Home Loans and Support

Question for Professor Shay

Discussion in 'Deed in Lieu of Foreclosure - Do You Need Help to ' started by willthisnightmareend, Feb 23, 2009.

  1. willthisnightmareend

    willthisnightmareend LoanSafe Member

    Dear Professor Shay,

    I have a question that I hope you can answer. My husband and I own 2 homes. One in CA, and one in AZ. We are currently trying to modify both homes with the help of an attorney.

    We put down over 200k on the CA home, and have a mortgage of 573k with Countrywide. $776k purchase price, and the home is now valued at 455k.

    The AZ home is financed at 100%. We purchased for 600k, and it is now valued at 357k.
    First w/ Countrywide: 416k
    Second w/ Webster: 132k
    Third w/ KeyBank: 50k

    We have great hopes of an interest reduction in CA, but can only survive in the AZ home if we get a principal reduction in addition to an interest reduction. So, my question is this: if we don't get the results we are looking for and have to take the "walk away" route, are we responsible for the 2nd and 3rd? If so, is our only hope bankruptcy?

    Thanks in advance!!!
  2. ProfessorShays

    ProfessorShays LoanSafe Member

    When you answer the questions below I want you to do it twice, once for the AZ home and once for the CA home.

    1. At the time you purchased the home, were the loan(s) identified in your earlier email created then, and if so were the entire loan proceeds utilized to purchase the home?

    2. Which home do you consider your "residence"?
  3. willthisnightmareend

    willthisnightmareend LoanSafe Member

    THANKS for the quick reply!

    Quick recap as I realize you don't know anything about our story. We moved from NV for my husband's job. We wanted to move to Phoenix, his employer insisted on the move to CA. The homes were insanely priced then, but we were given an increase in pay to make up the difference. We purchased the CA home as our primary residence, and since we put down so much money, only have one loan with Countrywide. Interest only, jumbo at 5.5%. We owe 573k, and the house is valued at 455k. We paid 776k. We do have a renter in the home now, but are anxiously awaiting their lease renewal as their lease was up this month. We absolutely have to keep this home, and pray that the market in CA will pick up in the next 5 years or so. All of our money is in this home.

    Shortly after moving to CA we found out my husband's employer was having financial problems, and we were afraid they would file chapter 7 and we would end up in a state we didn't want to go to in the first place. We quickly put our home on the market and moved to AZ. We purchased the AZ home, knowing full and well that surely the CA home would sell. :confused: However, after 18 months on the market with no bites and more price reductions than I care to recall, we had to face facts and rent it.

    We never would have purchased the AZ home had we known the position we would be in now. We paid 550k for the home. 1st w/ Countrywide for 416k at 5.5%, and 2nd with Webster 132k at prime. We had hoped to take our money from CA and pay off the 2nd and 3rd....which by the way was a pool loan. 50k to Keybank at 7%.

    We have been paying 6500k per month in mortgage payments for 2 years now, paid for the move from CA to AZ, have drained our savings, spent hours crying to Countrywide for help, only to end up here........new best friends with all of you.

    I hope for the best with the loan mods, but honestly no longer believe in naive optimism. I am trying to prepare myself for the worst case, whatever that may be. I had hoped for a principal reduction with the AZ home, but have read that it is highly unlikely. If we can't get that, then we will have to walk. I just want to educate myself as best I can on what happens if that is the road we are forced to take. I don't know anything about filing for BK, and know very little about foreclosure or shortsales.

    Again, thanks so much for your time! And in case you were wondering, his employer did file, closed their doors, and couldn't care less about our family.
  4. ProfessorShays

    ProfessorShays LoanSafe Member

    Willthisnightmareend replied:
    "We never would have purchased the AZ home had we known the position we would be in now. We paid 550k for the home. 1st w/ Countrywide for 416k at 5.5%, and 2nd with Webster 132k at prime. We had hoped to take our money from CA and pay off the 2nd and 3rd....which by the way was a pool loan. 50k to Keybank at 7%."

    We are going to see what ideas we can come up with that will make the nightmare at least tolerable. With regard to the pool loan, was it made at the time you purchased the property or later? I ask that because my guess is it was made later and you purchased the AZ home with only a first and second loan created at the time of purchase.

    Daniel
    1 person likes this.
  5. willthisnightmareend

    willthisnightmareend LoanSafe Member

    Hello again Daniel,

    Yes, the first and second were taken out the day we bought the house, and the pool loan was taken out 6 months later.

    Thanks!!
  6. ProfessorShays

    ProfessorShays LoanSafe Member

    I'm going to break down my analysis by first dealing with the California home and then switching over to the Arizona home. Assuming your facts are represented, I would suggest that you do not have personal liability for first loan because of its "purchase money" characterization. It appears that the loan was created at the time you bought the home and occupied it as your primary residence. Here California Code of Civil Procedure Section 580b comes into play, resulting in the loan being "non-recourse" in nature. That effectively means the lender's only choice is to foreclose on the home and they cannot go after you for a deficiency judgment.

    The Arizona residence presents more challenges. Clearly the first and second loan, given the facts as presented, and also assuming your home is located on a parcel of land of 2.5 acres or less, are purchase money loans and therefore you are not personally liable. That is even the case (unlike California) if they were refinanced.

    The third loan relating to the purchase of a pool provides a challenge. One non-lawyer commentator suggests that it is not, and I tend to agree (although I'm not suggesting that you shouldn't talk to a lawyer licensed in Arizona who is familiar with real estate law and debt collection practice). That non-lawyer comment was, "if you used a line of credit to buy a boat, take a trip or build a pool that this loan is not subject to Arizona’s non deficiency statute." (see Non Purchase Loan Impact on Arizona Short Sales | Arizona Real Estate | AZ Realtor | Arizona Blog )

    A really good discussion of Arizona's anti-deficiency laws that I lifted off of an Arizona lawyer's website is provided below. My guess is that a somewhat convoluted argument could be made that suggests that the pool loan was "purchase money" because you were buying a residential pool with the loan proceeds. Not that it is a winning argument, but it might have some settlement value.

    So to summarize my thoughts, you can likely walk from the California home without incurring personal liability. Walking from the Arizona home potentially exposes you to liability for the full amount owed on the pool loan. As always I recommend that you have your purchase and loan documents reviewed by a lawyer skilled in real estate law and debt collection practices.

    Good luck,

    Daniel


    The distressed residential real estate market has prompted some lenders to ask us about possible foreclosure strategies in the context of Arizona’s anti-deficiency statutes. Many of these questions have not been easy to answer, due to the language of the statutes, the amount of discretion left to the courts, and the scarcity of applicable case law attributable to our recent history of favorable market conditions. What follows is a brief discussion of Arizona’s anti-deficiency statutes and how they affect a lienholder’s foreclosure decisions.
    Background
    In Arizona, protection for residential borrowers is set forth in two anti-deficiency statues: A.R.S. §§ 33-729(A) and 33-814(G).
    While by its plain language, § 33-729(A) applies only to purchase money mortgages, Arizona courts have construed it to apply also to purchase money deeds of trust that are foreclosed judicially. Mid Kansas Federal Savings & Loan Association v. Dynamic Development Corp., 167 Ariz. 122, 126, 804 P.2d 1310, 1314 (1991). The statute defines a purchase money mortgage (or deed of trust) as one “given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price.†Thus, the statute would not protect borrowers who have assumed the mortgage on the property, mortgaged one home to purchase another, or obtained home equity lines of credit.
    In turn, § 33-814(G) applies to deeds of trust foreclosed by trustee’s sale, whether or not they are purchase money deeds of trust. The statutory scheme, however, does not provide for non-purchase money mortgages.
    Qualifying Properties. Regardless of which statute is applicable, the threshold for obtaining anti-deficiency protection is the same: the property securing the loan must be “two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling.†A.R.S. §§ 33-729(A) and 33-814(G). The Arizona Supreme Court interpreted this language to require that the dwelling be built and at least occasionally occupied. Mid Kan. Fed. Sav. & Loan Ass’n, 167 Ariz. at 129, 804 P.2d at 1317. However, whether the property is occasionally occupied by the owners or rented to third parties, it will qualify under the statute for anti-deficiency protection. Northern Arizona Properties v. Pinetop Properties Group, 151 Ariz. 9, 725 P.2d 501 (App. 1986). In addition, for purchase money mortgages (or deeds of trust judicially foreclosed), anti-deficiency protection will not be provided to the extent of any diminution in value of the property due to voluntary waste committed by the debtor. A.R.S. § 33-729(B).
    Deficiency Procedure
    If the secured property does not qualify under the anti-deficiency statutes, the lender may obtain a deficiency judgment against the debtor and/or guarantors. For judicial foreclosure of purchase money instruments, obtaining a deficiency judgment is part of the foreclosure proceedings. A.R.S. § 33-729. To obtain a deficiency judgment after a trustee’s sale, an action must be brought within 90 days after the sale; otherwise, any right to a deficiency is lost. A.R.S. § 33-814(D). The deficiency judgment is the amount due the lender, which includes interest from the date of the sale and any costs for bringing the action, less the fair market value of the property as of the date of the sale or the sales price, whichever is higher. Id. The debtor must file a written application for a special hearing as to the determination of the fair market value of the property within 30 days of the sale of the property; otherwise, the trustee or sheriff sale’s price will stand. § 12-1566(C).
    Foreclosure Strategies

    When the decision to foreclose on a borrower’s property seems imminent, the first question to ask is whether the anti-deficiency statute applies. If it does not, further discussion is unnecessary. As discussed above, for anti-deficiency protection, the property must be:
    • two and one-half acres or less;
    • a completed, single, one or two family dwelling; and
    • at least occasionally occupied by the owner or another party.
    Thus, for many lenders with liens on raw land or partially developed properties, the anti-deficiency issue is not a concern.
    Whether the anti-deficiency statute applies will influence the lender’s strategy regarding the method of foreclosure. This assumes, of course, that the lien came into existence via a deed of trust; obviously, there are no choices when it comes to mortgages, which is one reason we recommend that lenders use a deed of trust.
    Judicial Foreclosure. A judicial foreclosure has a few very important benefits. First, the anti-deficiency statute for judicial foreclosures does not apply to non-purchase money instruments. Thus, if the lender has a non-purchase money deed of trust for which the anti-deficiency protection may apply, the lender can avoid it, and pursue a deficiency, by judicially foreclosing. Also, even if it is a purchase money deed of trust, a judicial foreclosure is advisable if the loan guarantors are solvent. Perhaps due to a legislative drafting error, the mortgage anti-deficiency statute protects only the “judgment debtorâ€Â, i.e. the borrower. In contrast, the deed of trust anti-deficiency statute states that, if it applies, “no action may be brought,†which means no action may be brought against the debtor or guarantor. Finally, there is no 90-day limitation and, thus, no concern for the lender of losing a deficiency judgment through an oversight. Of course, it is important to include a claim for deficiency in the complaint when a foreclosure suit is filed.
    The downsides of a judicial foreclosure include length of time, the statutory right of redemption, and the election of remedies statute.
    Trustee’s Sale. The benefits of a trustee’s sale include simplicity, efficiency, reduced costs, and no statutory right of redemption. While there is no election of remedies statute for trustee’s sales, the Arizona Supreme Court has held that when the anti-deficiency statute applies, whether it involves a mortgage or deed of trust, the creditor may not waive the security and simply sue on the note. Baker v. Gardner, 160 Ariz. 98, 105, 770 P.2d 766, 773 (1980). However, if the property does not qualify for statutory protection, the lender can sue on the note and then conduct a trustee’s sale, or vice versa, or simultaneously sue on the note and pursue a trustee’s sale. In contrast, with a judicial foreclosure, if the lender sues on the note, the security is waived.
    For a trustee’s sale or judicial foreclosure, the statute provides that a lender may sue on a guaranty separately as a contract; however, if the suit is for a deficiency after a sale the statute’s fair market value limitations apply. A.R.S. § 12-1566(E); In re Five Flags Hotel Corporation, 179 B.R. 169, 174 (Bankr. D. Ariz. 1995) (holding that the guarantor is not entitled to a reduction in the judgment for the fair market value of the collateral property where the lender did not hold a trustee’s sale and is suing directly on the guaranty).
    Credit Bids and Fair Market Value. It is now the day of sale. The next most asked question, and perhaps the most difficult, is: What amount should the lender credit bid? This is not a simple question as there are many, sometimes conflicting, considerations. If the lender bids too high, it may eliminate the deficiency. In contrast, if it bids too low, the court may become skeptical and refuse to award a deficiency, finding that the sale proceeds satisfy the outstanding debt.
    The standard answer is to bid the fair market value of the property. However, in the current volatile market determining fair market value can be very difficult. The statute, A.R.S. § 12-1566(C), defines “fair market value†as:
    “… the most probable price, as of the date of the execution sale, in cash, or in terms equivalent to cash, or in other precisely revealed terms, after deduction of prior liens and encumbrances with interest to the date of sale, for which the real property or interest therein would sell after reasonable exposure in the market under conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably and for self-interest, and assuming that neither is under duress.â€Â
    Unfortunately for lenders, there is little case law explaining or applying this standard. Recently, the U.S. Bankruptcy Court for the District of Arizona, refused to award a deficiency judgment to a lender that, over the course of 32 months, submitted five appraisals of the property with widely varying values. “Minute Entryâ€Â, In re MCW Brickyard Commercial, LLC (Bankr. D. Ariz. Aug. 18, 2004). In light of that decision, we have recommended, when practiced, that lenders use only one appraiser and if necessary have the appraiser update his report (since the fair market value is to be measured as of the date of the sale), or solicit a broker’s opinion first for a more informal valuation of the property. We also recommend that, before obtaining an appraisal, the lender give the appraiser the statutory definition of fair market value for inclusion in his report. The Arizona Supreme Court has also held that a trustee’s sale may be set aside if it is “grossly inadequate,†which the Court interpreted as less than or equal to 20% of market value. In re Krohn, 203 Ariz. 205, 214, 52 P.3d 774, 783 (2002).
    Conclusion
    Given the two anti-deficiency foreclosure statutes and the various considerations that need to be taken into account, no single approach or strategy works every time. As always, it is best to make a judgment based upon all the facts. Even then, in this area of law, be prepared to make difficult decisions based upon less than perfect information.
  7. willthisnightmareend

    willthisnightmareend LoanSafe Member

    Thanks so much for taking the time to post all of that info! One last question, if we decide to walk from our AZ home, what steps do we take? Try for a shortsale, go with foreclosure, or will be faced with having to file Bankruptcy?
  8. ProfessorShays

    ProfessorShays LoanSafe Member

    Let me start by suggesting as I did in the quoted posting below my feelings about the when's and where's of filing bankruptcy.

    Unless there is an absolute assurance that the creditors will seek to obtain a judgment, I'm one who always suggests that it is better to wait in the event you can use the threat of bankruptcy (rather than the actual act of filing a petition), in an attempt to settle creditor claims.

    It isn't often that you have the opportunity to follow through on a threat (assuming there is little to lose as the result of the filing). So why not use that threat to convince creditors to settle on a nominal amount with the potential of lessening the time the negative iitems exist on your credit report (remembering that BK filings are reported for 10 years while other negative items such as foreclosures are reported for only 7 years).


    The challenge you face is the fact that there is little you can do to change the outcome. Having three secured loans on your AZ home makes it nearly impossible to put together a short sale, simply because all three lenders would have to agree to its terms and there is going to be a general reluctancy to give the holder of the third loan a dime. With foreclosure, the more likely party completing it is the holder of the first loan, and that effectively also means you will be facing the liability associated with the third loan after you lose the home.

    Daniel
  9. willthisnightmareend

    willthisnightmareend LoanSafe Member

    THANKS again for all your time!
  10. willthisnightmareend

    willthisnightmareend LoanSafe Member

    NEW twist in this saga, and I hope you can answer some questions for me. We retained a local attorney in AZ back in December. We were given a lot of false hope, and told we could expect: principal reductions, a wiped out 2nd and 3rd on the AZ home, very little credit ramifications, "forensic audits" on all loan docs, and 3% interest rates on both homes first mortgages with Countrywide. We were also told that the lawyer would negotiate down any penalties or late fees, and that we wouldn't be responsible for the missed payments during the modification period. Now, I know this all sounds too good to be true, but again, this is what we were told the mortgage companies were doing. This all happened before I became a loansafe "freak" who spends hours scouring this board, educating herself on what are realistic expectations. During this process, it has been absolute hell getting any info at all from the lawyer's office, and we have been kept in the dark. We asked for a meeting in person and went over our concerns and were told that everything was fine, but that we were given false information when we gave our retainers to them. We were also told we would receive a full refund if we chose to go that route.

    So, now I am wondering what happens then??? Our last payments were made in November 08, the lawyer receives all of our mail for all 4 loans, we have no idea where we are in the modification process, if anywhere at all. If we were to get a refund and no longer receive their representation, what would be our next step?? I honestly don't care about the AZ home, and from what I am reading on this board, we won't get the help needed to be able to stay in this home anyways. But the CA home is a different story altogether, and we really want to keep that house.

    Any help or direction you can give is greatly appreciated.
    THANKS!!
  11. ProfessorShays

    ProfessorShays LoanSafe Member

    These are challenging times for borrowers. The problem centers upon the fact that the situation isn't what we were use to in past downturns where you basically had a lender and a borrower. It isn't that simple with the sale of loans to Wall Street entities who packaged up a large number of loans into Collateral Debt Obligations (CDOs), with varying risk classifications (tranches). The initial question in many instances is "who makes the decision for the lender?" That isn't an easy question to answer, requiring generally a determination from the loan servicer's contract, as to the extent of their authority.

    With these practical barriers, a claim by anyone (be they a lawyer or not), that they can fulfill the sort of promises you have outlined should be viewed with skepticism. If you are as unsatisfied as you indicate, my suggestion is to fire the party you've hired for representation and either "go it alone" or seek the services of another lawyer who can suggest more realistic expectations.

    Daniel
  12. willthisnightmareend

    willthisnightmareend LoanSafe Member

    Re: Question for Professor Shays

    Thanks for your reply Professor. I agree 100%, and think we have been strung along enough, in an already bad situation. I was just wondering if you knew what the consequences would be in hiring one firm and then hiring another, or going it alone? Can I call the lenders directly to let them know we no longer have representation, or have new representation? Or should I send letters? Since we have 2 properties in question and Naca isn't an option, what do you recommend?

    Thanks so much.
  13. ProfessorShays

    ProfessorShays LoanSafe Member

    Chances are the loan servicer will not talk to you without written confirmation that you are no longer represented by counsel. As to whether it makes sense to "go it alone" or hire an attorney, that is virtually an impossible question to answer. It depends upon how good you are or how good the lawyer you hire is at negotiations. Back in the days when I was involved in negotiating, I often took the stance of dealing on a level playing field, more likely to negotiate at the lender representative's level (I was fortunate to have done their job in a past life), rather than take an ego based posture. This is in large part due to the fact that the underlying goal was negotiate, not litigate. From a practical standpoint, given the bonding requirements associated with enjoining a foreclosure, better to try to do a workout arrangement with a lender rather than going in the direction of instituting a legal battle.

    Daniel

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