in place for several decades will remain in place — at least for now.
Marc McCain, Esq.
McCain & Bursh, PLC, Attorneys at Law
(602) 604-2138
STATUS OF REPEAL OF ARIZONA SENATE BILL 127
Gov. Brewer signed and transmitted House Bill 2008 which includes a repeal of Senate Bill 1271, the recent change to Arizona’s anti-deficiency law contained in ARS Section 33-814(G) governing trustee’s sales. http://azgovernor.gov/DMS/upload/PR_090409_HB2008-09-12-13TransmittalLetter.pdf.
The repeal is set to take effect on approximately November 24, 2009 (90 days after the special legislative session ended), however the repeal was made retroactive to September 29, 2009 with the intent to do away with any attempt to enforce the changes implemented by SB 1271 during the window between September 30 and November 24, 2009. The repeal means that investors of qualifying properties (properties on 2 1/2 acres or less and utilized — by anyone - as single 1 or 2 family dwelling) will continue to be protected by Arizona’s anti-deficiency statutes upon a foreclosure by a first lien holder (barring any successful lender argument that SB 1271 should be applied to any foreclosures during the “window period” or any subsequent changes to the law).
However, remember that junior liens may or may not get anti-deficiency treatment following a foreclosure or short sale, but additional rules and analysis apply. This means that in some cases, junior lien holders whose lien is extinguished in a foreclosure or who release a lien in a short sale are not covered by AZ’s anti-deficiency laws and may sue a borrower on the note. In other cases, such lien holders will fall under the anti-deficiency statutes and will be barred from collecting on the note.
Always consult with a qualified professional on your particular situation and don’t forget that any foreclosure, short sale, deed in lieu or loan modification should be considered from a tax standpoint — consult with qualified tax professionals on your specific workout.
Marc McCain
McCain & Bursh, PLC, Attorneys at Law
(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
RESIDENTIAL LOAN MODIFICATIONS
You’ve probably heard a lot about residential loan modifications lately. Probably even seen a few notorious law firms advertising on TV or been swamped with junk mail from a “modification” company. I”m getting lots of call in my office lately from people asking about loan modifications and certain claims or promises by companies. One thing is certain from what I”m hearing from consumers – BE CAREFUL! If you decide to hire a company to process your loan modification, be sure you do your homework on the company. Here are a few tips before hiring a company and paying any up front money for a loan modification:
1. Make sure you are dealing with an established company, not some start up trying to capitalize on the new get rich financial scheme.
2. Be careful about hiring any company working out of state or that does not have a physical office in your state.
3. Try to hire a company or individual that is licensed by and in good standing with your state such as licensed mortgage brokers, real estate brokers or attorneys. Note that some states require that a loan modification be processed only by certain licensed professionals.
4. Don”t pay up front fees unless you are paying the money into a neutral escrow account that you can control, or to a professional that has licensing or regulatory obligations with respect to the handling of your money (such as an attorney licensed in your state that agrees to put all or a portion of your money in the firm’s trust account subject to withdrawal only as work is completed or milestones are met). There have been many reports lately of companies taking money for modifications they promise and don’t deliver, often with no evidence of any work performed.
5. Not all borrowers are candidates for a loan modification. Make sure the company does a preliminary review of your mortgage and financial situation to confirm you are a modification candidate. Although every lender and loan type is different, there are some general guidelines that assist experienced modification processors determine the likelihood a lender will modify a loan. However, be skeptical of any “guaranty” you will get a modification. In some cases, even if you would appear a candidate on paper, the investor holding your loan or loan servicer may not approve the modification.
6. Be patient. The process can take time and require lots of follow up with your lender.
7. Don’t give up. Even if your modification request is denied, you might qualify at a later date. The rule regarding loan modifications right now is that there are no rules. With the current economic crisis, bail out money and other changing guidelines, remember the old adage “if at first you don’t succeed, try, try again”. Just because a lender denies a modification request doesn’t mean you shouldn’t try again 6 months or a year later. Conditions are changing rapidly and there is no telling what a lender may do down the road.
Marc McCain is a founding partner at McCain & Bursh, PLC, Attorneys at Law, located in Phoenix, Arizona. He can reached be reached at (602) 604-2166 or by email at mmccain@mblawaz.com with questions regarding your residential mortgage. www.mccain-bursh.com.