McCain & Bursh attorneys
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
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
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 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