marc mccain lawyer
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 categorically false. Either these real estate professionals do not understand the law, or they are trying to create confusion to help attract clients for their services. 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 never result in a deficiency for a borrower.
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
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
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