loan modifications
BANKS SUE ARIZONA GOV. BREWER TO STOP REPEAL OF CHANGE TO ANTI-DEFICIENCY LAW
Looks like the threat was real. Banks hired one of Arizona’s most seasoned attorneys to block a portion of HB 2008 from taking affect. Among its many provisions, HB 2008 repealed Senate Bill 1271, which made significant changes to Arizona’s anti-deficiency law related to trustee’s sales. Senate Bill 1271 became the law September 30, 2009 and impacted investors and second home owners of residential property on 2.5 acres or less. Before passage of Senate Bill 1271, lenders could not seek a deficiency judgment against owners of such property following a trustee’s sale. However, with the passage of Senate Bill 1271, an owner has the burden to prove it lived in the dwelling for at least 6 consecutive months and that a certificate of occupancy was issued for the residence. See prior blog posts on SB 1271 and its myriad of problems.
Banks pushed SB 1271 through the legislature in a hurried fashion and presented inaccurate information to Arizona’s legislators. In fact, virtually all assumptions and statements of existing law and practice containted in the legislative summary for SB 1271 were WRONG (the summary is circulated to legislators and their staff to assist in considering the merits of a bill). Of course, the errors created sympathy for the banks and their bill and it passed with ease. When the local real estate community and consumers figured out what had happened, they were outraged. The outrage was channeled into quick and effective lobbying of our legislators to repeal SB 1271 and its terribly drafted language and unfair ramifications to tens of thousands of Arizona homeowners.
As part of Senator Pierce’s drive to repeal his own bill, he expressed a willingness to raise the issues related to SB 1271 in the next legislative session. Apparently not satisfied with addressing this issue on an even playing field, with ACCURATE INFORMATION AND STATEMENTS OF THE LAW as a backdrop to discussions, banks have now decided that paying thousands to attorneys and suing our Governor is the most productive way to move the ball forward.
While the dust settles on the lawsuit filing, perhaps banks can explain a few things to their Arizona customers (and no doubt, to hundreds of thousands of similarly situated customers in the United States):
1. did banks play a role in the (unreasonable) run up of real estate prices and the current foreclosure crisis?
2. did banks and their agents benefit in making questionable loans based on shoddy underwriting and overly optimistic appraisals — were they paid fees, points, commissions?
3. are banks being transparent with their customers in addressing loan workouts — modifications, short sales, deeds in lieu of foreclosure (remember, banks demand full disclosure of a borrower’s financial information to consider a workout — do the banks open their books to ANYONE including our Fed. Gov’t)?
4. are banks approving workouts of distressed loans/properties where it makes sense to both the bank AND THE BORROWER, or only when it is in the bank’s best interest to do so considering all of the behind the scenes deals at play that the borrrower has no idea are impacting its workout request (such as stimulus money, Gov’t guarantees or insurance of losses, private mortgage insurance, etc)?
5. are banks willing to sacrifice their bottom lines NOW, to assist its borrowers avoid financial ruin (remember banks, today’s foreclosure victims and bankruptcy filers won’t be your customers tomorrow — they won’t have any money).
It is anyone’s guess how this will play out in the Court or Arizona’s legislative process. One thing is for sure, the banks aren’t satisfied with playing within the established rules of Arizona anti-deficiency law. When times are tuffest, banks want to change the rules in their favor, on top of the billions they have already received from US taxpayers. Consumers are asking, where is my assistance, when will the banks work with me and do what makes sense? Unfortunately, unless our local and Federal governments stand up to the banks and their hired guns, consumers will continue to take it in the shorts and ask, where do we look for assistance?
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
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
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