loan modification
Arizona’s Anti-deficiency laws — what are they and for how long?
In Arizona, certain loans on residential real property are subject to what are called anti-deficiency laws. These laws limit a borrower’s liability to its lender if certain requirements are met. However, there are many misconceptions about Arizona’s anti-deficiency laws, when they apply, and whey they don’t. Moreover, Arizona’s anti-deficiency laws have been in recent flux, increasing the confusion in the market and borrowers’ anxiety as they try to navigate a very difficult and stressful situation. The recent changes to Arizona’s anti-deficiency laws were the result of Arizona Senate Bill 1271 which took effect on September 30, 2009 (for an understanding of the additional requirements imposed under Senate Bill 1271, effective since September 30, 2009 and until HB 2008 takes effect, see prior blog posts at www.marcmccain.com or contact the author).
However, Arizona House Bill 2008 was recently passed and signed by Governor Brewer and is slated to become law in late November, 2009. HB 2008 contained a repeal of the changes to the anti-deficiency law made by Senate Bill 1271 and included a clause that made the repeal retroactive to September 29, 2009. Thus, local practitioners have been operating under the premise that HB 2008 will be applied retroactively as written and that the requirements implemented by SB 1271 will never by applied in practice. However, the banks have now sued Governor Brewer to stop the repeal of SB 1271 from taking effect, or at least to increase their leverage in introducing new legislation that would limit the broad application of Arizona’s anti-deficiency laws.
With the foregoing as a backdrop, set forth below are the general anti-deficiency rules applicable in Arizona once HB 2008 takes effect later this month (assuming that is the case). If banks are successful in keeping SB 1271 on the books, a borrower must understand how the changes made by SB 1271 affect their situation. Moreover, if your foreclosure or workout falls within the “window period” of September 30, 2009 until the date HB 2008 and its change to the anti-deficiency law takes effect, you should consider the additional risks related to your foreclosure or workout given the potential application of SB 1271. However, borrowers must understand these are only general rules — every situation must be analyzed carefully based on the relevant facts and applicable law. And remember, the law can and may change!
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. 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. NOTE: SB 1271 made changes to A.R.S. § 33-814(G) AND THESE CHANGES ARE NOT SET FORTH IN THIS SUMMARY IN DETAIL. HOWEVER, SB 1271 IS TECHNICALLY THE LAW UNTIL HB 2008 TAKES EFFECT. Any borrower should understand the changes to A.R.S. § 33-814(G) made by SB 1271 and the status of HB 2008 before agreeing to any workout or foreclosure.
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-
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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 – before or after the foreclosure. This rule also applies to short sales. However, other Lender claims are not barred – e.g. mortgage fraud.
11. Under the trustee’s sale statute (WITHOUT TAKING INTO ACCOUNT THE CHANGES MADE BY SB 1271), 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 or rental properties qualify for anti-deficiency treatment, even if they are not owner occupied properties. HOWEVER, IF SB 1271 IS APPLIED, THE BORROWER MUST ESTABLISH THAT IT, THE BORROWER, UTILIZED THE PROPERTY AS ITS DWELLING FOR AT LEAST 6 CONSECUTIVE MONTHS. THIS COULD MEAN THAT CERTAIN INVESTMENT OR RENTAL PROPERTIES MAY NOT QUALIFY FOR ANTI-DEFICIENCY TREATMENT).
12. However, Arizona’s Supreme Court has held that commercial properties and loans secured by residential homes being developed for sale but never utilized as dwellings do NOT qualify for anti-deficiency treatment under the statutes.
13. In addition, Arizona’s 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.
14. 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.
15. Real property taxes are NOT an owner’s personal obligation, but only a lien against the real property.
16. However, HOA assessments ARE an owner’s personal obligation and if not paid can result in credit damage, lawsuits and other collection efforts.
17. Arizona’s anti-deficiency statutes and the cases interpreting them generally apply to short sales, but with some nuances. Borrowers must be careful when analyzing short sales and their potential liability after the sale. In some cases, a short sale will permit a lender to collect the balance due on its note whereas a foreclosure on the same property may bar a lender from seeking a deficiency.
18. 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!
McCain & Bursh, PLC, Attorneys at Law
(602) 604-2138
Arizona Senate Bill 1271 is Still the Law — But For How Long?
In light of the Banks’ recent lawsuit against the Governor attempting to prevent the repeal of Senate Bill 1271 from taking effect on or about November 24, 2009, it is important to understand the status of current Arizona law. To be technically correct, existing law INCLUDES the provisions of Senate Bill 1271, the bill that modified Arizona’s anti-deficiency provisions in the trustee’s sale statute – A.R.S. Section 33-814(G). The changes to A.R.S. Section 33-814(G) require that the trustor utilized the property as a single-one or single-two family dwelling for at least 6 consecutive months and also that a certificate of occupancy has been issued for the property.
However, House Bill 2008, recently passed by our legislature and signed by Gov. Brewer, repeals Senate Bill 1271 and the repeal is retroactive to September 29, 2009, the day before Senate Bill 1271 became law. Thus, the legal community has been operating under the premise that, although Senate Bill 1271 is technically the law from September 30, 2009 until the date HB 2008 takes effect, it will never be applied since HB 2008 makes the repeal retroactive to September 29, 2009 as though A.R.S. Section 33-814(G) were never changed. Now that the banks have sued the Governor, this premise, and the outcome of this power struggle, is in doubt.
The expectation from many in the legal community is that HB 2008 will take effect as scheduled on or about November 24, 2009 (90 days after teh end of the last special legislative session), and thus, Senate Bill 1271 will be repealed and A.R.S. Section 33-814(G) will be applied by courts as though it never changed. However, the repeal could be only temporary. Banking lobbyists are hard at work at the State Capitol trying to push a version of Senate Bill 1271 down the proverbial throats of our Governor and Legislators, with the pending lawsuit serving as leverage for their demands.
Given the uncertainty surrounding this very important issue of State law, I urge all of my clients and industry professionals to stay apprised of current developments and understand that the law in this area is in flux. What was “existing” or “current” law yesterday or today may not be the same tomorrow or next week, and how a court may interpret the mess created by this tug of war is anyone’s guess. As a result, a careful review of the law and application to a specific situation is critical before finalizing any short sale or permitting a home to go to foreclosure.
Marc McCain, Esq.
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
LETTER TO ARIZONA LEGISLATORS re ARIZONA SENATE BILL 1271
Here is a copy of the email correspondence I sent to Senator Sylvia Allen today. If anyone has a stake in the change in Arizona’s anti-deficiency law, I ask that you email me your concerns and opinions at mmccain@mblawaz.com. Although I have my own thoughts on this issue, I would like as much input as possible to take to Arizona’s legislators in the coming days.
Senator Allen:
Thank you for taking the time to meet with me yesterday and hearing my concerns over the passage of SB 1271. I want to stress that, although I support the AAR’s call for a repeal of the statute, I am not currently working on behalf of any one group or association. My concerns are based solely on what I am certain was an incorrect understanding of Arizona law and what I believe is an exaggerated problem of spec builder abuse of existing law (in the overall picture).
In addition, there appears to have been little to no discussion of the many serious consequences this legislation will have on thousands of Arizona property owners. These include garnishment of assets and wages, forced bankruptcies and cancelled debt taxes that could be substantial. All of these issues do not bode well for the average Arizonan at a time when they are struggling to stay afloat. For many people, this bill will either take whatever funds they have left, or push them into bankruptcy and neither result is good for Arizona’s economy.
Moreover, the wording of the statute and each change to the statute will create tremendous ambiguity in the courts and force potentially thousands of helpless property owners to litigate deficiency lawsuits against lenders and their counsel. In such litigation, the owner will now have the burden to establish the requirement that the property was lived in for 6 or more months. Since many lenders have no idea of how the property has been used, homeowners will face “fishing” lawsuits where lenders force them to satisfy their burden of proof in court or face a judgment – even if they in fact lived in the property for countless years. This is a David vs. Goliath scenario waiting to happen.
The certificate of occupancy (C of O) requirement is simply bad law and does not further the intent behind the change to the law. As I have indicated in my prior correspondence, not all cities issue C of O’s, some cities (like Phoenix) only started issuing them in more modern times, and even if a C of O can be obtained where one was not issued, this will tax local governments and their building departments at a time when resources are scarce, and can result in inspections of property and required upgrades to bring a property current (in order to get a C of O).
If this law is not repealed, it will most certainly result in a constitutional challenge by one or more consumer groups. The law was written to have retroactive effect – meaning it will be used against borrowers that entered into contracts long before the law was changed, and before foreclosure proceedings even commenced. In short, it will be used in an effort to change the rules governing the loan agreement and the borrower’s obligations thereunder after the contractual obligations were entered into. Given the vagueness in the law, the impact it will have on existing contractual rights and obligations, the problems with the C of O requirement, and the fact that the premise of the law was flawed, I expect a court to determine the law to be unconstitutional as written.
I am receiving numerous calls from owners and lenders asking about the new law. So far, the lenders I have spoken with are not calling about spec builders in default, but investors of qualifying residential property that will no longer get anti-deficiency treatment if the change in the law stands (despite the fact that the property has been used as a dwelling, albeit perhaps not by the borrower). Since the premise for the need to change the law was incorrect (which it most certainly was), the resulting legislation was inherently flawed. If lenders wanted to change the law to their benefit, they should have done so by presenting an accurate account of the law and with ALL impacts properly discussed and analyzed. I urge you to do what is necessary to repeal this law and bring the lenders and their lobby back to the table during the next normal legislative session to have a well rounded and accurate discussion of the issues at play.
Sincerely,
Marc McCain
Attorney at Law
ARIZONA’S NEW ANTI-DEFICIENCY LAW RAISES MANY QUESTIONS
Arizona’s anti-deficiency law with respect to trustee’s sales is changing effective September 30, 2009! The change was intended by the legislature to require (1) a trustor (the Borrower) to live in the trust property for at least 6 consecutive months, and (2) that the home had to be completed before a borrower could claim anti-deficiency status. In addition, the borrower now has the burden of proof to establish that it used the property as a dwelling for the required 6-month period. However, the wording of the new statute and the new requirements themselves are not entirely clear on their face. As a result, the change to the statute will undoubtedly lead to more confusion in the marketplace and perhaps, more manipulation of the new statute.
Going forward, it will be interesting to see how lenders act in response to the change and how courts will interpret the new law. Below is a sample of the issues and potential gray areas the new law raises:
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 (note the legislative summary clearly states the intent was that the trustor had to live in the property but this is NOT how the statute is worded – says the trustor must utilize the dwelling for 6 or more consecutive months)?
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 borrower 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 requirement or will evidence establishing construction was completed and all approvals and inspections obtained from the governing authorities be sufficient?
6. Can an entity such as a LLC or corporation that owns a home satisfy the requirement that the home be used by or lived in by the trustor — especially where the trustor under the Deed of Trust is the LLC or other entity?
Marc McCain
McCain & Bursh, PLC, Attorneys at Law
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.