foreclosure options
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33-814(G) intended to impose a requirement for the borrower to have lived in the property, this law was subsequently repealed such that it never took effect.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 don’t apply to short sales because a short sale is not a foreclosure. This statement entirely disregards established Arizona precedent. 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, several Arizona cases interpreting Arizona’s anti-deficiency statutes provide clear and established precedent restricting 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.
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
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 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
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
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
PROBLEMS WITH AZ’S NEW ANTI-DEFICIENCY LAWS
The major premise for the Senate Bill 1271 was that the existing anti-deficiency statute was being manipulated by borrowers that were sleeping on floors or moving into a residence with little belongings so they could claim the property was used as a dwelling and then get anti-deficiency treatment.
The 2 main new requirements of the anti-deficiency statute are:
(1) the property must be used as a dwelling by the trustor for 6 or more consecutive months; and
(2) a certificate of occupancy must have been issued for the property.
The problem with the premise for SB 1271 is that it applies predominantly to those borrowers that are building a home with the loan for resale or don’t complete the property and then claim anti-deficiency protection. The current statute already provides that the home must be used as a dwelling – it just doesn’t say that the borrower has to use it as a dwelling. Arizona courts have interpreted the statute to mean that as long as the residence is on 2 ½ acres or less of land and is used by anyone as a dwelling (e.g. a renter, the home owner or family member, etc.) it will get anti-deficiency treatment. However, Arizona courts have also said that the statute does not apply to borrowers who are building the residence for resale. Thus, the premise presented was targeting those people who, the story went, had really got the loan to build and sell the home but couldn’t sell it or complete it and then manipulated the statute to say they used it as a dwelling because they camped out in the living room for a short period.
Presumably, the certificate of occupancy requirement was related to this alleged problem since it would prevent those borrowers who may have been close to having completed construction of a home but didn’t get all final work done and inspected from trying to manipulate the statute by camping out in a home and then claiming they should get anti-deficiency protection (for example, a home that didn’t have water or sewer facilities, but could be alleged to have been used as a dwelling).
While I am not saying that such manipulation has never occurred or is impossible, I would suggest that this scenario represents a miniscule percentage of the problem loans that have gone to foreclosure or are heading to foreclosure. Most borrowers are not building their own homes – they are either buying a home from another or refinancing an existing home loan. Yes, the manipulation cited could also occur where a borrower buys a new residence from a builder and then never uses it or rents it, but again, most investors are able to rent a home at some time for some price, or in fact use the residence as a dwelling for some time (e.g. a second home, vacation home, etc.). Moreover, since the statute already requires the home to be used as a dwelling, and the case law says that builder/sellers do not get anti-deficiency protection, all the lender had to do was prove its case in a deficiency action. Once it presented evidence to show the borrower hadn’t completed the home and/or that it was not really used as a dwelling, the burden of proof would shift to the borrower to rebut this. While I can appreciate the desire to shift the burden of proof to the borrower regarding use as a dwelling, I think the overall summary of the statute is that our legislature just took a chainsaw to a problem that required a scalpel.
Moreover, the certificate of occupancy requirement was completely ill-conceived since many homes were built before certificates of occupancy were issued and some cities and areas in Arizona don’t even issue a formal certificate of occupancy – e.g. Mesa according to its Permits Supervisor.
There are numerous other issues and questions presented by the new law including:
1. does use by the trustor as a dwelling mean the trustor had to live in the property, or merely put it to use by someone as a dwelling — e.g. a renter for instance (note the legislative summary clearly states the intent was that the trustor had to live in the property)?
2. can a borrower use (or live in) more than 1 property as a dwelling at the same time — for instance a vacation home and a main residence?
3. how will a court interpret the 6 consecutive month requirement? if a borrrower that has lived in a home for 3 months goes on an extended vacation, does that stop the clock on the 6 month requirement and require that the borrower use or live in the home for 6 months or more upon return? what about extended illnesses or out of state work assignments?
4. will the new law be applied retroactively to all loans made before the September 30, 2009 effective date but that result in a foreclosure after such date?
5. will courts strictly construe the certificate of occupancy issue?
6. can an entity such as a LLC or corporation that owns a home satisfy the “use as a dwelling” or “lived in” requirement?
I have met with dozens and dozens of clients that are having difficulty making payments on one or more home loans. They are by and large homeowners and relatively small scale investors that bought homes in the boom times believing they could get a share of Arizona’s rising real estate prices. These borrowers were not and are not seeking legal advice to game the system, but to confirm the laws that were in effect when they got the loan — the laws they expected would apply in the unlikely event they lost the home to foreclosure. These clients have presented a consistent story of having excellent credit, never skipping out on a loan and having moral guilt over the prospect of a foreclosure. Now, after making decisions based on what was thought to be a well settled set of rules for borrowers and lenders to play by, our legislature, at the pushing of the banking lobby, just changed the rules of the game with 2:00 minutes to go in the fourth quarter. In Football, it would be like giving the defense an extra 3 players for the offense’s 2 minute drill.
What’s even worse is that none of the foregoing discussion addresses the 1099 cancellation of debt issue that was created for many investors and homeowners that now won’t fall under an exception to cancellation of debt income following a foreclosure. I doubt our legislature or Governor considered or even understood these issues. The potential tax liability created for thousands of Arizona residents and investors could have significant negative consequences for Arizona’s economy and recovery. We already know loan dollars are scarce, now we’ll have fewer investment dollars in Arizona pockets to feed Arizona’s recovery. Given the manner this bill was pushed through (the strike everything amendment) and the trumped up problem presented by the banking lobby, I think Arizona residents should be alarmed and outraged. This is not the way good law is made.
Finally, if manipulation was a concern to the banking lobby, I can’t imagine a statute being more susceptible to manipulation than the one they just helped create. Now, investors who own more than 1 property need merely stagger their foreclosures and move from home to home for a 6 month period to satisfy the new requirement (as intended by the legislature). Most foreclosures take longer than 6 months anyway and during this time the borrower is not paying the lender. So, the new law might slow down foreclosures some, but for many Arizona residents that invested in property and have made the decision that letting it go the bank is the best option, all they did was create some extra steps to get to the same position (assuming the other requirements of the statute are satisfied).
McCain & Bursh, PLC, Attorneys at Law
www.mccain-bursh.com
ARIZONA’S NEW ANTI-DEFICIENCY RULES
On Friday, July 10, 2009, Governor Brewer signed into law a change to Arizona’s anti-deficiency law contained in the trustee’s sale statute – A.R.S. Section 33-814(G).
The following additional requirements must now be satisfied by the borrower in order to qualify for anti-deficiency treatment:
1. THE TRUSTOR (BORROWER) UNDER THE DEED OF TRUST MUST HAVE USED THE PROPERTY AS A DWELLING FOR AT LEAST SIX (6) CONSECUTIVE MONTHS; AND
2. A CERTIFICATE OF OCCUPANCY (“C of O”) MUST HAVE BEEN ISSUED FOR THE PROPERTY.
In addition, the statute provides that the Trustor (Borrower) is responsible for proving that the property was used as a dwelling for the required six (6) consecutive months.
The second new requirement (a C of O must be issued) would not seem to change the application of the anti-deficiency statute to most borrowers. However, in some cities C of O’s are not issued for homes that do in fact comply with building codes. For instance, historic residences in the City of Phoenix were built before C of O’s were issued. Moreover, some cities don’t even issue C of O’s for residences. According to Trevor Howell, Permits Supervisor at the City of Mesa, Mesa does NOT issue C of O’s for residences as a standard practice. Did the legislature mean to exclude all historic homes and virtually all homes located in the City of Mesa from anti-deficiency treatment? I would think not, yet based on a strict reading of the new statute, that is exactly what our legislature did! As a result, the C of O requirement may result in thousands of homeowners being subject to a deficiency judgment notwithstanding that they occupy their home. Thus, it would be wise to check with the applicable governmental entity with jurisdiction over your property to confirm a C of O was in fact issued (such as your City building, zoning or development services department).
If a C of O was not issued on a home, the borrower could face a deficiency action by its lender following a foreclosure. If a lender attempted to seek a deficiency because a C of O was not issued, but if the home was in fact completed, I recommend gathering as much evidence as possible to establish that plans for the home were permitted, the constructed improvements were inspected and approved, and that the home and all systems were completed and in use (e.g. water, electric, etc.). Assuming the borrower can demonstrate the foregoing, I would argue that the intent of the new requirement is satisfied. Of course, the court hearing the deficiency action would have to agree with this line of reasoning.
The first new requirement in the statute (that the borrower used the trust property for at least six (6) consecutive months) may change the applicability of Arizona’s deed of trust anti-deficiency statute for many borrowers facing foreclosure. Although the statute reads only that the property must have been used as a dwelling, the legislative summary of the bill explains that the bill was intended to require a borrower to have lived in the dwelling for at least six (6) consecutive months. This means that for many investment properties, the anti-deficiency rule that formerly prevented a lender from seeking a deficiency or suing its borrower directly on the note will no longer apply (assuming a court interprets the new language consistent with the stated legislative intent) – the lender will be able to sue the borrower for the balance owed on its loan following a foreclosure if the borrower did not live in the property for at least six (6) consecutive months.
One issue that needs clarification is whether the six (6) month requirement means that the dwelling must have been a primary residence, or whether a second home used as a dwelling by the borrower for six (6) or more months would qualify under the new statute. For instance, what if a Phoenix resident has a second home in Flagstaff that it does not rent out, but uses as a vacation home or weekend getaway? Assume the home has been owned and used in this fashion by the borrower for more than six (6) consecutive months. Will this property get anti-deficiency treatment following a trustee’s sale assuming the other requiremens of the statute are satisfied?
In addition, some practitioners I am consulting with on the new law are taking the position that the law is not clear and that use as a dwelling could include a rental property that was not actually lived in by the trustor. While I agree that the legislature did not fully understand the current state of AZ anti-deficiency law, I find this argument a stretch given a plain reading of the statute and coupled with the legislature’s stated intent. I certainly expect lenders to take the position that the trustor/borrower had to live in the property.
Other questions include whether the law will be applied to all loans that were originated before the September 30, 2009 effective date, or just to foreclosures on loans that originated after the effective date of the new law.
Of course, whether a lender decides to seek a deficiency will depend on many factors. In many cases, a lender may forego its right to seek a deficiency and simply cancel the balance of its debt following a foreclosure. However, the cancelled debt may no longer qualify for an exception under the tax code to the recognition of cancelled debt income. Any potential foreclosure or short sale should also be analyzed from a tax perspective so the borrower understands the tax consequences before proceeding with the foreclosure or short sale.
If you need to consult with me based on the change in the law, please call or email me as soon as possible to schedule an appointment so you understand your rights and obligations in connection with any pending foreclosure or short sale. Note that the particular facts of your situation will determine whether a lender can seek a deficiency.
Marc McCain
McCain & Bursh, PLC, Attorneys at Law
mmccain@mblawaz.com
(602) 604-2138