phoenix short sale attorney
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
UPDATE ON ARIZONA’S ANTI-DEFICIENCY LAWS
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. Arizona Senate Bill 1271 was passed in the summer of 2009 and briefly became the law until repealed, most recently by Arizona Senate Bill 1004. As a result, Arizona anti-deficiency law will remain unchanged, at least for now. For an understanding of the additional requirements that Senate Bill 1271 would have imposed to get anti-deficiency protection, see prior blog posts at www.marcmccain.com.
With the foregoing as a backdrop, set forth below are the general anti-deficiency rules applicable in Arizona now that Senate Bill 1004 has taken effect. 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 sale price does not pay a lender what it is owed, the lender may generally seek a deficiency against the borrower for the balance of the loan. However, Arizona has what is called an anti-deficiency law that bars a lender from seeking a deficiency in certain situations. The anti-deficiency laws with respect to real property loans in Arizona 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).
3. In determining if Arizona’s 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 and what law will most likely apply to the lender’s rights under the Promissory Note.
4. Assuming Arizona law applies to the lender’s rights under the note, in both judicial foreclosures and trustee’s sales in Arizona, 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.
5. 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.
6. However, the trustee’s sale statute, A.R.S. § 33-814(G), does NOT require that the loan be a PM loan.
7. Special rule regarding purchase money loans: a PM loan does NOT lose its PM nature when it is refinanced. However, cash out refi’s raise interesting issues.
8. In judicial foreclosures, if the loan on qualifying residential property is a non-purchase money (“NPM”) loan, then the lender is not prevented from seeking a deficiency following a foreclosure or from suing borrower on the note. Only lenders that made PM loans on qualifying residential property are prevented from seeking a deficiency or suing the borrower on the note. However, for several reasons, judicial foreclosures on residential property in Arizona are relatively rare — most lenders foreclosure via a trustee’s sale.
9. 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.
10. 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.
11. Arizona’s Supreme Court has ruled that a PM lender on qualifying property can NOT waive its security and sue directly on its note. This rule should prevent a PM lender on qualifying property from suing a borrower on the note before or after a foreclosure or after a short sale. However, other Lender claims are not barred – e.g. voluntary waste of the property. Moreover, many lenders are ignoring Arizona law in collection efforts and short sale approvals and negotiations.
12. Under the 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 or rental properties qualify for anti-deficiency treatment, even if they are not owner occupied properties.
13. 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.
14. 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.
15. 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.
16. Real property taxes are NOT an owner’s personal obligation, but only a lien against the real property.
17. However, HOA assessments ARE an owner’s personal obligation and if not paid can result in credit damage, lawsuits and other collection efforts.
18. Arizona’s rules governing foreclosures and deficiency issues may apply to short sales, but a borrower must understand the law and its loan and realize that the outcome can be different in a short sale vs. a foreclosure, e.g., a short sale on a NPM loan will generally permit a lender to collect the balance due on its note whereas a trustee’s sale on the same loan will prevent the lender from seeking a deficiency. Short sales also present the parties with the chance to negotiate terms of the short sale and deficiency issues.
19. 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!
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