Marc McCain Blog

ARIZONA COURT RULES REFINANCES AND CONSTRUCTION LOANS CAN GET PURCHASE MONEY PROTECTION

In a case borrowers and lenders have been tracking for months (Helvetica Servicing Inc. v. Pasquan) involving a refinance of an original purchase money loan and additional loan proceeds given to a borrower for construction of a dwelling and for personal household purposes, the Arizona Court of Appeals, Division One, ruled on many key issues that have been in dispute in Arizona.  The Court’s holding sets out the following rules for borrowers, lenders and their legal counsel to follow when determining when a refinanced loan or construction loan will be given purchase money status under Arizona law in certain situations and thus, afforded anti-deficiency protection in the judicial foreclosure context:

  1. A refinance of a purchase money loan does NOT destroy purchase money protection to the extent the loan proceeds from the refinance are used to satisfy the underlying purchase money loan.
  2. A construction loan given to borrower that is (1) secured by a deed of trust that covers both the land and the dwelling to be constructed on the land (provided the dwelling is a qualifying dwelling under the anti-deficiency statute, i.e., 2.5 acres or less and limited to 1 single family home or 1 duplex), and (2) actually used to construct such a dwelling, will be afforded purchase money status under Arizona law.
  3. Loan proceeds given to a borrower in a refinance that are clearly not used to satisfy an underlying purchase money loan may be traced and segregated and recovered in a deficiency action.

 

The Court noted that it will be a question of fact in each case as to whether a loan is in fact a construction loan, or some other loan, such as a loan given to make home improvements (which the court suggested would not get purchase money protection).

Although the Court’s ruling was in a judicial foreclosure deficiency context, it provides authority to borrowers and lenders dealing with deficiency actions (or actions on the junior note) by junior lenders before or after a foreclosure sale by the senior lender.  That is, where a junior lender sues a borrower on its note and the note is a refinance of an underlying purchase money obligation that can be traced; the borrower should only be liable for the amount of the junior loan that was made for clearly non-purchase money protection.

Borrowers and lenders will have to wait to see if the Court of Appeals’ decision is appealed to Arizona’s Supreme Court.  Until then, this is the law in Arizona and will do away with much uncertainty and confusion in addressing lender rights to pursue a borrower for a deficiency on a non-purchase money loan.  Note that the Court’s decision does not affect a lender’s or borrower’s rights in a trustee’s sale foreclosure — a lender that forecloses its deed of trust at a trustee’s sale will be barred from seeking a deficiency against the borrower as long as the property is a qualifying dwelling under the statute — the loan does NOT have to be a purchase money loan.

 

Marc McCain, McCain & Bursh, Attorneys at Law PC

www.mccain-bursh.com

The Court noted that it will be a question of fact in each case as to whether a loan is in fact a construction loan, or some other loan, such as a loan given to make home improvements (which the court suggested would not get purchase money protection).

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LENDER TRENDS IN PURSUING DEFICIENCIES ON SECURED REAL ESTATE LOANS

  1. There are no trends – almost anyways.  Lenders and their servicers tend to be very different when it comes to collecting deficiency balances.  One trend is that larger institutions tend to settle for lower percentages on the dollar, while smaller banks or credit unions tend to dig in for more money.
  2. Many short sales stall because the borrower and lender/servicer can’t agree on a seller contribution or settlement of a deficiency (assuming one would exist after a short sale).   If the property goes to foreclosure, many of the deficiencies are settled for less (oftentimes substantially) than what the lender/servicer was demanding in the short sale – I know, go  figure.
  3. If a lawsuit is filed and a settlement is reached that requires a payment plan, the lender will typically want the borrower to sign a stipulated judgment for the full deficiency, but agree to a payment stream considerably less.  If the payments are satisfied, the judgment will be satisfied.  If not, the lender will have a judgment in place that they can enforce – hello garnishment and asset seizure.
  4. Similar to a short sale or loan mod request, most lenders require a borrower to submit financial information in connection with deficiency settlement discussions.  For borrowers with nothing to their names, this is not a big risk.  For those with assets, disclosure can put them on the proverbial collection map.  However, even where borrowers have liquid assets, significant discounts are still commonplace for deficiency settlements, especially lump sum settlements.  Of course, there are exceptions – can anyone say Desert Schools Federal Credit Union?
  5. Some lenders pursue deficiencies rather promptly following a short sale or foreclosure.  Take M&I Bank (now Harris Bank) for instance – expect them to be knocking on your door fairly quickly if they are owed money after a short sale or foreclosure sale.  On the other hand, some lenders don’t seem to know they even have a deficiency right, at least not for 12+ months in many cases – B of A, where are you hiding?  However, don’t be fooled by a delay in lender collection activity.  Unless you have received a 1099C cancellation of debt notice from your lender, for written contracts  in Arizona, a lender has 6 years to pursue the debt after a default.

 

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Important Facts For Realtors and Brokers About Short Sales and Strategic Defaults on Residential Properties in AZ:

  • Short sales may result in a deficiency owed to a lender whereas a foreclosure may not.
  • Short sales may result in tax liability to a seller whereas a foreclosure may not.
  • Until Arizona law is clarified by new legislation or case law, all refinanced residential home loans that are paid in a short sale transaction present potential deficiency concerns to a seller unless proper waiver of deficiency language is provided by a servicer/lender.
  • In Arizona the statute of frauds requires certain agreements to be signed to be enforceable. Contracts involving liens against real property are 1 such contract. This includes a lender’s agreement to release its lien in a short sale approval letter. As a result, many unsigned short sale letters that contain waiver of deficiency language may not be enforceable, at least from a lender’s or debt collector’s perspective.
  • Realtors cannot use third party negotiators to process their clients’ short sales unless the third party is a licensed attorney in the State of Arizona or licensed by the Department of Financial Institutions. This restriction also prohibits the use of other realtors unless they are a co-listing broker. Agents and Brokers that refer clients to or work with unlicensed third parties in this capacity could be putting their real estate license on the line and risking substantial fines.
  • Many realtors are not properly documenting the “Agreement Notice” under the Short Sale Addendum to the AAR Residential Resale Real Estate Purchase Contract thereby putting their seller at risk for being in breach of contract with their buyer.
  • Realtors and Brokers have a duty to disclose all material information to parties in a real estate transaction which may include a seller’s or buyer’s inability to perform under a contract. Recent court decisions have broadened the required disclosures in residential real estate transactions to include prior failed attempts to short sale a property and a buyer’s impending financial troubles.
  • Realtors cannot provide clients advise on legal or tax implications of a short sale including the lender’s terms and conditions. Doing so violates an agent’s ethical duty to avoid providing services outside their area of competence and presents inherent conflict of interest/breach of fiduciary obligation issues due to an agent’s financial incentive to close a short sale. A prudent agent will provide appropriate disclosures and disclaimers to her clients.
  • Laws and liabilities related to short sales continue to evolve and require constant review and updating of a Broker’s and Agent’s processes and documentation.

The law office of McCain&Bursh, PLC offers high quality, professional, and cost effective short sale negotiation services for you and your client. Please contact McCain&Bursh, PLC Today at (602) 604-2138 to discuss how McCain&Bursh, PLC can close your short sale transactions while providing your client with exceptional legal representation.

Marc McCain

McCain & Bursh, PLC Attorneys at Law

(602) 604-2138

www.mccainbursh.com

www.marcmccain.com

mmccain@mblawaz.com

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Realtors Should Think Twice Before Suggesting a Short Sale or Strategic Default to Homeowners

While a short sale can be the right choice for certain homeowners, the laws regarding short sales and strategic default are in flux and raise many possible pitfalls for a homeowner/borrower considering a short sale or strategic default on a residential or other property.  The modern day short sale is a relatively recent phenomena.  As a result, current Arizona laws fail to provide clarity on many issues stemming from a short sale or foreclosure including (1) whether a borrower will have personal liability for a deficiency after a short sale or foreclosure; (2) whether a short sale or foreclosure will result in cancellation of debt income and substantial tax liability to the Federal or State Government; (3) whether a lender can properly ask for a seller contribution as part of a short sale; and (4) what a seller should disclose to a buyer in a short sale transaction.

 Far too often we receive calls from angry borrowers who realize AFTER a short sale or strategic default that they may have liability for unpaid loans or for taxes owed on cancelled debt income.  A common comment in these scenarios is that they would never have completed a short sale had their realtor advised them of the possible negative consequences a short sale can present.  Realtors and brokers have a fiduciary duty under Arizona law to protect and promote their client’s best interests.  Realtors who promote short sales to clients not understanding how the short sale may impact a homeowner from a legal or tax perspective are not satisfying this duty to their clients and are increasingly finding themselves on the wrong end of lawsuits or other disciplinary action by the Department of Real Estate. 

 Moreover, realtors and brokers are prohibited from engaging in activities that are outside their scope of competence.  Considering the many issues that must be considered in a short sale, few realtors or brokers are equipped to guide their clients though the short sale process without the assistance from legal and tax professionals.  McCain & Bursh can assist homeowners evaluate whether a short sale, strategic default or other loan workout is the best option considering their individual circumstances and at the same time, help reduce the chance of disputes between borrowers and their realtors and brokers.

Marc McCain

McCain & Bursh, PLC Attorneys at Law

www.mccain-bursh.com

www.marcmccain.com

(602) 604-2138

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UPDATES ON ARIZONA ANTI-DEFICIENCY LAW AND SHORT SALE ISSUES

ANTI-DEFICIENCY PROTECTION JUST GOT BROADER

One of the requirements for Arizona’s anti-deficiency statutes is that the property in question must be limited to and utilized for a single one or 2-family dwelling.  (See. A.R.S. § 33-814(G)). Based on prior holdings by Arizona courts, the majority view has been that if a borrower did not actually put the residence to use as a dwelling, the borrower would not get anti-deficiency protection.  As a result, many lenders holding notes on properties that have not been completed would pursue borrowers for a deficiency after a trustee’s sale or judicial foreclosure.

Lenders will need to re-evaluate their rights on construction loans for residential properties of less than 2.5 acres after a recent holding by the Arizona Court of Appeals in M&I Marshall & Ilsley Bank v. Mueller, 2011 WL 6778743 (Ariz.App. Div. 1).  In this case, a borrower took a construction loan to build a residence that,  if completed and actually utilized as a dwelling, would have received anti-deficiency after a trustee’s sale.  However, in this case, the borrower was unable to complete construction and no one ever actually moved into the home.  The Court distinguished a prior holding of the Arizona Supreme Court where a property was not completed and used as a dwelling and held that here, where the borrower was a homeowner (as opposed to a commercial builder of residential properties), , the primary purpose of the Arizona anti-deficiency statutes is met – that is, to protect homeowners’ from deficiency judgments.   

At the heart of the Court’s holding was the fact that the borrower had intended to occupy the dwelling upon completion of construction.  This holding expands anti-deficiency protection to certain constructions loans, although the application to any given case will be dependent on the particular facts of the transaction. 

 ARIZONA LEGISLATORS INTRODUCE BILL TO BAR A DEFICIENCY FOLLOWING A SHORT SALE

 A bill recently introduced in the Arizona House of Representatives, House Bill 2584, would bar lenders from seeking a deficiency against certain borrowers following completion of a short sale.  The bill is intended to cover loans that would get anti-deficiency protection under Arizona’s trustee’s sale and judicial foreclosure anti-deficiency statutes, although it is unclear which statute would apply to a given short sale considering that a short sale will avoid a foreclosure and the anti-deficiency statutes in each statute are different.  As currently drafted for the trustee’s sale anti-deficiency statute, the short sale protection will apply if:

 “1.  The property is sold in a transaction in which the beneficiary agrees to the sale of the secured property for an amount that does not satisfy the full indebtedness of the trustor under the deed of trust.

2.  The transaction is not a trustee’s sale.

B.  This section applies to beneficiaries of first deeds of trust who have agreed to the sale and any junior lien holders who have agreed to the sale, and their successors and assigns. END_STATUTE

Sec. 3.  Applicability

Sections 33-729.01 and 33-814.01, Arizona Revised Statutes, as added by this act, apply to contracts for sale executed after the effective date of this act.”

 See the complete text of the bill and follow its status at: http://www.azleg.gov/DocumentsForBill.asp?Bill_Number=2584&Session_Id=107

 Many real estate professionals and attorneys have been calling on the legislature to codify protection for borrowers in residential short sale transactions and have pointed to recent legislation in California as an example of the type of protection borrowers should be given against their lenders.  This bill is a good start, although the legislature needs to clarify when the short sale protection in Section 33-729.01 should apply, and when the protection in 33-814.01 should apply.  Without such clarification, many short sale transactions could leave borrowers in deficiency limbo until a court is called upon to interpret the legislature’s intent.

 Marc McCain

McCain & Bursh, PLC Attorneys at Law

www.mccainbursh.com

www.marcmccain.com

mmccain@mblawaz.com

(602) 604-2138

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ARIZONA SUPREME COURT SIDES WITH LENDERS ON KEY TRUSTEE SALE ISSUE

IN VASQUEZ V. SAXON MORTGAGE, INC., ET. AL., the Supreme Court of Arizona recently held that Arizona’s trustee sale statute does NOT require the recording of an assignment of a deed of trust to reflect the interest of the foreclosing lender (as the current beneficiary under the Deed of Trust) before a trustee sale can be conducted.  The U.S. Bankruptcy Court for the District of Arizona certified 2 questions for the Court’s consideration:

     1.    IS THE RECORDING OF AN ASSIGNMENT OF DEED OF TRUST REQUIRED PRIOR TO THE FILING OF A NOTICE OF TRUSTEE’S SALE UNDER A.R.S. § 33-808 WHEN THE ASSIGNEE HOLDS A PROIMSSSORY NOTE PAYABLE TO BEARER?

 AND

     2.    MUST THE BENEFICIARY OF A DEED OF TRUST BEING FORECLOSED PURSUANT TO A.R.S. § 33-807 HAVE THE RIGHT TO ENFORCE THE SECURED OBLIGATION (that is being foreclosed)?

 On the 1st issue, the Court focused on Arizona’s trustee sale process and the statutes that govern how a trustee’s sale is conducted.  Finding no authority in Arizona statutes for the idea that an assignment of a Deed of Trust must be recorded in the County Recorder’s office to provide evidence that the foreclosing beneficiary is the current holder of the beneficial interest of the Deed of Trust being foreclosed, the Court refused to impose such a requirement as a condition to a trustee’s sale.  The Court was mindful to articulate the reasons why an assignment of a Deed of Trust would be appropriate, but explained that such an assignment is discretionary and only impacts the rights of the parties to the assignment and potentially a third party that would buy an interest in the trust property without knowledge of the assignment.  However, as between the owner and the lender, the Court found that an assignment is not necessary and cannot be used by an owner to stop a trustee from carrying out the authority granted to it in the Deed of Trust.

 The Court declined to address the 2nd issue, finding that the answer to this question would not help decide any issues in the underlying bankruptcy action since the foreclosing lender, Deutsche Bank, had been assigned the promissory note in question before the notice of trustee’s sale (related to the Vasquez foreclosure) was recorded.  As a result, this issue remains open to debate, although it will likely be clarified by decisions of Arizona courts in the near future.  Until then, some borrowers will choose to push this issue to the forefront of their disputes with their servicers/lenders. 

 Unfortunately, in not addressing the 2nd issue presented, the Court left unanswered a very important question plaguing the non-judicial foreclosure process (i.e., trustee’s sales) and, in my opinion, a question that goes to the heart of the issues in many foreclosure disputes.  The basic argument behind the 2nd issue is that when mortgages were sold in the securities markets, the note and collateral were separated and the collateral securing the note was never assigned to the parties that actually own the note.  Since the collateral is being sold to satisfy obligations under the note, how can a party that can’t prove it owns the note, and thus the right to enforce the note, authorize a trustee to sell the property at a foreclosure auction?  In many cases, it simply is not clear who actually owns the note that is causing the foreclosure.  If the trustee takes direction from a beneficiary (or its agent) as to when to record a notice of trustee’s sale and when to conduct a foreclosure, this begs the question – does the party that is telling trustees to foreclose on Arizona properties actually own the notes that are the subject of the foreclosure (or work for someone that does)?  If not, then one question looms large – who the heck is telling the trustees to foreclose?

 Losing a home is a pretty big deal.  Doesn’t common sense tell us that if you are going to take someone’s home, someone’s property, you better be able to establish that you own the note (or work for someone that does) that is the underlying reason for the foreclosure?  If not, can’t anyone allege they own the note or work for someone that does, never have to prove their position, pick their own trustee to do the trustee’s sale and provided the trustee follows the statutory process, sell a borrower’s house out from under them.  And what is the justification for looking the other way on this issue – simply because the borrower is delinquent?  Perhaps, but does a delinquency justify such sloppy and questionable business practices? 

Marc McCain, Esq.

McCain & Bursh, PLC

www.mccainbursh.com

www.mmccain@mblawaz.com

602 604-2138

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