Arizona Anti-Deficiency Laws - Update

[KFish]

Thought I would pass along some info I learned this week for you Arizona home owners. I currently have 3 investment properties that our family can no longer afford due to pay cuts. This week, I met with an Arizona real estate attorney to have him review our loan documents and discuss the options and consequences of foreclosure.

As we know, Arizona has very broad anti-deficiency laws. Recently, the governor repealed SB1271 (hopefully I got that right!) which the banks managed to slide in. The banks have filed a lawsuit and they are pushing for the bill again, or some form of it. This bill I believe specifically targets investment properties. They are also pushing for some of these proposed changes to possibly be retroactive.

I havnt seen anything on here mentioned about the lawsuit (just filed on the 20th I believe) so I thought I would give the other investors a heads-up. There is no way to say what will happen with the law, but we should all keep our fingers crossed for sure.

If the moderators dont mind, I will post the address of my attorney's blog that he updates regarding this issue: marcmccain.com

We are about to walk away from our properties, so I will post our story. Maybe our info can help others...I have learned so much from this site and enjoyed sharing everyones stories!

[KFish]

Reference the battle over Arizona's anti-deficiency laws..here is what our attorney updated today on his blog. For those Arizona homeowners (especially if your properties werent owner-occupied) we definately need to keep our fingers crossed this stuff goes our way....


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, I wanted to clarify the status of current Arizona law. To be technically correct, existing law INCLUDES the provisions of Senate Bill 1271, the bill that modified lace w:st="on">Arizonalace>’s anti-deficiency provisions in the trustee’s sale statute – A.R.S. Section 33-814. The changes to A.R.S. Section 33-814 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.>>
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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 it were never changed. Now that the banks have sued the Governor, this premise, and the outcome of this power struggle, is in doubt.>>
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The expectation from many in the legal community is that HB 2008 will take effect as scheduled on or about November 24, 2009, and thus, Senate Bill 1271 will be repealed and the law will be applied 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.>>
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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. 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.>>

[AZOwner]

I am sorry for your battle.

This does apply to investment property and not principal mortgages . . . just so we are not misunderstood.

Thank you for the update, BTW, have you signed the petition? We are glad that so many get info from this site, and would like to be able to take our case for mass reform to the MASS scale, so please sign.

Also, we were just referenced in the Huffington Post -- Please post a positive note about the article so we can keep this fight in front of the American public.


Richard Zombeck: Homeowners: "Hey Congress, Get Off Your A**"

The petition is in my signature.

[KFish]

Yes, IF it ever goes through, they are specifically targeting properties that were not owner occupied.

And I just signed the petition

[KFish]

Here is the latest update on the blog for Arizona investors...

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-

continued…

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 rules governing foreclosures and deficiency issues also apply to short sales. BUT, borrowers must be careful when analyzing short sales and their potential liability after the sale – sometimes 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!

[KFish]

Here's the latest from the blog for fellow AZonians...

COMMON MYTHS ABOUT ARIZONA FORECLOSURES AND SHORT SALES

Over the past 18 + months of advising owners of distressed property, several common myths have emerged regarding foreclosures and short sales in Arizona. Here is a list of common myths.
1. Only purchase money loans on qualifying residential property get anti-deficiency protection in Arizona. This is not necessarily true. If the holder of a mortgage secured by a single 1 or 2 family dwelling on 2.5 acres or less forecloses via a trustee’s sale, that lender will be barred from seeking a deficiency pursuant to A.R.S. 33-814(G). However, rights of junior lien holders and the right of a lender to waive its rights under a Deed of Trust and sue a borrower on its note must be analyzed under a different context.
2. A borrower must have occupied its residential property as its primary residence to get anti-deficiency protection. This is simply not true. Although a recent amendment to A.R.S. 33-814(G) intended to impose a requirement for the borrower to have lived in the property, this law was subsequently repealed such that it never took effect. In Arizona, the anti-deficiency statutes have always been interpreted to only require that a qualifying residential property have been put to use as a dwelling by someone, not necessarily the actual borrower.
3. Arizona’s anti-deficiency statutes don’t apply to short sales because a short sale is not a foreclosure. This statement entirely disregards established Arizona precedent. It is true that Arizona’s anti-deficiency statutes are contained within the judicial and non-judicial foreclosure statutes and that a short sale is not a foreclosure. However, several Arizona cases interpreting Arizona’s anti-deficiency statutes provide clear and established precedent restricting a lender’s right to sue a borrower where Arizona’s anti-deficiency laws would apply to a lender in a foreclosure context. In short, if a lender makes (or holds) a purchase money loan on qualifying residential property, that lender’s rights to sue a borrower for lack of payment on the note are severely restricted, if not altogether prohibited.
4. A short sale will always be better for a borrower’s credit. Although I am not a credit counselor and do not profess to understand all the ins and outs of how a credit score is calculated (does anyone?), in most cases, a lender will require a borrower to be delinquent before contemplating a short sale. As a result, a borrower’s credit is almost certainly to be hurt before the short sale is consummated, and once it is, the reporting of the sale as a short sale will generally damage one’s credit even further. However, a potential benefit of a short sale is the ability (in concept) to qualify for certain loans sooner versus having a foreclosure on one’s record.


Wishing you all well with your journeys!