Marc McCain Blog

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

Marc McCain — Mon, 13 Feb 2012 17:53:22 +0000

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

(602) 604-2138

UPDATES ON ARIZONA ANTI-DEFICIENCY LAW AND SHORT SALE ISSUES

Marc McCain — Mon, 30 Jan 2012 17:24:58 +0000

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

(602) 604-2138

ARIZONA SUPREME COURT SIDES WITH LENDERS ON KEY TRUSTEE SALE ISSUE

mmadmin — Mon, 19 Dec 2011 17:27:31 +0000

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 1^st 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 2^nd 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 2^nd 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 2^nd 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

http://www.myfoxphoenix.com/dpp/news/housing_market/strategic-foreclosures-penalty-bill-12-13-2011#

www.mmccain@mblawaz.com

602 604-2138

DÉJÀ VU ALL OVER AGAIN – SENATOR CALLING FOR REPEAL OF ARIZONA’S ANTI-DEFICIENCY STATUTE

mmadmin — Mon, 19 Dec 2011 17:16:58 +0000

Didn’t we just go through this a few years back? Didn’t the Banker’s Association support a bill that would have stripped anti-deficiency protections to what could have been tens, or possibly hundreds, of thousands of homeowners in the State of Arizona? Didn’t the Senator that sponsored that bill learn after its passage that the Banker’s Association had not been accurate in its portrayal of Arizona’s anti-deficiency laws and failed to mention the horrible impact the legislation would have had on already battered consumers and our State economy? Didn’t that same Senator, after learning how the covers had pulled over our legislature’s eyes, call for the repeal of his own bill? Didn’t the repeal end in a messy battle with the Banker’s Association suing the Governor over the repeal of the bill only to have our legislature pass a stand-alone repeal of the bill that passed with only a single dissenting vote? Didn’t the repeal leave the banking community with egg on its face over an issue that was already enflamed with the public’s outrage over the bailouts of our heralded financial institutions?

The answer to these questions is “yes”. Unfortunately, one Arizona Senator thinks it is a good idea to tinker with Arizona’s anti-deficiency statutes even though the statutes have been on the books since 1971 and are grounded on fundamental policy rationale that consumers need protections from falling home values when those assets are pledged as collateral for a loan. Republican Senator Jack Harper of Surprise thinks that banks need more protection against consumers when making a residential mortgage loan and wants to strip Arizona’s longstanding anti-deficiency protections from consumers, enabling lenders to sue borrowers for any deficiency owed on a loan after taking a home in foreclosure. In doing so, the thought goes, banks will suddenly be apt to lend in Arizona and this will get our economy going in the right direction.

While the specifics of the bill are still in question, a recent article and news story by Fox News of Arizona indicated that the Senator’s bill intends to target loans written after the date the legislation takes effect. This is a fundamental difference with the prior bill that was only short lived – it is forward looking and won’t affect the rights and protections afforded to homeowners with loans written before the new legislation would go into effect. While Senator Harper can be commended for leaving pat the rights of borrowers and lenders in existing loans, the potential problems that such a change to our well established anti-deficiency laws would create are too many to address in a single blog post (more to come on these problems in future posts). Read the story at:

Suffice it to say this – Arizona’s anti-deficiency statutes and the case law that has interpreted them must be fully understood before our legislature starts tinkering with parts of the statute. What was clear in the last dog and pony show that took place over our anti-deficiency statutes is that our legislature did not understand the many complex rules and painstaking analysis that must take place when working through our statutory non-judicial foreclosure scheme and its sister scheme, judicial foreclosures. Our legislature did not understand that changing only the trustee’s sale anti-deficiency statute, while leaving intact the judicial foreclosure statute, would throw most of our case decisions and analytical framework out the window and leave everyone wondering how certain cases would be decided. It did not understand that in order to properly address the rights of lenders and borrowers in this market, a comprehensive statutory overhaul would be in order. An overhaul that would also address borrower liability after a short sale.

Moreover, if getting lenders to lend more in Arizona is the goal, it is highly questionable that such a change in our anti-deficiency statute will achieve this purpose. First, loan rates in Arizona already factor in the additional risks to lenders that our anti-deficiency laws impose. Second, anti-deficiency statutes should, in theory, make lenders more cautious when writing loans and valuing the real estate that serves as collateral for the loan. However, we all know this didn’t happen over the last decade. Thus, the notion that changing our statute will change the way loans are written in Arizona is without any historical support – if our statutory non-judicial foreclosure scheme is so bad for lenders, why were lenders so willing to make the risky loans they made in the past? Why did lenders not question the substantial spike in home values with so much to lose?

Additionally, most loans are insured through one form of insurance or another – whether it be private mortgage insurance paid by a borrower, insurance provided by FHA, Fannie Mae, Freddie Mac or even insurance purchased by lenders on their own portfolios. This insurance and who pays for it is another factor in the interest rate a borrower pays and a lender’s willingness to lend in Arizona. As long as this insurance is available, and as long as lenders diligently underwrite residential mortgage loans, lenders should not be motivated to make a loan by the prospect of being able to pursue a borrower for a deficiency post-foreclosure. Even without such insurance, prudent lenders will simply factor in the potential for increased losses into the interest rate on a loan to compensate them for additional risk of loss.

It seems more logical to suggest that if anti-deficiency protections didn’t cause lenders to be cautious when making loans on Arizona properties over the last decade, putting the risk of future falling real estate prices on the backs of Arizona property owners will only encourage lenders to look past asset values and make even more risky loans in the future. If so, this would not be a good by-product of such legislation — our economy has suffered enough by lender’s shoddy lending practices. What is clear in this matter is that Senator Harper, while having good intentions, needs to consider the many ramifications and consequences of changing our anti-deficiency statutes. Trying to deal with a shattered housing market by putting more of a burden on homeowners is simply not the answer.

If you are concerned about this legislation or want to voice your opinions on the matter, contact your local representative and express your views. You can find information on your representatives at www.azleg.gov

Marc McCain, Esq.

McCain & Bursh, PLC

(602) 604-2138

PHX Consulting’s 1st Annual Holiday Food Drive

Marc McCain — Sat, 10 Dec 2011 19:12:49 +0000

We are still looking for more donations and there is still plenty of time (the food drive ends on December 14, 2011). Even as little as one or two cans of food can make a huge difference in these people’s lives. Thank you for your support!!!

During this holiday season there are many less fortunate families that are severely struggling in obtaining basic needs such as food and clothing. Here at PHX, we are looking to raise 2,500 units of non-perishable food items to be organized into food baskets that will be donated to the Wesley Community Center. Recently, on several occasions the Wesley Community Center Food Pantry has run out of food to feed its surrounding community.

We are asking for your help in achieving this goal by donating whatever you can. For your convenience, you can either drop off your donations at McCain&Bursh, PLC located at 4300 N Miller Rd, Suite 250, Scottsdale, AZ 85251 at anytime or we will also be conducting weekend home pickups on 11/26, 12/3, and 12/10.

If you would like us to pick up your food donation, please send an email to 2011FoodDrive@PHXConsultingServices.com with the date, time of pickup, and address of the property. Please place the non-perishable food items in a plastic bag near the garage door.

For additional questions, please contact Michael at (480) 559-4365.

About the Wesley Community Center

The Wesley Community Center was established in 1950 as a 501(c)(3) non-profit, community service organization dedicated to empowering and assisting families in the south-central Phoenix community of Nuestro Barrio (our neighborhood). This predominately Hispanic community is home to approximately 7,000 individuals, in which 70% are living in sub-standard housing making less than $12,000 per year.

Some of the neighborhood challenges include:

• Extreme Poverty
• Social Problems
• High Crime Rates
• 42% School Dropout Rate.

Wesley’s Mission Statement:
“Together We Empower Positive Change,” is at the heart of all Wesley programs.

Requested Items (Please make sure nothing is set to expire within 30 days)

• Boxed Cereal: 12 oz – 18 oz
• Crackers: 16 oz
• Peanut Butter/Jam: 16 oz
• Instant Soups: 10 oz
• Pasta/Spaghetti Sauce: 26 oz
• Sugar: 5 lbs
• Pinto Beans: 1 lb – 2 lbs
• White Rice: 1 lb – 2 lbs
• Flour: 5 lbs
• Canned Vegetables: 14 oz – 16 oz
• Canned Meat: 14 oz – 16 oz
• Cooking Oil: 48 oz or less
• Tomato Sauce: 8 oz – 15 oz
• Tuna: 5 oz
• Jello: 3 oz – 5 oz
• Instant Mashed Potatoes: 12 oz
• Macaroni ‘n’ Cheese: 7.25 oz

Please help support this great cause and thank you to our sponsors:

Distressed Property Negotiators (“DPN”)
McCain&Bursh, PLC
PHX Consulting

Short Sale Update and Tips

mmadmin — Sun, 06 Nov 2011 18:30:12 +0000

One issue that comes up often in short sale transactions I review for clients is whether the servicer/lender must sign a short sale approval letter for the approval and related terms to be binding on the servicer/lender. In short, the answer is a definitive YES. Why, just a little something called the statute of frauds which requires certain types of agreements to be both (1) in writing, and (2) signed by the party to be charged with the agreement. Thus, if you are looking for a servicer/lender to release you from any deficiency that may result from a short sale, you better be certain the short sale approval is both clear and signed. There may be exceptions to the statute of frauds, but why take a chance when the deficiency could be substantial. For more information on this topic, consult with qualified legal counsel that has experience in short sale and real estate transactions.

Marc McCain

McCain & Bursh Attorneys

(602) 604-2166

ARIZONA SUPREME COURT TO TACKLE KEY ISSUES REGARDING FORECLOSURE IN ARIZONA

Marc McCain — Wed, 20 Jul 2011 14:53:43 +0000

In September, the Arizona Supreme Court will hear oral arguments on 2 issues related to a lender’s right to foreclosure in Arizona. These issues are:

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 promissory note payable to bearer?

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?

A thorough analysis of these issues is not possible in this blog, but suffice it to say that these issues are of paramount importance to both borrowers and lenders and the Court’s decision will send shockwaves through the legal and lending communities. The first issue goes to whether the holder of the promissory note must show that it has been assigned the rights as the beneficiary under the deed of trust that secures the note. In essence, the Court is being asked whether the beneficiary can establish a proper chain of title under the deed of trust. While hard to believe, countless foreclosures have occurred in Arizona (and elsewhere) where the alleged holder of the note was not assigned the rights of the beneficiary under the deed of trust at the time of a trustee’s sale. Essentially, a borrower does not know who owns their note and from whom the trustee that started the trustee’s sale got its authority to conduct the sale. If lenders are forced to establish a clear chain of title before foreclosing, this could present problems for many lenders who allegedly own a note but are far removed from the original lender – that is, given the shoddy document practices in the mortgage backed securities business, it may be impossible for certain lenders to get assignments of the deed of trust from the prior owners of a note so that the chain of title under the deed of trust clearly establishes they are the beneficiary who has the right to foreclose.

The second issue is, in reality, a version of the produce the note argument. In other words, must the lender that is foreclosing establish that they are the rightful owner of the note that the deed of trust secures? While one would assume this must be the case since the note is the actual obligation to pay and the deed of trust merely acts as security for that obligation, several Arizona courts have held that in a non-judicial foreclosure state such as Arizona, a beneficiary under a deed of trust need not show they own the note, but only that they followed the statutory process for conducting a valid trustee’s sale. For these courts, it is immaterial that the beneficiary may have no right to sue the borrower on the note, only that they claim to be the beneficiary under the deed of trust and followed the trustee sale process. Like the first issue, if lenders are forced to show their right to enforce the note in a trustee sale context, many will have a hard time doing so given their inability to show how they came to own the note (e.g. many don’t have the original instrument or any evidence of prior assignments of the note to them).

Stay tuned Arizona . . . this could get interesting very quickly.

Marc McCain

McCain & Bursh, Attorneys at Law

www.mccainbursh.comn

www.marcmccain.comn